Spotify Technology S.A.

Hello and welcome to the Spotify Q2 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star 1 on your telephone keypad. I would now like to turn the conference over to Bryan Goldberg, Head of Investor Relations at Spotify. You may begin.

Great. Thanks, operator, and welcome to Spotify's first quarter 2026 earnings conference call. Joining us today will be our co-CEOs, Alex Norström and Gustav Söderström, and our CFO, Christian Luiga. We'll start with opening comments from the team, and afterwards, we'll 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 SpotifyEarningsQ226. 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 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 differ materially 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. Reconciliations 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 the call over to Alex.

Thank you, Bryan. Hey, everyone. Thank you for joining us. I hope you're having a great summer. Today we'll pick up where we left off at our investor day in May, updating you on what we said, what we've shipped since then, and also what the early signals are telling us. Q2 was another quarter of healthy broad-based growth. Revenue grew 15% year-over-year on a constant currency basis, accelerating from 14% in Q1. Gross margin hit a record of 33.4%, and free cash flow continued to strengthen. And we beat our subscriber guidance, crossing 300 million subs for the first time. All while continuing to grow engagement, with the number of active days for global subs increasing. What pleases me the most is the shape of the quarter. More people are choosing Spotify, they're engaging more deeply, and they're converting. We've been working on turning our outperformance in MEU into revenue growth. So to capitalize on this opportunity, we are adjusting elements like product optimization and ad load, among other things, in select emerging markets. Now, this strategy carefully increases friction in our free service with a goal of driving higher user conversion and revenue growth down the line. Thank you very much. We've talked before about rebuilding our ads business, and the results are really starting to show. On the supply side, our audience of very attractive global users keep expanding our inventory. And on the demand side, the enhanced technology we've deployed is making it much easier for advertisers to reach these engaged users. Just one example. Our automated channels represent nearly 40% of ad-supported revenue in Q2, up from just over 30% in Q1. And active advertisers grew 60% year over year. We're now set up in a way we weren't a year ago, and we will keep building from here. Another development from the quarter worth calling out, our launch of Reserved. At Investor Day, we called it one of the most wonderful improvements to premium in our history, and the early signs really backed that up. So since launching in the U.S. in June with Live Nation, Reserved has supported multiple tours with nearly 100,000 tickets reserved through Spotify. For some tours, we sold through 100% of our allocations, and Live Nation upsized them mid-run. The biggest fans get first access, artists get their most dedicated audience in the room and every seat we fill makes a Spotify subscription just more valuable. I'd like to use the remainder of my time on something that Gustav and I think about a lot, Spotify's position. And these are unique times. Business history has produced just a handful of companies with hundreds of millions of recurring paying customers worldwide. And Spotify is proud to be one of them. And like many of the others, we built that scale on a single product. That is unique territory to be in. I'm a student of Charlie Munger who once said that the one structural advantage that matters disproportionately is scale. If you're choosing a music streaming service for the first time, it matters that one brand comes with several hundred million passionate ambassadors. and perhaps most consequentially, the scale and the cash generation we now have lets us innovate and invest in building a much better product, adding more value for every subscriber around the world in the most cost efficient and competitive way. The point is scale matters. In the past five years, we've added more than 25 million net subscribers every year, growing in developed and emerging markets alike. So with over 300 million subscribers and 777 million users, we have achieved consequential scale. Our financial picture tells the same story. Since our last investor day in 2022, revenue has compounded at 18% a year, reaching 17 billion euros in 2025. Gross margin went from 25% to over 33% this quarter. We became more disciplined with OPEX, which has turned into a growing positive operating margin. And last year, Spotify generated 2.9 billion euros of free cash flow. And we expect that growth to continue. That strength is why we set the 2030 targets we did in May. A mid-teens revenue CAGR, gross margin of 35% to 40%, operating margin above 20%, and strong growth in free cash flow. Gustav and I believe there are opportunities only Spotify is positioned to invest in because of our scale, the health of our business, and our focus. So we rigorously explore new premium offerings and new verticals with our customers. We cover these at length at Investor Day, but there are a few that's worth repeating. The first is AI. Many investors ask about our large taste model, which learns from the 3.4 trillion events our users generate on the platform every day. But the reality is, we've been investing in AI-driven personalization for more than seven years. Today, AI-powered experiences like DJ are used by roughly a quarter of our active users. And Prompted Playlist, our newest edition, gives users direct control over the algorithm. Around 14 million of the first 100 million users we've rolled it out to are already using it. And the early retention improvements look promising. A second big idea is the power law. As we've grown, we've observed that the usage of our products, features and content follows a power law. At the head of that curve are many millions of people who simply want more, and they're willing to pay for it. Audiobooks proved it first in just a handful of initial markets. We see that overall audiobooks penetration among premium listeners has more than doubled this year. And Audiobooks+, the add-on, has passed $100 million in annual recurring revenue. It's subscriptions on top of subscriptions, with more on the way. So combined, these two just make for something powerful. Inference-driven products carry a marginal cost per use, so they need a compatible way to monetize. And that is exactly the muscle we've built over 20 years of freemium. Feature-gated, usage-driven products optimized for the best value-to-price ratio. Now, we will price and optimize these features and content just as we've successfully done with our premium product. So in conclusion, we have a scale that few companies in history have reached, a business that is healthy and compounding, and opportunities only we are positioned to pursue. Spotify lives across your whole day, the commute, the workout, studying, gaming, the dinner table, and sleep. At our scale, that is rare. Most products own one or two contexts. Our position gives us an opportunity space as wide as our users want it to be. and at Investor Day, we told you where Spotify is going and this quarter we're building momentum behind that. With that, let me hand it over to Gustav.

