Spotify Technology S.A.

Good afternoon and welcome to Spotify's third quarter 2024 earnings call and webcast. All participants are in a listen only mode. If you require operator assistance at any time, please press star zero. As a reminder, this conference call is being recorded. I would now like to turn the call over to Brian Goldberg, head of investor relations. Thank you. Please go ahead.

Thanks, operator, and welcome to Spotify's third quarter 2024 earnings conference call. Joining us today will be Daniel Ek, our CEO, and Christian Luiga, our CFO. We'll start with opening comments from Daniel and Christian, and afterwards we'll be happy to answer your questions. Questions can be submitted by going to slido.com, -O.com, and using the code hashtag SpotifyEarningsQ324. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. If for some reason you don't have access to Slido, you can email investorrelationsatiratspotify.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 shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliation between our IFRS and non-IFRS financial measures can be found in our shareholder deck, 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. All right.

Thanks Brian, and hey everyone, and thanks for joining us. So we're in LA this week to spend time with creators, and over the next few days, we'll have a couple of announcements that I'm sure will be of interest to you related to our expansion of video on the platform. So more to come on that. But I want to start this call by welcoming our new CFO, Christian Lugia. I know some of you have already met him, and I hope the rest of you have the opportunity to do so soon. Christian brings incredible expertise and proven leadership to Spotify, and I'm grateful to have the benefit of his track record. I also wanted to take a moment to thank Ben Kung for the fantastic job he's done as interim CFO. It's been seamless, which is a huge testament to all that he's brought to the role. As you can see, there's a lot of positives this quarter. Q3 is another standout in what you've heard me refer to as the year of monetization, and we're on track for our first full year of profitability. We outperformed on both subs and MAU, revenues were in line, and we had significant beats on gross margin and operating income. We also had another sequential and all-time record quarter of free cash flow. Back at our 2022 investor day, we set clear goals for Spotify's growth, and this quarter marks a key point where we successfully achieved and even surpassed those targets, doing so slightly ahead of schedule. And I think this demonstrates what we've been saying over the past year. Spotify is not just a great product, but well on its way to become a great business. A big thanks to our team for their hard work and dedication in making this vision a reality. Over the past few years, we've continuously modulated our time and resources between focusing on growth and optimizing for profitability. This approach led to our record year in 2023 for MAU and premium editions. However, as the macro environment shifted, we made the difficult but necessary decision to adjust and focus on our efforts on cost efficiency. And we did this while continuing to transform our business, which included expanding into audiobooks in Europe, launching new subscription tiers and bringing more video onto the platform, just to name a few. And today's results demonstrate what we've consistently seen, the importance of finding the right balance between growth and reinvestment. So as we head into the year, I'm sure you're asking what does this all mean for Q4 and beyond? We will close out Q4 just as we started the year, laser focused on monetization and the underlying fundamentals of our business. Looking at our forecast, we expect to make further progress across all of our key metrics, which sets us up with plenty of runway for growth and profitability expansion in the years to come. But make no mistake. We're not here to merely optimize for today. I am as energized as I've ever been about the current landscape of technology. What's unfolding in AI with all of its knock on effects is both thrilling and humbling. Moments like this don't come often. They're inflection points where you can either let the opportunity slip by or you can seize it and press forward with conviction. We're choosing the latter, fully committed, heads down and building for a future full of possibility. So as you think about Spotify in 2025 and beyond, picture a company that operates with the same discipline management you've seen this year, but one that also has the ambition to seize the opportunities presented by what's happening in technology. In the near term, I see potential for transformative shifts in music discovery and new innovative ways to connect artists and fans like never before. All great stuff for the music industry, which will drive further growth across our core business. And just as we successfully entered the audiobook space, we're committed to making the targeted investment that also expands Spotify into new areas, enhance the platform and deepen the value we bring to users. And this relentless focus on consistently delivering exceptional value well beyond the price a user pays for Spotify is how we drive sustainable growth for all stakeholders across our entire ecosystem. So to conclude, our commitment to the long term goals we shared at the investor day remains unwavering, but our journey will, as always, be defined by bold innovation and relentless pursuit of what's next. And with that, I'm going to turn it over to Christian to share his perspective and then he'll provide more details into the numbers.

