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spk00: Ladies and gentlemen, thank you for standing by and welcome to the Spotify Q2 2021 earnings conference call. At this time, all participants are in a listen only mode. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Brian Goldberg, head of investor relations. Thank you, sir. You may begin.
spk01: Thank you, and welcome to Spotify's second quarter 2021 earnings conference call. Joining us today will be Daniel Ek, our CEO, and Paul Vogel, our CFO. We'll start with opening comments from Daniel, and afterwards, Daniel and Paul will be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code hashtag SpotifyEarningsQ221. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. We ask that you try and limit yourself to one to two questions, and to the extent you've got follow-ups, we'll be happy to address them, time permitting. If for some reason you don't have access to Slido, you can email investorrelations at ir at spotify.com, and we'll add in your question. Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's call, in our letter to shareholders, and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our investor relations website, and also furnished today on Form 6K. And with that, I'll turn it over to Daniel.
spk03: All right. Hi, everyone, and thank you so much for joining us. I will touch briefly on the quarter and then offer context for some of the opportunities I see across our business. All along, we've been pretty clear that our outlook for 2021 included a higher degree of variability, given the ongoing uncertainties of the pandemic and the uneven recovery worldwide. And with the exception of MEU, we've had another strong quarter, which is apparent in the solid outperformance of all other metrics. And while I'm disappointed that our MAU growth was softer in the last half of Q1 and the first half of Q2, the good news is that we've seen the trend line reverse and all the leading indicators I'm seeing show that we're back on track. And there's a lot to learn for us on the MEU shortfall. Markets like India, Brazil, and parts of Southeast Asia lag behind our expectations. And we've also seen slightly slower adoption rate in some of our newly launched markets. All these regions have been hard hit by COVID. Ultimately, we lost about a quarter of growth between Q1 and Q2. And in hindsight, we likely underestimated the acceleration we saw in MEU growth in 2020. All that said, I feel really, really good about what we're seeing. Taking a bigger picture view and looking at the last two years averaged together, we're still on track to outpace our MEU growth in these two previous years. 2020 was a bit of an outlier. Companies rarely grow in a straight line, and nothing in our data changes our long-term outlook and the audio opportunity for Spotify. In fact, if there's one thing that has surprised me the most during COVID, it's been how effectively we've been able to dream up and accelerate the roll-up of new innovations in the midst of tremendous disruption, while also executing against our existing roadmap. And long-term, I believe speed of iteration will be a key competitive differentiator. So there's a lot of positives that we also bring with us from this. We've highlighted several of these innovations in our letter, but we've actually introduced more than 20 significant new features over the last few months. It's been on everything from collaborative listening worldwide to launching our new live audio experience, Spotify Greenroom. We also began rolling out paid podcast subscriptions and Spotify Open Access, both of which offer solutions for creators and publishers to earn revenue from their Spotify listeners. These product innovations unlock an entirely new class of content on Spotify. And I'm hearing from consumers and creators alike about their firsthand experiences with the changes they are seeing on the Spotify platform. And frankly, from where I sit, it's incredibly exciting to know that there are plenty of improvements we can deliver that will substantially enhance our offering and as a consequence, open new doors for Spotify as well. And all of this has been accomplished while our entire team has been remote, allowing more teams across the world to collaborate on each new release. And we've used our learnings to supercharge our velocity of shipping, and that impact is starting to show. Put in other words, the platform we're building is all about moving from 8 million to 50 million creators, and from 400 million to more than 1 billion users on our platform. For each improvement, we will turn more listeners into super fans, give voice to more types of creators, and offer users multiple ways to interact and engage with the talent they love. When we connect creators at every stage with fans around the world, our flywheel moves faster and faster, unlocking even more potential growth. We are still early in moving linear radio to on-demand audio, which just goes to show the growth opportunity still out there is significant. Then, of course, there's the growing strength and importance of our ad business. Admittedly, this is an area where I previously didn't spend much time, but it's becoming impossible to ignore. It's now safe to say it's becoming a second big revenue driver for Spotify. And I'm especially inspired by the early success of the Spotify audience network. While we are growing the overall ads business from a small base, the potential is significant and the trend line is clear. We saw strong growth of 110% year over year. Adjusting for FX, the growth is even more impressive, coming in at 126%. And looking at podcasts, podcast revenue was up over 627% year over year, or nearly 200% on an organic basis. And the continued outperformance is currently limited only by the availability of our inventory, which is something we're actively solving for. So it's clear to me that the days of our ad business accounting for less than 10% of our total revenue are behind us. And going forward, I expect ads to grow to be a substantial part of our revenue mix. So as you can see, there's a lot going on and there's a powerful pipeline of platform improvements that will benefit consumers, creators, and brand partners in Q3 and Q4. And now I'll turn it back to Brian and the questions.