Thanks, Alex. So I want to use my time on two things, how we're building and what we're building. And both matter for the durability of our business over the next several years. So a couple of quarters ago, I mentioned our internal tool Honk, which enables our engineers to go on Slack from their phone and ask an AI agent to fix a bug or add a feature, and then they get a testable build back before they even reach the office. That way of working is now ubiquitous, and it's unlocking a compounding advantage. So Honk is our coding agent, but there's something new that we call Chirp, which is the engine that we've built underneath it. And you can think of Chirp as something that you use instead of using Cloud Code or Codex directly. that sit in front of it. So Chirp lets our engineers switch models mid-task and route every job to the best available price performance, including open source models that we host ourselves so that we are never locked in. It also shares the context across not just different models and different developers, but across the company. So we don't pay for the same reasoning twice, and we don't lose our own data. and it also shows us our inference spend down to the individual developers. There is plenty of industry debate about AI investment and costs, but our view is that being an AI beneficiary means winning on the cost side too. We hold a high bar for every investment that we make in this area, and we invest only where it generates real advantage and sets us up well to drive growth and improve margins over time. If something works, we double down. If it doesn't work, we eventually move on. Over the last three years, we have not increased headcount while revenue per employee is on track to double. So as you can see, the operating expense growth is not coming from people. It's coming from compute and marketing. Both of these are variable and entirely in our control. And we will continue to invest in AI on our terms. We're vendor agnostic, we have controls over our usage, and we always undertake these investments relative to the returns that they can support. The inference we give users is also under our control, which means that the cost curve is also under our control. At Investor Day, we laid out four big ideas about where Spotify is heading. One quarter later, we've shipped against all four. We said the world is moving from recommendation to generation, with users in control. Today, Talk to Spotify, Personal Podcast, and Studio by Spotify are in users' hands. And in the coming weeks, we'll be rolling out prompted playlists for audiobooks to our best-in-class books experience. And Alex mentioned our large taste model, which is a big investment for us. Let me tell you what it's doing so far. In the first two months since we deployed our new autoplay recommendation system, powered by the taste model, active days have increased, which is very hard to do at our already high engagement levels. Autoplay minutes and track saves have both grown significantly. and Autoplay Dropoff has declined. And in our chat experiences, the large-stage model is doing the same. Minutes are up double digits, more active days and more saves into libraries and playlists. These are powerful inputs to our customer retention rates and lifetime value and among the most challenging metrics to move for us. The industry watched this scaling curve and the scaling loss play out with general LLMs. And one way to think about it is that now we are watching it play out with our taste LLM on a model that no competitor can buy. We said that engagement follows a power law, and we launched our first one-time credit add-ons to serve the head of that demand curve. From DJ to Daelist, we know these investments take time to scale, and they pay off over time. These add-ons are capped by design. Every credit purchase carries a defined amount of inference behind it, so usage, cost, and monetization stay connected. We also said that Spotify is moving from single player to multiplayer. and this quarter that stopped being a roadmap and became behavior. Messages is live and people now react to tracks, reply and share music directly inside Spotify. Listening activity shows you what your friends are playing right now. And listening stats is becoming something you share and compare, not just a private report for you. Almost 50 million people are already using Jam every month to listen together in real time. You're no longer alone on Spotify. You're there with your friends, your real life friends. and we said we would keep optimizing for time well spent and increasing the value of premium. One example that I'm personally very passionate about here is fitness. Last week, we began rolling out running mode. You tell Spotify, in plain language, to build a running playlist for an eight-minute mile or an interval session. It understands not only your taste and the BPM, it serves you your favorite tracks to your exact cadence, mixing them together seamlessly so that you can literally run to the beat. Thank you for watching! Finally, our music remix capability. We're excited about the product experience and what it will unlock between artists and fans. Our model is one where artists choose which songs they want to make available for remixing, with consent, credit and compensation to sign in from the start. That model is winning over the industry. Following our agreement with UMG in May, today we're announcing a deal with Merlin, the digital licensing partner for the world's leading independent labels and distributors. The agreement gives artists across 30,000 labels in Merlin's network the opportunity to participate and make their catalogs available for covers and remixes. The enthusiasm from the independent community has been striking, and we hear that same support across the wider market. Deals like these take time, but we built this so that virtually every rights holder who wants can join in. Big picture, there is more work to do before launch, and it will take time to scale into a material revenue driver, but we are very excited about the potential for Spotify and for artists. So if there's one theme I would leave you with today, it is this. Investor Day described where we believe Spotify is going in the future. And this quarter demonstrated that we are already building that future. Better engineering, faster shipping, new products, and new ways for users to engage. We're still in the very early stages of what is possible, and we'll continue to have a high bar for investments. Our margin is a managed outcome, not a byproduct. Our job remains the same. Understand the technology early and deeply and turn it into something that people love, creating value for our stakeholders. Now Christian will take you through the numbers.