Thanks, Daniel. And thanks, everyone, for joining us. I could be more excited to join Spotify. I've been on board for just now a short time and I'm impressed with the talented teams I met and I see great potential in the product business. I'm looking forward to working together in efficiently allocating our capital and scaling the business towards our long term goals. Turning then to the quarterly results, quarter three marked another strong quarter for the business. MAU grew by 14 million to 640 million, and we added six million net subscribers, finishing at two fifty two million. Both MAU and subscriber growth outperformed our guidance by one million. Total revenue grew 21 percent year on year on a constant currency basis to four billion. Premium revenue rose 24 percent year on year on a constant currency basis, driven by continued subscriber growth and ARPU acceleration associated with price increases. Our advertising business saw currency neutral growth of seven percent year on year, reflecting another quarter of volatile marketer spending on brand related campaigns. Moving on to profitability, we're pleased that we have delivered on our intermediate term gross margin target of 30 percent. In fact, was Martin came in at the record 31.1 percent, surpassing guidance by 90 basis points due to primarily content cost favorability. Operating income of four hundred and fifty four million euro also set a new record aided by gross profit strength. Operating income was impacted by 54 million in social charges, which in the quarter were thirty nine million higher than our forecast due to share price appreciation. As a reminder, we don't forecast share price movements in our outlook for the business since they are outside of control. Finally, the free cash flow was a record seven hundred and million seven hundred and eleven million euro in the quarter. And performance here was driven by improved operating income profile as well as network and capital favorability. Looking ahead to fourth quarter guidance, we are forecasting six hundred and sixty five million .A.U. an increase of 25 million from quarter three and two hundred and sixty million subscribers, an increase of eight million over quarter three. We are also forecasting four point one billion in total revenue. As you have seen in today's results, a favorable foreign exchange rate movements created a larger than expected headwind to the business in quarter three. These movements have also impacted our quarter for outlook by approximately 80 million euro. We also anticipate gross margin of 31.8 percent and operating income of four hundred and eighty one million euro, pointing to our first full year of positive operating income of one point four billion. With respect to subscribing net additions, the very low levels levels of churn that we expect in the six markets where we recently announced price increases is also incorporated into our quarter for outlook. This is consistent with what we have seen historically. We have also incorporated our ongoing actions to drive better subscriber monetization. Although new pricing will contribute towards our growth in quarter four overall, we expect the lapping of two to three years price increases that we had in sixty three markets that they will lead to an approximately four hundred basis point moderation of a year on year or growth on a constant currency basis in our revenue outlook. In terms of our recent gross margin improvement, as Daniel mentioned, we are very pleased with the strides we made this year. A significant rate of improvement in our gross margin in 2024, which exceeded even our own plans, has been exceptional and should be viewed as such. Looking ahead, we see substantial runway to grow margins and income over the long run, which will be driven by continuing focus on improving our product and business via targeted investments, disciplined management and improving monetization. Finally, on capital allocation, we have a strong balance sheet with six point one billion in cash and equivalents and one point three billion euro in an exchangeable debt and a trading 12 month free cash cash flow profile of one point eight billion. As a sustainable growth company, our top priority remains to invest in opportunities that make sense for the business with high returns. We are, of course, considering our shareholders as part of our overall framework as well. Overall, we are very pleased with the positioning heading into the year end and looking forward to building on our momentum going forward. With that, I hand things back to you, Brian, for Q&A.

All right. Thanks, Christian. Again, if you've got any questions, please go to slido.com. Hashtag Spotify earnings Q324. 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. Today's first question is going to come from Eric Sheridan on capital allocation. Are you thinking about a multiyear approach to capital allocation as your profitability levels continue to scale? And can you frame your priorities for capital between growth investments and possible capital returns?

Well, I'm going back to my remark, but also just emphasizing again, it's really amazing and good to start this this journey for me and for the company now with with a strong balance sheet, which we have. It is an important and great question. It's fantastic to see now how we have brought healthy returns in the past and the investments we have made. And I think the main focus is to continue to focus on on LTV over SAC ratio. And I believe the investments that we have made in audiobooks and others are those that we should look for going forward. How do we create growth and a sustainable profitability in this company?

Next question is going to come from Bacha Levi on gross margin performance. Can you provide more color on what drove the gross margin beat versus your outlook? What are some of the drivers for further margin expansion sequentially?