spk01: Thanks, Daniel. Again, if you've got any questions, please go to slido.com, hashtag Spotify earnings Q221. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right. We'll be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions. And the first question today is going to come from Ben Swinburne. Can you provide some data during the first half of the year that supports the view that MAU weakness is driven by COVID-related factors? For example, are the regions performing better or worse, where the variants can be explained by different phases of lockdown, reopening, or economic stress?
spk02: Yeah. Thanks, Ben. So we can, and we've looked at this. And so there's a couple of things I would highlight. So first is we know in general that engagement leads to better MAU and better retention. And so where we have markets where engagement is high, we're seeing positive trends and where engagement is not as high, the trends aren't as great. And so how can we measure that? Well, there's a couple of ways. One is What we've noticed in markets where COVID is significant, either lockdowns are significant or the spread is significant, you're seeing less mobility. And in markets where you're seeing things more open, you're seeing more mobility. And more mobility leads to higher engagement, which tends to lead to higher retention and better MAU. So we've seen it in that data. We've also seen it, as we've talked about in the past, when we first went into COVID, we sort of mentioned that every day kind of looked like the weekend, meaning every day had sort of similar types of patterns that were like a Saturday or Sunday. You didn't have the normal cyclicality in the day through a commute. And what we've seen is, again, in markets that are more open, in markets where it's less of an issue, you're seeing a little bit more of a return to that cyclicality. Weekdays are starting to get back to the way they normally are with that cyclicality and that usage and engagement. And in markets where COVID is still bad and we're still in lockdown phase, those midweek days are still looking like weekend days. And so we can see it in that data as well. So that's kind of... a nutshell sort of thinking about it from the engagement and metrics perspective. The other thing we know is in markets where COVID was very prevalent, we cut back on marketing and advertising pretty significantly. So regions in particular, India is one where we're still... Relatively new there. We know how our marketing plans work. We know that when we do marketing plans, they tend to have a direct impact on user growth in India. We didn't really spend any money in Q2 in India, given what was going on with COVID in that area. And so as we... increase some of the advertising, increase some of the spend in the back half of the year, assuming some of these markets get better, we feel like we'll see some of that MAU growth come back where we weren't spending in the last quarter. I think those would sort of be the highlights of sort of how we've tried to triangulate between kind of markets with COVID and where things are better or worse and how they've impacted kind of our engagement metrics and our MAU growth.
spk01: All right. Our next question is going to come from Matt Thornton, another one on MAUs. Wondering if you could expand on or quantify the impact of the intake issue you experienced with a third party platform. And again, you know, what gives you confidence that slower MAU growth is a function of COVID as opposed to a function of price increases, competition and or saturation?
spk02: So I'll take the first part. Now, I guess I'll let Daniel take over the second part. So with the third party platform, that was an issue with email verification between us and the third party. In full disclosure, this was an issue on our end. We made a change. That was not caught soon enough, and we believe it had an impact on growth. The estimate right now was about one to two million of MAU growth was impacted by the friction created by this email verification change. It's since been corrected and should not be an impact in Q3. In terms of the first half of the second part of that question, Again, talking about COVID, I think I mentioned it in the last question. I will say we obviously don't think it's price increases because our subscriber growth was actually slightly better than expected. So price increases would really have a bigger impact on subscriber growth as opposed to free user growth. And then maybe I'll let Daniel talk about sort of competition and saturation.