Thank you, Gustav, and thanks everyone for joining us. I'll cover the quarter two results and then provide some perspective on our outlook. Unless, otherwise noted, as always, our reference growth metrics are presented on a year-over-year constant currency basis. We're pleased with how the business performed in the quarter. MEU continued to grow healthy at 12% year-over-year, with notable outperformance in Europe and North America. Our net additions of 16 million were 1 million below forecast. We added 7 million net subscribers during the quarter, growing quarter on quarter across all regions, with notable outperformance in the rest of the world and North America. We finished at 300 million, 1 million ahead of our guidance. Total revenue was 4.8 billion euro, growing 15% year over year, which was an acceleration of the 14% we delivered in quarter one. Premium revenue rose approximately 16% year over year, versus 15% last quarter. and many more. This strength was largely offset by expected declines in our direct sales channel. Importantly, our price optimization work is now complete and this channel is stabilizing. We have also completed the migration of our ad inventory to our in-house ad server, allowing us to further streamline our sales process and capture more demand. Respect to our outlook, nothing has changed. We continue to expect our ads business to inflect towards double-digit growth in the second half of 2026. Gross margin came in at 33.4%, surpassing guidance by 30 basis points. The year-over-year expansion of 193 basis points. Favorability versus our guidance was driven by primarily quarterly timing shifts related to our growth investments. We also saw a small one-time benefit from a cancellation of the digital service tax in Canada where we reversed an accrual from previous years. Operating income of 655 million was 25 million above our guidance of 630 million, delivering on operating margin of 13.7%. Social charges contributed to 9 million of outperformance, and that was against our forecast, of course, and due to share price movements in the quarters. Excluding the non-forecasted social charges favorability, we came in at 16 million above guidance, driven by the gross margin outperformance. Finally, free cash flow was 797 million euro in the quarter, up 14% year over year. The quarter was slightly lower relative to quarter one, partly as a result of timing of cash tax payments. Our first half working capital benefit remained consistent with the prior year. On capital allocation, we have repurchased $662 million in shares year-to-date through August 3rd, representing 30% increase over 2025 levels. In aggregate, we have bought back nearly 2.2 million shares since we resumed repurchasing activities in 2025. We're approximately 1% of shares outstanding. Given the stronger cash flow in the years ahead, even with M&A, We expect that we will also return cash to shareholders. As a close of the quarter, we had 9.4 billion euro in cash and cash equivalents and no debt other than lease liabilities. Looking ahead to Q3, we are forecasting MEU of 788 million, an increase of 11 million from Q2. As Alex discussed earlier in more detail, this guidance includes product optimization activities in emerging markets, while growth rates in developed markets remain stable. On subscribers, we are forecasting 305 million for Q3, or net additions of 5 million. We continue to see the business as well positioned to drive another full year of healthy MAU and subscriber growth. We are also forecasting total revenue of approximately 5 billion in Q3, or 14% growth. This reflects an RP increase consistent with Q2, and improved growth in our advertising business that I mentioned earlier. We anticipate a quarter-free gross margin of 32.9%, approximately 130 basis points above the prior year. Our gross margin outlook incorporates continued strengthening in our core business, reinvestments into new products, and the typical charge we take in the third quarter to account for our annual exposure to regulatory fees in one of our markets. Moving to operating income, we're guiding to 670 million in Q3. This reflects the above, along with the temporarily elevated operating expense in Q2 and Q3. We continue to expect these marketing and AI-related investments to drive approximately 200 million in incremental operating expense for the full year. Quarter 4 is well positioned to see a moderation in the rate of year-over-year operating expense growth as we move past the heavier concentration of this year's marketing of activities and calibrate on the other costs. In 2026, we continue to be flat on the number of employees. So this year's investment cycle is not driven by structural expense additions. It's marketing and AI related. Both are investments that are entirely in our control. As we stated at our recent investor day, we remain focused on striking a clear balance between LTV enhancing investments and sustainable margin expansion. Although we do not provide full-year guidance for gross margin or operating margin, we continue to expect both to improve in 2026 on a full-year basis. As we have said, the quarterly progression of our margins is variable and dependent on the timing of investments. As you've seen from us historically, the rollout of new features and products can temporarily moderate margin expansion while setting the business up well for future monetization potential. We continue to expect meaningful year-over-year growth in free cash flow in 2026. So in conclusion, we had a solid quarter two. We remain well positioned to continue compounding growth, profitability, and free cash flow. And with that, I hand it back to you, Bryan, and Q&A.