Thank you. The gross margin improved in a way that it was a continuation of quarter two. I mean, we have a very good marketplace program that that actually is developing well and has improved the gross margin. We also have streaming and delivery costs and I have to add also payment costs that we are scaling on. And on top of that, we have the US publishing rate favorability that comes through our books. And that is the reason for quarter two. And that's the reason for quarter three improvement. And and I'm not going to go in that much on future drivers.

OK, our next question comes from Doug on on 2025. You've now reached the low end of your medium term financial targets. How are you thinking about drivers of incremental leverage into 2025? More of the same across marketplace bundling price increases, podcast improvement? Or are there other new initiatives?

Yeah, I really do believe it's kind of a bit of both. As you look at 2025, it's pretty much a continuation of the trends that you some of them you already spoke about yourself. I would probably add audio books to the mix, too. But as you kind of go into the later part of the year and certainly 2026, we are looking at new initiatives, too. So the story of Spotify, if you know, is by now through our history of a public company, it's really been one where we constantly keep innovating and we keep pushing the envelope of what our consumers are expecting for us. And we really do that through that lens of the value to price ratio that we keep talking about. How do we constantly and relentlessly add more and more value to our consumers? Because we know that if we focus on that, eventually price will be there for us to take as I think we've proven this year.

Our next question is going to come from Justin Patterson on pricing. The record labels have recently signaled that they expect industry prices to increase. Given the product innovation at Spotify relative to peers, how do you think about setting price in relation to the broader industry? Do you need competitors to raise price to support your own price increases?

Yeah, I mean, look, we feel really good about the proposition of Spotify and our value to price. And in many markets, in fact, we are a price leader. And I think that is a testament to the great offering we have at Spotify. Now, with all that said, obviously, every product in the marketplace lives in respect of the competitive set as well. So that is not an endless thing. The key thing, however, is we are rather than speaking about the competitive set, we are relentlessly focusing on how we can keep adding more value to our consumers and how do we measure that value. And you've heard us talk in the past about these concepts quite a bit. So you hear us talk about everything from Shuren, you hear us talking about engagement being a leading indicator for low Shuren and so on. These are all metrics that we're tracking relentlessly. And when we see them and we keep developing and enhancing our proposition and our engagement with our customers, we will eventually have opportunity to raise price as well.

OK, our next question comes from Jessica Reif Erlich on advertising. There have been reports that you've built your own ad exchange and can tie into demand side platforms such as the trade desk. Can you provide some color on the time to ramp up, how quickly you can scale and when will it, quote unquote, move the needle on your advertising revenue?

Yeah, thank you. I just want to remind ourselves about the journey we are on. Also, I mean, we we are at its business today have been heavily reliant on direct sales and top funnel brand spend. And therefore, I mean, we've seen over the years the type of ads business that we built has an exposure to the macro trends. So with this, we have now diversified and changed our platform and built this Spotify ad exchange and moving on with the trade desk as a test pilot. What we do see is that 2025 will be a year of testing and trying out this and we will see the impact going into two thousand twenty six. It is early days. We are new to the auction environment, and it's important that we are very deliberate and careful about how we roll out the supply into these channels. But we also in the same time, very excited that this will help us to change.

OK, our next question comes from Richard Greenfield on a super premium product offering. Well, some of the labels have talked publicly about this. There doesn't appear to be a consensus of what the record labels or artists want the product to be. What does Spotify want the offering to be and how involved with the will the artist need to be to make this work?

Yeah, so so overall, just as a reminder, we have talked about this in the past quarters as well. We are excited about this and just to set expectations, we are moving from this one size fits all markets that quite often happens in in early, early development, where you have fewer skews to then as you keep growing into more and more mature marketplaces, you add more skews to address more of the market. That is sort of how you should think about the evolution of Spotify. And this higher priced music tier of Spotify is certainly one that I think will have a lot of growth for the music industry and something that consumers will love to. Can't really talk about specifics for it, but again, I can talk about the principle that's driving this. The principles for us is always the same, which is how do we create something that consumers love, but that also delivers value back to creators. And you can go back to vinyl buyers, you can go back to all of these super fans that already exist to look for clues in what some of the things are that they value. Some of those things are proximity to artists. Some of those things are, of course, better sound quality and a bunch of other things. I can't get into specifics, but I think I've left enough breadcrumbs for you guys to get excited by.