spk03: Yeah, I mean, as Paul kind of outlined both in this question and the last one, most of the underperformance we saw were in sort of emerging markets and not sort of Western markets. So as it goes to the question of saturation, et cetera, those are also in markets where we're in much earlier stages of growth rather than the sort of bigger markets. Markets like the U.S. and most of Europe as well. And then as competition goes, I still look at all the leading indicators. Our engagement is up. NPS scores looking super healthy compared to competitive set, et cetera. So we feel really, really good about where we are. From a competitive standpoint, we see a strong demand for Spotify really across the world. But obviously, as we said, going into the year 2021, we'll have a higher degree of variability and especially for a global company like Spotify, where we have so many regions that are all in different stages of maturity. And I really think that's what you're seeing here. And just to contextualize it even further, it's really been playing out over a quarter. So I look at it more as a bump on the road than anything else. And because we've had such a strong 2020 year. So if I'm disappointed about anything, it's probably just, we should have seen it coming more in the forecasting, but it's obviously very difficult to forecast these things. But I feel really, really good about our long-term growth prospect and that hasn't changed.
spk01: All right. Next question is going to come from Mike Morris. How did churn compare for subscribers seeing price increases during the first half of 21 versus those who didn't? Has it varied meaningfully by market? And what's your view of future price increase potential for standard subscribers or additional increases for other plans?
spk02: Yeah, so churn was down year over year and quarter over quarter, which is great. We don't get into specifics about regions or geographies or products. I will say that in the markets where we increase prices, things performed in line with expectations, if not slightly better. In terms of thinking about things from a gross intake perspective or from a churn perspective, again, everything was sort of in line to slightly better. So nothing there to call out at all in terms of an impact from price increases. You know, we are continuing to roll this out. We've tested a number of markets. I'm not really going to comment on whether or not we'll roll out into more markets or more standard plan or family plan. But you can imagine we're going to continue to test and experiment with all different offerings. And again, we're excited about how the trends have been so far in the markets where we have raised prices.
spk03: Just maybe to iterate on the strategy here, the strategy for us is really all focused on increasing engagement. If we increase the engagement, the value per hour increases of our customers. And as we're seeing that, we will be proactive in raising prices when we believe that ability exists. So it's more aligned with the engagement of our customers rather than maybe some may have speculated competitive sets, et cetera. And that's what we feel so good about when we have raised prices is both the engagement staying very, very strong. And the fact that, as we've said many, many times, we have more than two or even three X and sometimes the amount of engagement per user than some of our competitors do. And obviously that means that there's a very, very loyal customer base there. And I think that's what you've seen play out in the business and why subscriber growth has been so strong as well.
spk01: Right. Next question is from Justin Patterson, directed to Daniel. At StreamOn, Daniel, you talked about a billion user opportunity for Spotify. Given the degree of growth that implies, what are the key investments you need to make to deliver on that target?
spk03: Yeah, I touched upon this in the opening remarks, but for us, we've grown in the past few years from about a million craters to now more than 8 million craters. But the opportunity in front of us is really to get to more than 50 million craters. And as part of that, it's really all about getting those audiences of those 50 million potential creators to start listening to that content, becoming super fans and creating more and more tools for the creators and fans to start engaging with each other. turning that engagement into monetization opportunities and so on. Um, so that's really the kind of main strategy. And a lot of that comes down to the combination of platform improvements, uh, discoverability, uh, just being able to showcase and seeing new content. And then, um, obviously, um, the content team and onboarding new creators and, and finding, um, you know, compelling ways to get creators to feel like Spotify is the number one platform, because when that happens, it, it, it is a flywheel that, uh, turns into, you know, more creators turns into more users and more users turns into more creators and so on and so forth.
spk01: All right, next question from Mario Liu. Can you provide more details on both the strategy and economics of Spotify open access? Are partners expected to pay Spotify revenue share of subscriptions, or is the main goal simply to increase engagement on the Spotify app overall?
spk03: Yeah, so really the idea between Spotify Open Access is to provide an open platform for creators. So we want to enable as much audio as possible, and we view it as we want to be the audio platform of the world. And we have multiple ways for creators to engage with our platform. One of them is obviously the open access where we don't partake and take any revenue and the creator themselves can choose how they best want to monetize their audience or in the case they already had a paid audience like Ben Thompson, they can enable that audience to listen friction-free on the Spotify app without sort of any hiccups. And then to the extent that the creator needs help in both getting more customers to come to them and help in better friction on payment, et cetera, we do also offer that opportunity, and those are added opportunities. revenue opportunities as well. So the better way to think about it is we're primarily doing it to increase engagement and to draw new users there. But I am 100% confident that that also leads to more business opportunities for Spotify long term as we'll have more and more platform tools, whether that be advertising, whether it be payment options that we can offer, or even, you know, in the future, live rooms, etc, we can offer via the platform. I think all of those are exciting new revenue possibilities.