Great, thank you, Christian. Again, if you've got any questions, please go to slido.com, hashtag SpotifyEarningsQ226. 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 our first question today is going to come from Jessica Reef Ehrlich on the product roadmap. You have a unique global platform for both audio and video products. You provided a robust product roadmap in May at your analyst event. What products are you most excited about in the near term, and where do you think you will get the most traction over the next three to five years?

So thanks for the question, Jessica. This is Gustav. I'll start and then maybe Alex wants to jump in because I know he's also very excited about product. But this is kind of like asking me to choose between my children. So it's a tough question, but I'll try. But first, I kind of want to level up a little bit because what I am most excited about is the system that we've built and what we presented at Invest Today. So the way to think about it is, some time ago, over a year ago, Alex and I spoke and we realized that the world that we were in, where software development was mostly an amortization game, right? You developed once and then you amortize your developer investment over more and more users. That world was going to change because inference adds a variable cost per user. So we looked at this and we said the game is going to change. There's going to be more variable cost per user. This could be a headwind or it could be a tailwind. So we decided to start working on changing the model where this power law that Alex and I talked about where some users use the product a lot more than others, which didn't really matter so much in the amortization world because it didn't have large variable costs, but it will matter a lot in this new world. We decided to change the model. So we've built this platform where we can decide how much inference we want to put into the free tier, how much we want to put into the premium tier. And then instead of saying that's where the party ends, you have to go somewhere else. We say to people, if you want to live in the future, you can. You just pay more. So we let some people who are prepared to pay for it run ahead of other users. And we demonstrated this model with audiobooks, which works exactly like this. We give about 15 hours of audiobooks in the premium tier. Some people want much, much more than that. They're allowed to run ahead of everyone else and pay for it. So we spent a lot of time building that infrastructure and as we don't like to ship ideas, we didn't really talk about it until investor day. That's kind of what we revealed. This system to be able to have different types of users with different levels of monetization and different needs on the same platform instead of being sort of kept back by the average or what the least engaged user can afford or what we can afford to give them. So that is what I'm excited about, having built this platform. Now we're launching a long range of products on top of this. And I can tell you sort of what I'm excited about there and which ones in the near term and longer term. But it's important to think about the structure. I'm a systems type of guy. That's what really excites me. In terms of actual products, I would say right now the thing that excites me the most is reserved. It is probably the feature that the most people ever have said, this is the best thing you ever did at Spotify. And we've seen, as Alex said in his introductory remark, really exciting numbers there. So I think this is one of the biggest values that we've put in premium ever. And as we said before, this is actually unique to us because of the structure of these deals. So that's very exciting to me. The second thing I would say more in terms of AI, which I mentioned in my comments, my prepared remarks, is the LPM. The LPM, we talked a lot about it at Invest Today, pretty big investment for us, both in terms of personnel, but also training costs. So it's very good to see it paying off. The bet we made there was that the old type of machine learning had capped out. More data and larger models did not produce better results. The sequence-based LLMs follow different laws, the laws that are called scaling laws, where more compute, more parameters and more data actually produces better results. And now we're seeing those. We're seeing these scaling laws play out on the inside in terms of taste and recommendations. So that's very exciting to me. The third thing that I'm really excited about, which I think Alex mentioned as well, is SongDNA, which is a feature that we poured a lot of love into. We acquired a company called WhoSample to power this feature. So we invested something there. We took some costs and now it's paying off with over 100 million users using it and loving it. It's also very unique to us. So that's maybe my 30 if I would rank them. Another one which we don't talk so much about but that I'm personally very excited about is music videos. We invested in music videos and a great music video experience for a very long time. Now we have both a good experience and the catalog. And we are seeing that songs with music videos, specifically new releases, are performing much better, which was the bet, meaning that music videos is... is of outsized importance when you're discovering a new artist because you're wondering who they are. You want to see them. It's not that important the tenth time you listen to the song, but it's very important the first time. So that's quite exciting to me. Obviously, I think it's a tie between maybe gen pods and running. Running, just because fitness is so close to my heart, I think we have a very unique experience there, which no one else can really do. There is no other service that can give you a playlist at the cadence you're running in with your favorite songs and beat stretch them and mix them together. Gen pods excites me because... It's something that is new to people. I think those are the ones that are near term and exciting. Longer term, I was also obviously a bit remiss if I didn't say that our remix and covers, I think, is an incredibly exciting product. Again, because there is no one else that can really do this. Normal generative music will happen with or without us. This product will not happen without us. and it needs to exist so that existing artists can participate in this. So that's very exciting to me. It's a lot of work, it's going to take more time, but I'm very excited about what we're seeing internally. Lastly, I would say the longer term, back to systems thinking, Thank you for watching! These are better answers than you get from any LLM, certainly within our domains about podcasts and books and music. So, you know, without stretching it too far, I feel like Spotify is coming alive and you can literally start talking to it. That was a long answer, but that's what I'm excited about.