Okay, our next question comes from Benjamin Black on 2025 framing. 2023 was the year of efficiency. In 2024, you're proving out the unit economics with the strong gross margin performance. What will the story of 2025 be?

Yeah, I wish I had a much cleaner way of positioning the story, but the story of 2025 is growth with profitability, the mix of both being the story. So it's really proven that it's not just about growth or just about profitability, but that we can deliver both at the same time. And as I mentioned in my opening remarks, we're very excited about what we are seeing right now and the inflection points that sometimes opens up as technology becomes available for us to add value to consumers. And this adding value is the key long term indicator, I think, for building a very strong business. And so we see a lot of those opportunities in 2025. And obviously, we will remain a profitable company as we're pursuing those investments.

All right. Another question from Rich Greenfield on advertising. Advertising revenue is growing slower than MAUs and has shrunk from over 14 percent of revenues to now under 12 percent. We understand the softness in brand advertising, but there seems to be a growing disconnect between the engagement of your audience and ad dollars. Is your programmatic push the fix alone for advertising?

Thank you. Let me go back and just remind us again here that I just want to say that we actively build out to become a more automated business to accommodate the external demand. We do rebrand our self-serve platform, Spots Ads Manager, and we're also piloting our first applied side program, Ematic Platform, Spots Ads Exchange. And I think programmatic is a big part of the solution, that's for sure. But there are also other things into the mix, driving more measurement, diversifying ad formats, etc. That will help us. And on programmatic, we should view that as a trivial single fix. With programmatic comes auction, and auction is a new thing for us. And that will be a big support in this journey.

All right. Another question from Doug Anmuth for Christian. Christian, since joining several weeks ago, where have you been most focused? How should we think about your operating philosophy? And has anything surprised you thus far about the company?

Well, I'm getting a little bit senior, so I don't get surprised that often any longer. But it is amazing to see the journey and the results the company has accomplished, I have to say again. And when you get into the company, you see it also hands on. And that is always something that gives you a little bit of warmth. And so that's a very good question. Also, what have I done my first two months in the company? And to be very explicit, I mean, the first five, six weeks I spent trying to to learn and understand, meeting my colleagues and external partners, everything for what drives the business, how how are we set up? How does the company work and what are the drivers? And then I have spent quite a lot of time making sure I'm in control of the numbers that we just presented today to the market. And and from there, I will I will discuss with with management how we should take things going forward after this. So that's really where I started. And I just want to again say that my I'm really excited, but and my style then. Well, I would leave the daughters to talk about my style, but I'm I'm quite hands on. I usually say I work with a short screwdriver that makes me come close to the details to understand them before I go in and decide on how we should do things in a broader scale.

OK, another question from Jessica, like on audio books. Can you provide an update on audio books usage and engagement?

Yeah, thank you, Jessica. We're very excited about audio books, and it's fascinating to see, you know, a year into this journey, how much has happened. You know, we as we launched about a year ago, we thought we had a pretty comprehensive library of title, but we've more than doubled now the number of titles we have available, which is really fantastic. And we are seeing strong, strong, strong adoption across the board and the adoption per user is also growing very nicely. So, for instance, in the US among the audio book users, we're seeing more than five hours more consumption per Spotify users. And remember, Spotify is already a very well used service. So the fact that we can see five more hours of consumption on average is a pretty strong testament to what a great proposition this is for consumers. So we're very excited.

OK, another question from Rich Greenfield on sports. We've seen Amazon and Netflix push into sports to build their respective advertising businesses. Does Spotify need sports audio content to accelerate advertiser demand and interest?

I'll take this one. I think overall we know what we need to do in advertising. And the primary story in advertising is about meeting the marketeers where they want to be met. And that is in the programmatic marketplace and enabling them to more easily buy across Spotify, the network. So I think that's the bigger story. Now, when it comes to sports in particular, the truth is we're already playing a pretty big role. So just look at something like The Ringer. The Ringer is doing phenomenal for us on the podcasting side. And I know many of you are listeners already to Bill Simmons and all of his podcasts. And so, you know, we see that as a great driver for us with advertisers and with consumers as well. So we're very excited about that.