spk01: And actually, it looks like Mario has a follow up on this one. With the Green Room soft launch in mid-June, can you explain why you decided to create a separate app for the live audio experience versus embedding it within the core Spotify app?
spk03: Yeah, I mean, the origins of this is an acquisition we did earlier in this year, and I'm actually very proud of the team. We pretty much made the acquisition, and a quarter later, we're able to incorporate it into Spotify. You have a consistent refresh of the product, stabilize it for a Spotify-sized audience, et cetera. That's very much the reason why this is a sort of separate app, and I think you should expect There will be more and more tie-ins to the main Spotify app too, and obviously we'll leverage our existing distribution on Spotify too. But this felt like a great way to learn, experiment, and iterate much faster than if we had to wait for a full-on integration into the main app, given the difference in the creator and consumer experience.
spk01: Okay, we've got another question from Ben Swinburne. You called out a revenue mix shift towards podcasts, among other things, benefiting gross margins. Previously, you had discussed podcast investments this year as a greater drag versus last year. Has something changed? Is the business now at a scale that it should drive gross margins going forward?
spk02: Yeah, so... A big chunk of that is a couple of things. One is revenue exceeded expectations on the podcasting side, you know, led both organically as well as the acquisition of Megaphone and some of the inventory for Jerry and others. which was super impactful. As Daniel mentioned, his opening podcasting revenue growth was up 627%. It was actually up close to 700% on an FX neutral basis. On an organic basis, it was up almost 200% FX neutral. So the revenue growth there was better than we expected, which led to better margins on that side. On the investment side, I would say it was... Inline, maybe a little bit lighter than we thought in terms of the quarter. That has more to do with just quarterly variances with respect to content spend than it does any shift in terms of the overall investment we'll make for 2021. There's some of the shift got pushed out to the back half of the year. But in general, it was really led by just the leverage you get on having more upside on the podcasting revenue side. Um, in terms of how it drives gross margins going forward, um, I wouldn't necessarily say it's inflection. I'd say it's a, it's a strong indicator of where we can go, um, when advertising is strong and where we can go with the leverage on the, uh, on the podcasting side over time, we're going to continue to invest in the business. Um, but I'm, I'm super pleased with how we performed in the quarter.
spk01: Okay. Next question on Rich Greenfield, also related to podcasting. We sense a shift in your podcast strategy from studio content that's available on all podcast platforms to high profile exclusives like Joe Rogan, Alex Cooper, and Dax Shepard, both in the US and around the world. What's changed with your strategy?
spk03: Hey, Rich, and I believe happy birthday, by the way. Yeah, I don't think really anything has kind of changed. I think we have been experimenting with windowing. We have been experimenting with exclusives. And we've said for quite a long time that obviously we want more and more of the listening to happen only on Spotify. So it's been kind of more of a natural evolution to drive it towards that end. I do think, again, from a strategy perspective, we are very much aiming to be a very open platform all along. And the most important job for us is to be, you know, a great partner to all the creators that we have in the ecosystem. So I don't think it rolls out and say that we would only do exclusives hard on. I think you're going to see us do many different types of deals, but where possible, we would obviously opt to take it fully exclusive. But we're going to be very opportunistic about that going forward.
spk01: All right, next question from Mike Morris, another one on gross margin. What are the factors that drove 2Q gross margin above guide to the 26.5% result that are not expected to recur? Or said another way, what are the incremental headwinds anticipated in the second half of the year, given that the high end of third quarter and fourth quarter guidance is below the 26.5%?