Man, you covered all of the ones that I wanted to add. Sorry. It's great.

All right, we'll go on to the next question. and another one from Jessica Erlich on advertising. Advertising growth in the past year has been subdued despite programmatic now comprising over 25% of ad supported revenue. Can you provide an outlook for the coming year or years and what can you do to drive momentum in what is a very high margin business that monetizes your engaged and growing base of users?

Hey Jessica, this is Alex. I'll start. I should take the opportunity to organize this a little bit differently because I do think that this similar question is coming further down the line from Richard Greenfield. So I'll try to do both at the same time. I'll speak to maybe most to why should investors have confidence in us when it comes to the ad sales business of Spotify and then maybe Christian can talk about the margin side of things. So I want to pull the lens back a little bit and and talk about the past two years here. I've said many times now that we have been in a transitional phase with ad sales. And in the beginning of this year, we completed that transitioning. We now are entirely on the new ad stack that is proprietary built inside the walls of Spotify. I think 99% of all the impressions that we serve are now on our own ad stack. But the big thing is the addition of the biddable exchange that we put in place and the automated sales channels. These are now almost 40% in Q2, up from 30%. And if you ask me, I can tell you that it's even going up further from here. So the two things to think about is obviously supply and demand. We'll start with supply. The supply picture has actually never been stronger. It's not only about user growth and reach, which is obvious because we grow and then the reach sort of follows, but it's also about MFT Plus and the new placements we have in the free tier. It's also about us launching personalized ad load, and it's also about the depth of the engagement that we have. So this in turn drives a lot of supply for us to sort of match the demand against. Now on the demand side, For the longest time, since the inception of Spotify really up until two years ago, the way to buy ads on Spotify is a brand would call us, literally call us, or contact us via email, and they would buy fixed and guaranteed campaigns from Spotify. Now that's all good, but it's also capping us in several ways. One is it's really capping us in terms of pricing and sell-through. So when the inventory is bought, it's bought. And it's also capping us obviously in the ways that people want to buy. Not everyone wants to write emails, sign IOs, and make calls. They further want it to automate the buying as well. So what we have put in place now actually uncaps this, unlocks both of these things. and many more. and many more. and people are now actually prompting to create campaigns and audio assets. I think out of the 33,000 active advertisers we now have 7,000 of them using our AI audio asset creation tool which just makes it easier for brands to buy on Spotify. There's a lot of change going on, but I'll just rinse repeat. There's something that hasn't changed, and that's the three reasons that people come to Spotify to buy ads. It's the beloved brand, it's the high-quality content, and it's our high user engagement.