OK, our next question is coming from Deepak on AI. Given all the innovation on the product front with AI, video, et cetera, over the last six months, can you give us some color on how these enhancements are benefiting metrics such as engagement and retention?

Yeah, overall, you know, Spotify keeps bringing up engagement and keep bringing down churn. That is the story we've been on. And whenever someone thinks we've reached a ceiling, it turns out that we're finding more ways to drive up the engagement and driving down the churn. And I think this again showcases that we keep adding more and more value to the platform across the board. And AI is one of those ways. Video is obviously another one. Podcasting is the third. Audiobooks is the fourth. What we're doing with courses in the UK being a fifth, there's so many ways that we both adding lots of new ways that people can engage with Spotify, but also small incremental improvements that are driving great results. But we are very excited about, you know, driving our usage of Spotify up over the next coming years. I mentioned that when we spoke about AI too, but I really feel like this is a huge unlocking technology that can enable really transformational new ways where people want to soundtrack their lives in even more ways than they've done in the past.

OK, another question from Benjamin Black, this time on MAU. You changed your marketing strategy and now we're seeing MAU net additions revert towards prior levels. Did you dig in a little bit more into what you did? How sustainable is this level of MAU growth? And should we expect a reversion back to the 70 to 80 million per year net ads you've pointed to in the past?

I think it's early days, but I do believe we turn a corner and are back to a growth again on the MAU side. And I'm happy about that because I wasn't happy about us missing the prior forecast. So it feels like we've got a good grip of it now. Now, as it relates to what do we do to make that happen, the reality is it's a bunch of different things. But the chief among them is really product improvements. So lots of small tweaks that have been driving good results. Things in the past that probably weren't smart, we've reversed. We've added new things as well. All that's created the backdrop of stronger engagement, which then translates to more MAU. Then, as you mentioned, on the marketing side, we have improved there too. So we have spent a little bit more on marketing. Now, it's important to add why didn't we do that prior? Well, we didn't do that because we weren't seeing efficiency. So as we're seeing more efficiency, i.e. the SAC to LTV ratio that Christian spoke about, then we are happy to spend. Why wouldn't we be? So the team's been working on a bunch of those things. And if we see great opportunities with great SAC to LTV ratios, we will pursue them. If nothing else, the core will be about improving engagement on the product, improving efficiency on marketing.

Okay, next question is from Rich Greenfield on video podcasting. Daniel, if you put your creator hat on, will Spotify offer an ever larger platform for video podcasting? It's still dwarfed by the scale, reach, and engagement of YouTube. We presume that's why creators like Joe Rogan want to be on YouTube and not just Spotify. How do you change that over time?

Well, I mean, if you look at the history of the company, we've always been up against much bigger companies and platforms. And I feel like this is the story of Spotify. And we don't really, as we're entering spaces, we don't think too much about competition is the honest answer. What we do think about is what are the needs of the consumer? What are the needs of creators? We have an upcoming video event tomorrow. So I'm plugging that to all of you. I hope you'll follow along in what I'm sure people will live tweet and all that from the event where you can see really our philosophy at play, where we're solving real creator needs, where we're solving real consumer needs that we're seeing. And it's really how we're pursuing this. I think that there's not so much people make it out to be this sort of the winner takes all dynamic in that there's only one player that can solve all of it. What we're actually seeing is creator wants to be multi home. They want to be in more platforms. That's certainly what we learned in podcasting. And that's what we're leaning into. I think what we're seeing now is we have lots of creators that are on Spotify, but only with parts of their content. And they want to enable more ways for them to add that more content to Spotify. There are new creators that have needs which we aren't yet fulfilling, but hopefully tomorrow is a great step in that direction.

OK, our next question is from Stephen Cahal on the ad supported tier. Would you consider a modest subscription fee on ad supported users in mature markets? This appears to be attractive to the labels and it may support your commentary about scaling profitably in ad supported, especially in a soft CPM environment.