spk02: Yeah, so let me just unpack gross margins in the quarter in general. So we reported a gross margin of 28.4, and we've talked about sort of more of an adjusted organic number of 26.5. So the delta between those two was the reversal of some publishing accruals There were one time in the quarter, but I will say if you think about what we had done we take a very conservative view of how we play publishing globally, where sometimes it's a little bit of a challenge to make sure you're you're paying people so we tend to accrue at rates that are even higher and more conservative than we need and as we're able to get comfortable that we're paying the right amounts, we reverse those accruals. And there's been some work done in Europe in particular to get this accomplished in a way that was satisfactory for everybody. We can get into the details offline with the IR team if you'd like. But so in every quarter for like the last two years, we've actually had about 20, 30 basis points of a hit to gross margin that we haven't necessarily called out because we were accruing more than we actually potentially might have to pay out to be conservative in We now feel comfortable about the proper payouts. So we're able to reverse that accrual. And that was the big 190 basis point gain there. The rest of that's about two thirds of the the upside relative to expectations. The rest of it was a couple of factors. One I mentioned, which was the better revenue on top of podcasting, which helped. We did benefit significantly. on some of the other costs of revenue a little bit more than we thought. You know, so payment fees, streaming delivery, customer service, those types of things where we got a little bit better leverage than we thought. So the team's done a really good job on those angles. And so it's really been a combination of the better revenue growth on the one hand, which helped on the margin side, and then also on the other cost of revenue side. In terms of going forward, so now that that accrual has been reversed, that actually gives us a benefit moving forward. It's about 20 million or so a year. So that'll help in terms of a positive. And then the negatives are, as I said, there's always some seasonality on the content side. So there'll be potentially more spend on the content in the back half of the year than the front end of the year. And we're not expecting quite the same leverage on some of those other costs of revenue that we saw in Q2.
spk01: All right, next question from Doug Emmeth. MAUs have been light the last two quarters and it usually takes 12 to 18 months to convert to a premium sub. Does that slower top of funnel growth create premium sub risk in future periods?
spk03: Maybe I'll start here and then Paul, you can add. So I think it's really important to contextualize that most of our lightness has really been due to an outperformance in 2020 more than anything else. And even despite all of that, as I said in some of my opening remarks, and part of the reason why I feel really good about things, including, of course, all the leading indicators pointing positively, is that when you look at the... sort of the last two years, we're still on track of outpacing those average, the average growth of those past two years. We're still on track of outpacing that in this year. So overall top line MEU growth is healthy. We're just comparing it to an exceptional 2020. And that's clearly on us. We should have realized some of this variability going into the year, et cetera, but I feel really good about that. And then the second part of that is overall, Leading indicators are looking super healthy, engagement, super strong podcast engagement, super strong. So just overall plenty of runway left and we're still early and going from linear radio to on-demand audio. So I feel really good about the sort of future path to a billion plus users when it comes to Spotify.
spk02: Yeah. And I would just add on top to highlight what Daniel said. If you look at, you know, the 2020 and 21 combined and think about the sort of average growth in MAU, it exceeds any other year we've ever done. And so we again, we still feel really good that the overall sort of long term slope of the growth in users is is on track and healthy. And then on top of that, some of the variability has been in markets where we would expect they would have higher free users for a longer period of time. Anyway, there are countries, again, like India, where our expectation is you're playing a long game there. And while we expect subscriber growth there and we're optimistic, you know it's going to take a long period of time. So one quarter here or there of growth is really not going to impact the overall trajectory of where we're expecting. So At this point, we don't think that it should impact any of our subscriber expectations at a minimum this year. And then we'll talk about next year when we give guidance later on in the year.
spk01: Okay, we've got another question from Rich Greenfield, this one on Marketplace. Can you help us understand discovery mode? Walk us through an example of how it's being used and how that leads to 40% more listeners for artists utilizing it.
spk03: Yeah. So the first way to contextualize discovery mode is it's really a marketing tool for artists and labels. So the great thing here is that it's really a result-based marketing tool where you're really only paying Spotify if you find success. Hence why we're highlighting the success from discovery mode here. So it's really a marketing tool where you opt in, you choose the program, you do see the downstream implications of How many more listeners were I able to generate because of this? How many more downstream follows and subscriptions am I able to generate? And labels that are in this beta are now very, very active on it. And we're seeing a very healthy sort of retaining rates of new bookings through the tool as well. And we're just looking at making that easier and smoother in this beta period. And hopefully that will lead to even better results, which of course, means even better adoption.