So, Christian here, just on the margin side to fill in on that, I mean, one of the things you brought up, Alex, is very important to understand. I mean, when we move to an automated sales channel and we also have self-served, it becomes a scale business different from before. So as we scale and the ads monetization, both on music and podcast, we will also be able to improve our profitability. And as we said on Investor Day, Thank you for joining us.

Are you surprised more artists have not signed on to the AI music tier to enable you to launch? What is stopping artists from participating?

I'll start and maybe Gustav you can jump in. Following our agreement that we had with UMG and Universal Music Publishing Group in May, we announced today the deal with Merlin, which adds 30,000 labels in Merlin's network, the opportunity to partake into this new product that we're building around covers and remixes. I think it's worth repeating what we said during investor day. What we're trying to do is very considerate and planned out. So we're trying to, we call it the three C's at Spotify. First of all, we are looking for consent. We want artists to be consenting their work into this catalog so people can play around with covers and remixes based on their art. We also obviously want to give them credit. And last but not least, this is about compensation to the labels and publishers and artists and songwriters. Not only do we Have the consent and give credit, but we also drive the compensation for this. So really we're talking about the first legal way to partake in this AI tailwind that we see coming for interactive music, basically.

And I would just say we have really strong momentum there. One thing that I think is important to remember is that while you can see that there is skepticism around net new artificial music by many people out there, What we're doing is something different, and artists see that. Our products are about real artists, not fake artists. And in the case of remixes, real artists with real voices, right? So you're listening to real people. And that's a very different proposition, which is why we're focusing on this. This is the thing that doesn't exist. And artists remain excited about that, and consumers remain excited about that. But it is an ever-changing landscape. I would say what to expect... Thank you very much. So this is not a test of the product. It is the thing that guarantees that the product will be very good. So for those of you who know about machine learning, you know that one of the most important phases is the post-training using reinforcement learning. So what we will do is we will allow people who are fans of a certain artist to start making remixes with songs from that artist. And what they do is they say, I think this remix was better than this remix. And then we get the preference data that actually makes the model better. and this is our unique advantage in this business you know we have now 777 million people and music fans to do reinforcement learning with which is why we think we're very well positioned in this business so that's kind of what you should expect as the next step we're going to launch the product when it's ready and we think it's good enough and it has the right appeal to consumers

Okay, our next question is going to come from Justin Patterson on AI tooling. Over the course of 2026, we've seen meaningful momentum in open source. How are you thinking about the costs and benefits of deploying open source more broadly versus how you're using Anthropix, Cloud, and other models today?

Yeah, so I'll go here as well. Thank you very much. Thank you very much. Also, I think you can all see that this is putting pressure on the pricing. And there are lots of announcements of prices coming down per token, which is obviously very helpful for us. Like on a constant per feature quality level, it's pretty clear that the costs are coming down for a certain level of quality. That doesn't mean that we won't use more advanced models, but for a certain feature of level of quality, the costs are coming down quite fast.

Okay, our next question is going to come from Bacha Levy on MAU. What's informing your guidance for slower MAU growth in the third quarter? Do you see a change in the competitive environment or the general intake for your campaigns? And then if I may, I see Benjamin Black had a question about some initiatives to drive MAU growth in the future as well. So you might want to address that also.

Yeah, I will. Thanks, Batja and Benjamin. Just to hijack this for a second, you don't see us here, but Gustav and I are in Stockholm. The sun is shining, and we're happy about the fundamentals of Spotify. It's really in a good place. We just hit 300 million subscribers, and we're super elated to be in this sort of rarefied air, and it just keeps growing. On the question of MAU, So we've had a few years of outperformance in MAU. And maybe more recently, in the maybe past four or five quarters, we've had outperformance relating specifically to emerging markets. I think we've pointed that out in past earnings calls. And of course, emerging markets includes countries like India and Indonesia and so on. And as a reminder, these are very populous nations. So they're a very lucrative opportunity for us. and what you're seeing us do now is that we're making changes to the product and the value proposition and strategy in these markets. We've made changes like tweaking the sign up to get a higher quality MEU throughput. We've deprecated a lower end Android device support and many more. This is going to take some time, but the shape of the growth curve follows other markets. And the way to think about it is really, when you start out in a market, you work on getting prop market fit and get some MEUs. Slowly and surely, that MEU growth will increase, and then all of a sudden you have a base to convert from. Then you have some subscribers come in, there's some conversion coming, and then as you calibrate the product and value proposition, that growth then continues to become something like a LATAM, which also started out with very low conversion but massive MAU growth. So our planning here is very considerate and I think also a consequential point here is that this will not affect SAB's growth in the near term.