I can't really comment on specifics about pre announcing what we may or may not do, but I can talk about the sort of general views. We're always open to considering how we evolve our opportunity. And as I mentioned before, we're always thinking about what does creator needs and what does consumers want? And we're really trying to find win-wins between the two. One of the challenges and specifically why music is not analogous to video, however, that's good for investors to be aware of in music specifically because of the regulatory rights environment. You are with radio and other things. There's a lot of ad supported music available out there in the marketplace. This is not something that's likely going to change. And so as you think about that, there is a very, very different industry dynamic in music as compared to, say, something like video, where we've obviously followed what's happening with the ad supported tiers with fees involved, etc. So we're always open. We're always discussing with our partners and with consumers needs, thinking about how do we create the best possible proposition. But it is a very different environment than in video. So I don't think we can just overlay what happened in video and say, hey, let's do the same thing in music because it's a very, very different regulatory environment and very different industry environment. Okay,

we've got another question from Jessica Reif Erlich on revenue drivers. At your 2022 investor day, you provided a revenue goal of 20 percent annual growth. Are you comfortable that you can achieve this? And can you help us think through the various levers to reach this target?

Yeah, so we have very high goals in this company, and we will continue to set very high goals across the board. And we're always going to push for more innovation and constantly push for what's next. And we want to be one of these very few iconic companies that defy expectations. And that's certainly what I'm focused on every day of my my task here. Now, what are the drivers to get to 20 percent annual growth? Well, it's probably a combination of both super strong top line user growth. And then on top of that, very strong monetization. And so in both of these buckets, when you really think about it, we're just scratching the surface of all the potential we have in reaching more consumers across the world. So as you think about the addressable universe, there's definitely more than three billion people around the world that cares about music. We're only at six hundred and forty million so far. So there's plenty of growth left to be had. Now, obviously, if you stretch out 20 percent across decades on, it will be very tough because we've run out of people. So eventually that growth, depending on what sort of time period you're looking at, will be hard to accomplish. On the revenue side, however, you saw us this year to close some of that gap between the value to price ratio. We're now back to adding more value there and we will eventually close the price gap on that, too. I feel very good about our ability to monetize and we have to put things in perspective, too. A few years back, it was a big question around whether Spotify could even increase prices at all. I think we've proven now that we have that ability to do so. We have the ability to lead on price and we have the ability to do so profitably. There's nothing that makes me stop and think that we cannot do this going forward. But we certainly, to get to 20 percent growth, need both advertising to grow faster than what is going now and our subscription business had to have more skews to help with that sort of growth. So those are sort of the main ingredients as you think about this.

Okay, our next question is going to come from Kanan Venkateshwar on distribution opportunities. With Record Labels looking to launch Superfan apps, could you talk about Spotify's potential role as a distributor of other applications?

Well, we really don't have anything to announce at this moment. But again, the goal of the company, as I've said now a few times, is to look at the intersection of consumer needs and creator needs. We're always open to discussing with the industry how we can improve our proposition. And if there are Superfan apps that we think has great consumer appeal, we would be more than happy to look at ways to contribute to that growth.

All right, our next question is going to come from Doug Anmuth again on advertising. FX Neutral ad revenue growth of 7 percent is well below digital ad peers. Can you talk about the product roadmap here in diversifying the advertiser base away from brand while leveraging demand side platforms and other ad tech partners to accelerate growth?

As going back a little bit to what I talked about before, so actually the purpose with the changes we are doing and with the Spotify Ads Exchange is to actually move into more performance-based ad services instead of brand. And that will then take us there. So that's the short answer and I'll keep

it at that. All right, we've got a question now from Maria Rips on Marketplace. Is there any quantitative color you can provide around Marketplace growth so far this year? Are there any new products or features that you've recently introduced or are working on that you think could be notable growth contributors in 2025 and beyond?

Yeah, Marketplace, I'm very pleased with what we're seeing with Marketplace. We are, there are more and more artists and label teams that are using Marketplace across the board. That's driving some of that growth. And as it comes to product features, one of the big things is just giving more control back to those marketing teams in how this shows up when it works, when they have their campaigns ready, how they do it, and more granularity and more integration with the tools and workflows that label teams and artist teams are already using today. Those are some of the sort of near-term drivers. The longer-term drivers is I still think we have a lot to do on the merchandising front. And on the merchandising front, what I'm simply referring to is how the music releases and Marketplace products show up to users. What we do see as one example, as we've been adding music videos, when there's music videos on a product, you see significant uptake in stream share. We're just giving more and more tools and more and more controls to label teams and artist teams on how to use Marketplace.