spk01: Okay, next question comes from Stephen Cahal. How should we think about your ARPU trajectory on a constant currency basis as you move through price increases? Should we expect ARPU to expand from here? Are there any plans for a base price increase, excluding family or duo? And then finally, are there any notable churn impacts from price increases?
spk02: Yeah, so I think I answered the first two already. So, you know, gross intake churn right on plan, if not slightly better in markets where we've changed prices. In terms of thinking about ARPU, yeah, so we were up in Q2 on an FX neutral basis very, very modestly, but we were up, it's the first quarter, I think in three, four years, as far back as I looked, where we had positive ARPU. So that was a great trend. We do expect ARPU on an FX neutral basis to be positive in the back half of the year. That is a combination of the follow-through or the flow-through of the price increases somewhat offset by some of the pressure we get from product mix and geographic mix. But in general, we do see ARPU being up modestly for the back half of the year. Again, on an FX neutral basis.
spk01: Okay, next question from Matt Thornton. Can you talk about what inning you're in with your marketplace strategy overall, the momentum and artist label publisher feedback around sponsored recommendations and discovery mode and how much of an opportunity or focus is live?
spk03: Yeah, so as a European, I'll try to do my best imitation of what inning is what. But if I'd make an educated guess, I would say we're probably in the second or third inning. I have no idea, but that should indicate early in the journey, but not starting. So it's still very much early days. We're past the point of launching this. We're getting results. We're seeing very, very strong results. sort of leading indicators around both results that partners that are participating in these programs are giving us and the feedback around how we should develop this even further. A lot of this just comes down to a lot of details around how labels and artists work together and understanding that and building out products that are bespoke to that. And to an extent, that's probably one of the biggest sort of surprises for us is just how much data sharing between labels and agents and managers and building out almost like an enterprise suite for products where you have certain types of rights for certain types of people on the artist team, certain types of dashboards that should only be available for other types of teams. So a lot of that stuff is the stuff that we've now been building out over these past few quarters and And that's certainly like new and that's what happens in the customer development phases. You're actively going in and learning more about the customer needs and understanding that. But the good news is usually when you're past that, you have a product that's highly tailored, highly bespoke to that type of audience. And I feel really, really good about the feedback that I'm seeing. Of course, as with anything that goes with our music partners, there's always a lot of controversy around almost anything we do at this point, just because of the size we are for the industry and how much of an impact any single change that we do. So even shifts in how our algorithms work massively impact almost all marketing teams on labels and artists too. So we get a lot of feedback on even those types of changes too. But I think that's just more of a sort of a natural evolution as goes to just the scale and the size of Spotify and how important we are for the music industry. And then live, again, I talk about this, but I think the most important thing really is we're very, very creator focused. And so live, if you think about music creators, it is today a vast majority of all the income that normally flows through to an artist. So to the extent that Spotify can be helpful in driving live outcomes, that's going to materially improve the earnings of an artist. And that obviously means that we can be an even better partner to artists that can then drive preferences and get artists engaged even more on the Spotify platform. So it's a long-term, very important focus of ours to the extent that it'll have an impact on the business side. That's not how we work. What we're doing really is we're focusing on the needs for the constituent and building amazing experiences. And thereafter, we tend to focus on how do we monetize that too. So I just wanted to be clear. upfront about that, that you should expect us to try to build amazing products that will drive meaningful outcomes for our partners. And it's only at that point that it starts flowing through to business outcomes for Spotify too.
spk02: And I would just add two things. One, just dovetailing what Daniel said, everything about that is 100%, but it did actually impact gross margins. And I should have said that in my other comments. So there was a slight benefit, not slight, a decent benefit to the gross margin outperformance. So I mentioned the better revenue and I mentioned the other costs of revenue. Marketplace was also another driver of improved gross margins in the quarter. And I should have mentioned that earlier. Um, and then the second point is for those of you, um, non-Americans on the call, that's about the 15th minute of a, uh, of a football game in terms of, uh, translating innings into football games.
spk03: Great. Now I understand. I liked that you said football too, by the way, I didn't call it soccer. So I appreciate it.