All right, our next question is from Rich Greenfield on Reserved. You started a meaningful ad campaign for reserve ticketing after Role Model. How many concert tours have you worked with since, and are you starting to see an uptick in conversion to paid tiers to excess reserve? And how do you see Spotify's positioning in the broader live event ecosystem evolving?

That's a good question. Thank you, Richard. Whenever I get to talk to users about Reserved, we get so much praise. We get praise. Live Nation gets praise for the partnership with us and the way we're sort of shaping this feature. And just as a reminder, the big idea with Reserved is that the biggest fans get access to tickets. Secondly, artists get to have the biggest fans in the room. And third, Spotify gets to have unique value for our premium subscribers, which obviously gives us differentiation the way the deals are structured to Gustav's earlier point. But it also increases value to price perception for Spotify. It really is like a triple win. It's still early to your point on how many tours we've done. It's been a few. It's US only for premium right now. So the rough number is that we've had about 100,000 tickets reserved. And in some instances, we've blown through the allocation and Live Nation has even upsized them mid-run. Obviously, I'm looking forward to many more tours and more markets. And as far as monetization goes, this is currently about increasing the value to price ratio on premium.

All right, our next question is going to come from Jason Bazinet on music add-ons. You now have AI music deals with UMG and Merlin. Do you need deals with all the majors before you launch an AI service? Why or why not?

So I can start there. So the answer is we do not need a deal with all the majors. We would like to have as many artists as possible, obviously, but we don't expect to have all artists. And if you go back to the beginning of Spotify, Spotify started without significant parts of the catalog. It took many, many years before the big acts like maybe the Beatles, Metallica were on. So we don't need full catalog. Of course, we want as many as possible because that's better for consumers and for creators. But as I said, what you should expect is that we start improving this product in the public as a research preview so that we can start getting the preference data that automatically improves our model. So that will be the next step. And then we'll decide when we launch based on where we are. There's more to come, but very strong momentum.

All right, our next question comes from Eric Sheridan on monetization. On the heels of Q226 premium subscriber growth reaching 300 million, how should investors think about the scope for monetization efforts as a result of more interactive tools and live event integrations across the subscriber base?

I'll take that. So you're basically baking in a opportunity and time question and also sort of like a pricing question in here and product as well, I guess. And, you know, we've said it before, but we're early in our days. I think we've reached this sort of 300 million mark, which is rarefied air. There aren't many and other companies that have built one product and have 300 million recurring customers come back again and again every month. So we're now close to 4% of the world's population. We've said before that maybe we'll not reach 90% of the world, but it's not implausible that we'll get to 15% penetration of the world. So our most important line of work here for Gustav and I is actually to drive the value to price ratio upwards, meaning we need to keep building and so on and so on. I've spoken to MEU as well, so there's a bit of a differentiated approach depending on if we're talking about developing markets or established markets. And so we do think that the opportunity ahead of us is still immense.

Okay, our next question comes from Justin Patterson on time spent. In 2025, you streamed 211 billion hours of content versus Netflix's 191 billion. As you expanded new formats like fitness and deepened personalization capabilities across the platform, how do you believe time spent can evolve on Spotify?

It's a good question, Justin. So you're pointing to Netflix, and sometimes we also get a similar comparison with YouTube. And I think the important comparison and observation to make here is that we're very different from these other streamers. When it comes to engagement, our engagement typically spans many more devices than our friends here in the industry. Whereas most of them are big screen and maybe small screen. We are speakers, we are gaming consoles, we are cars, we are contexts like sleep, we are contexts like studying, where you actually find Spotify much more compatible. So you have sort of the context I think it's worth pointing out also that the one metric that we put special value on when it comes to engagement is the active days and you know we've talked about before that you know we have over 100 million of our subscribers spending more than 20 days in a month with us and so the reason why we're tracking this this number the active days is that we find it to correlate very well with lifetime value which is great for us right so so we've seen that increase again and again and even this quarter active days in a month has increased overall for premium subscribers on Spotify.

All right our next question is from Deepak Madhavanan on AI products. You've launched several AI-powered products in the last six months, including prompted playlists. Can you discuss what types of benefits you're seeing in the KPIs such as listening hours, conversion rates, or churn?