Okay, we've got another question from Jessica Reif-Ehrlich on music royalties. There's been speculation that the record labels would like to move to a per-subscriber pricing model similar to cable TV networks. From a Spotify perspective, what are the pros and cons from moving from variable to fixed pricing?

Yeah, I'm not sure I can comment so much on that speculation, but to say that we have a very healthy relationship with our partners and we're constantly discussing what the future of the model will be and how this can provide growth for the music ecosystem.

Okay, we've got a question now from Mark Mahaney on new features. How impactful have music videos and AI DJ features and products been to user engagement and satisfaction?

One of the more interesting things is that as you think about something like Spotify and the size of Spotify, over 640 million users, the reality is there are very few things that move things on the aggregate and there are more things that may move numbers on small individual cohorts. AI DJ and music videos, however, have been exceptions to that where it truly is moving averages and we see that people who are using music videos have significantly higher engagement and retention than ones that don't, similar to how AI DJs work in too. AI DJ, we're seeing amazing results not just on quantitative metrics but also on quality metrics, how people feel about Spotify, what they say they love about Spotify. Both music videos and AI DJ are showing up in pretty great ways and I think this showcases the strength of Spotify. We are at our best when we can bring great innovation to our consumers.

All right, we've got time for a couple more questions. Next question is going to be from Michael Morris on AI objectives. Can you help frame incremental investments for your longer term AI growth objectives? You mentioned you'll be disciplined but should we expect an additional period of net investment while you pursue new opportunities?

I think, again, one of the hard things I think for the entire technology industry right now is it's very difficult for all of us to try to predict exactly what that investment pattern will look like because there's so much movement in the underlying technology stack and what it means. I think what I can say to make investors feel calm about this is that this is not reckless spending and we're not back to 2021 but we're going to be highly disciplined in what we do. We also, unlike other AI companies, this is not CAPEX intensive for us. This is purely based on usage when we find it and obviously usage is correlated to higher engagement and higher retention which then brings value. So that's how we should be thinking about it but we will be disciplined but if we see something that we think will drive meaningful engagement or retention uplifts it is in the best interest of Spotify obviously to pursue that and if that means that shorter form trade-offs where numbers on a margin perspective will go down for a little bit of a while we're still always happy to make that trade-off. Now that said, of course, we are going to be very disciplined in how we

pursue it. Okay we got another question from Kanan Vinkadeswar on podcasting subscriptions. If podcasters like the New York Times use a paywall on Spotify to improve their yield, is there an opportunity for Spotify to share in that upside? You know

it's, there's of course constraints in how the app stores work and our ability to work with upsells overall. As you guys know this is a very near and dear topic for me personally that we are fighting because we see the need for creators that they want to provide more opportunities à la carte and we would love for that to happen. So there's some restrictions in how we're able to do so given how app stores exist but I think in a perfect world what we are seeing is partners of ours are coming and they want to offer more products through Spotify. They would love for us to be incentivized in doing so. The question is more of a technical one and sort of app stores perspective one. Can we even do it? But in theory we could and I think our partners would like for us to help drive their businesses and we obviously would love to do so too but I think in the near term there are challenges on app stores and our ability to do so.

All right and our final question today is going to come from Barton Crockett on the competitive landscape. How do you believe Spotify's growth currently compares to major rivals such as Apple Music?

Yeah we feel really good about our growth rates relative to the peer set in music and I think yeah I'm just going to leave it at that. We feel really good about it.

Okay well that concludes our question and answer session and I'll turn the floor back over to Daniel for some closing remarks. All right thanks Brian.

So I think from all my remarks today and my commentary if we want to conclude I would just say we've never been in a stronger position thanks to what's really been an outstanding execution by the Spotify team and I'm incredibly proud of the way we've delivered and the progress we've made. We are where we set out to be if not a little bit further and on a steady path toward achieving our long-term goals and the key here is really the relentless pursuit of innovation and commitment to growth that I think sets us up to reinforcing the core strengths that make Spotify unique and I am incredibly excited about what lies ahead for us and obviously I hope you guys will join us and check out the news on our video event tomorrow too so thanks for joining us.

Okay next week's call for replay will be available on our investor relations website and also on the Spotify app under Spotify earnings call replays. Thanks again everyone.