spk01: Okay. Next question comes from Doug Emmett. Um, related to podcasting. How would you characterize the early returns on the Spotify audience network, the open access platform and streaming ad insertion? And what are the next steps to boost their utilization and monetization?
spk03: Yeah. So I think the early returns has been a great creator excitement, which usually translates to adoption. Some of these are more mature than others. So OAP, very early days, still building it out, rolling it out, but great returns. excitement among partners. SAI and SPAN obviously, you know, already are alive today and even in the quarter started impacting the results that we're seeing. But for me, the most important thing, again, comes down to focus on our constituents that we're serving, providing great tools for them and When that happens, that then leads to better outcomes for Spotify. And maybe if I zoom out and just kind of give some context, I think really the big thing you all as analysts should focus on is the shift of Spotify as a you know, premium subscription music service to an audio platform. And that audio platform means that the business model fundamentally of Spotify now is very different than what it had been in the past. And you're starting to see that shift come through with ads, but I suspect over time, there'll be many more tools and services that we are, you know, driving and and delivering here that will then all start impacting the overall results in different ways of the business going forward. And so when I, in my opening remarks, focused on that sort of shift on velocity for product improvements and platform improvements, that is, for me, perhaps one of the most important leading indicators here. for me about sort of having that kind of impact both for creators and consumers that then leads to tangible benefits. But you should really expect this to be more investing in the platform side of Spotify, you know, which will then lead to lots and lots of really exciting business outcomes for Spotify in the future too.
spk02: And then it just, I'll go Daniel at macro. I'll go a little micro here. If you look about at sort of span and SI in particular in terms of ad products in the quarter, as we mentioned, we had a really strong advertising quarter numbers, all beat expectations. We've seen through the implementation of some of these new products that sell through rate was better than expected in the quarter. And CPMs were also a little bit better than expected in the quarter. So we saw, you know, better utilization as well as better CPMs in the quarter.
spk01: All right, we've got the next question from Hamilton Faber. Could you comment on recent press reports that Spotify is interested in becoming involved in live events? How easy would it be to scale in this space?
spk03: Yeah, and maybe by way of context, we've actually sort of, depending on how you view it, been involved in live space now for many, many years, both having as a feature the ability for artists to post upcoming concerts on the platforms on their Spotify pages. But then subsequently with our own playlist and brands like Wrap Caviar, we've been doing some shows with tens of thousands of people in attendance and having that all over the US and UK and so on. So we've been in the space for quite some time. Now, I can't really comment on sort of product tests that we're doing. But as I mentioned in my previous comment, live is a meaningful thing for many of our creators. And it's something that we're excited about. And in the past quarter, as evident by some of the tests we did, we did some live concerts, digital live concerts and tested that and saw some really positive results from that and lots of excitement from our artist partners about Spotify helping out during COVID and providing more meaningful ways for them to monetize their fan base. And I think that's in line with our strategy to the extent that live will have an even bigger impact. I think we're still an open platform. We want to work with as many partners as we can and provide as many opportunities for creators to create more ways to
spk01: know turn a listener into fans and turn fans into super fans and increase the monetization for those creators all right next question comes from uh deepak and it's directed to paul can you provide additional color on some of your assumptions in the second half outlook or guidance you've renewed several promotional programs but also have new ones such as tick tock how are you thinking about contribution from these new programs particularly as you potentially expand them into more markets
spk02: Yeah, I mean, it's hard to talk about any one plan because we don't really do that. I would say in general, we're excited about a number of new partnerships we have. They are all baked into our forecast moving forward. Obviously, the newer ones are sometimes tougher to forecast because they are new and we don't have a track record or history in terms of success. I would say in addition to the partnerships, which we're excited about, there'll be – higher marketing expense in the second half of the year as well, because we'd pull back on some of that. So I think that's all factored into the guidance, as well as kind of the trend lines we saw coming out of Q2 relative to the first half of Q2. So that's all what's in the numbers with the obvious caveat that there's still a lot going on. There's still a lot of variability in the number of markets with respect to COVID. So we are forecasting and monitoring as best we can.
spk01: All right, next question is from Mark Mahaney, also somewhat guidance-related. What updates can you provide on the two-sided marketplace and your view on when these initiatives will become financially material to the company?