Thanks, Deepak. So I think in general, some metrics is that AI-powered experiences now reach about a quarter of our active users. And this year's launch, as I talked to Spotify, Studio, Personal Podcast, from the playlist, they're scaling really fast. So it's already reached more than 25% adoption among active users. So we have scale. and a healthy compounding business and opportunities that were then uniquely positioned to pursue. So we feel very good about the overall adoption from the playlist specifically. I think it's reached already 14 million of the 100 million active. So that's pretty, pretty quick adoption for a feature like this. And in terms of what we're seeing, I shared a bunch of metrics and prepared remarks here around the large taste model where we are moving some of the metrics that are absolutely the hardest to move, which are active days. And sort of related to the previous question of viewing hours and engagement, as Alex has said before and I, we focus on active days as the most important metric to try to drive rather than only engagement in the moment. and so we are seeing those effects from this. And I think overall since 2010 when we started investing in personalization, the correlation between personalization and retention has been super clear for us.

Okay, our next question comes from Doug Anmuth on third quarter operating expenses. Can you talk about the drivers of the implied acceleration in operating expenses in Q3?

Thank you, Doug. Yeah, I just wanted to, I understand it could be a little bit of confusion here on our expense for this year. We have said we're going to elevate it with 200 million for this year, something that is very much in control and structural. And just to give a little bit better guidance on it, excluding the currency and social charges we see on our expenses, Our expense growth in quarter three, we expect it to be roughly consistent with quarter two. So it's going to be pretty much the same growth. So I think it's important to be careful with the rounding nature of our guidance. We talk about five billion. We also add, I mean, growth, 14% growth and ARPU consistency between the quarters. So we're well positioned to actually moderate this into quarter four and to keep it consistent into quarter three. And this is a structural, non-structural cost change. Personnel is in the same level. We do this investment to increase engagement in LTV and marketing. We have a lot of new features coming out, and we are also boosting a bit on our AI, and we talked about that at Investor Day. So nothing strange, nothing new, and we are keeping this consistent, what we have been thinking all along from the beginning of the year, and we are in full control. So excluding currency and social charges, we see our expense growth to be roughly consistent in Q3 with Q2 growth.

I would just chime in here. I said this in my prepared remarks, but we started this year by investing to make sure that we were leading in this wave of using AI. And we are leading, according to other companies, actually. Now we're starting to focus on cost and efficiency, which is always the second step. This is what I talked about when we talked about Chirp. and many more.

All right, we are coming up on the hour, so we've got time for a few more questions, and we've got a follow-up from Doug Anmuth on product tiers in ARPU. Can you help us understand the timing of add-on tier rollouts across verticals, and how should we think about their impact on premium ARPU in the second half of this year and into 2027?

Hey Doug, Alex here. We don't comment on timing for launches and we don't give guidance on ARPU either, but I can comment on this in a different way. You heard Gustav talk and wax passionately about the different products that we've been rolling out and how The usage-driven paradigm is one important paradigm for us and how we convert from free to premium, from premium to add-ons. The one example I want to share is that Audiobooks Plus, which was launched a while ago, since we last shared a number on that, that has now doubled. which is great. And it just keeps growing and this is just in a select few markets. So obviously that introduces another type of change to ARPU. ARPU obviously can change by way of price increases but when we have success with an add-on like this it'll structurally increase ARPU in a different way. So in the sort of like price to quantity equation we're really providing a different type of price increase here than just sort of moving the price of premium up

Okay, and our next question is going to come from Jason Helfstein on the pricing environment. Is there any read-through from the Apple Music price increase that was announced in July, and how does this impact your thinking about price increases going forward?

We don't comment on other companies' price increases, but what it does show is that this is an example of just continued value in music streaming services, and we're happy about that for the ecosystem. Our category leadership in and many more.

Okay, and our last question is going to come from Jason Bazinet on the subscriber opportunity. You had solid premium net ads this quarter, but the record labels suggested the industry's premium growth slowed in the second quarter. How confident are you in the long-term growth of premium subscribers for the industry and Spotify?

Very confident. We don't give guidance for long term, but what we're optimizing for is a healthy funnel. This not only builds our business, Jason, it's of course aimed at helping our subscriber growth and not slowing it down. So very confident about the long term growth.

All right, great. So that concludes our Q&A session. Thank you, everyone, for the questions. And it also 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. And thanks again, everyone, for joining.

This concludes today's conference call. Thank you for joining. You may now disconnect.