spk02: Yeah, so I think I said earlier, we are starting to see benefit of the two sided marketplace, it did have a positive impact on gross margin in the quarter, you know, to Daniel's point we're going to continue to launch out tools and services and products that help creators and artists and labels and enable in order for them to sort of maximize you know, their careers and their monetization. And so we feel good about it. I think a couple, you know, while ago, we gave some, some numbers on marketplace and where it's going. I would say we've sort of met or exceeded all of the expectations we had in terms of the marketplace impact on, on gross margins.
spk01: Great. Next question is from Jessica Reeve-Ehrlich. Is the advertising strength you're seeing right now solely from the US? In addition to a healthy ad market, how has Spotify audience network contributed to the growth? And should we anticipate faster growth as you roll out to additional geographies?
spk02: Um, so the US is our largest market when it comes to advertising, that's probably not surprising. And it did outperform but all of our markets actually outperformed. So we had great growth in markets outside the US and so, you know, as the US goes the advertising market for us will go because it is the largest part but every, every segment we had every geography outperformed their expectations which was, which is great. Spotify audience network definitely helped to contribute to growth. I think, as I mentioned a little earlier, sell-through rates were better than expected. CPMs were a little higher than expected as well. So we're seeing the benefit of what we created and bringing the megaphone inventory into the Spotify family, which has been great. And, you know, geographies, more geographies will help. As I said, the U.S. is still predominant in terms of advertising in Europe is a pretty big second and everything else is pretty small after that. So I would say for the near term, it's really a U.S. Europe story over over time. More of those geographies will contribute.
spk03: Maybe just as an addition here, we've talked a little bit about this before, but I'll say it again. We're mostly supply constrained and off-demand constrained, meaning it's really more about us opening up more inventory than there being a lack of interest from advertisers in advertising with us. So the really big effort for us at the moment is just how do we unlock even more supply for all the demand that we have?
spk01: All right, we've got time for one or two more questions. The next one is going to come from Doug Ameth regarding podcasting. O&E content is a small percentage of overall podcasts on the platform, but it accounts for approximately 20% of the total consumption. How do you think about the optimal mix of O&E content going forward?
spk03: I don't think we have a particular number that we're striving towards. What we can see is that the O&E part of this tends to drive a bigger bump in engagement and in particular translates into more new users. So whenever we've done an exclusive, we've tended to be able to convert more of the existing Spotify audience to also start listening to podcasts on Spotify. And likewise, we've been able to get more people from outside outside of Spotify to try Spotify for the first time. So it's definitely been positive. But as the mix goes, we're primarily focused on making Spotify the audio platform on the internet. And we think that is the most important thing, and that's opening up more content. And as I mentioned, going from 8 million creators to 50 million creators is the primary focus. But obviously, the O&E part is a very helpful addition, and it's helpful not just with our ability to get more people to listen to podcasts, but also is a very attractive proposition for advertisers, as I think was evident in the quarter.
spk01: All right. Thanks for the question, Doug. And actually, we are out of time for Q&A, so I'll turn it back over to Daniel for closing remarks. All right.
spk03: Well, thank you so much for listening to this Q&A portion. And of course, MEU growth slowed during the significant COVID-related pull forward we saw in 2020 and the impact of the uneven recovery in the first half of 2021. But we do anticipate a strong second half, and our trend lines are looking very healthy. And of course, in the short term, some COVID uncertainty lingers. And in the long term, the shift from linear to on-demand audio will only continue to accelerate. And as more than 1 billion user opportunities left, I think it really reinforces our position as the audio browser of the world. And no one else is as laser focused as we are in audio. It's all we've done for over 15 years. And that dedication is an advantage we leverage every day for creators, for fans, and brand partners. We're pushing ourselves to deliver at an unprecedented pace, and we're building out the infrastructure to go even further, faster, and long-term. I believe these product innovations will bolster MAU and subscriber growth, helping to attract more and more users around the world and connecting them to creators they already love, as well as the ones they are waiting to discover. I'll be talking more about the quarter on our podcast, Spotify for the Record, which will go live on our platform tomorrow. Thanks again, everyone, for joining us.
spk01: Okay, and that concludes today's call. A replay of the call will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks everyone for joining.
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