Spotify Technology SA Q1 FY2025 earnings call

• Subscriber growth was strong, with Q1 being the highest Q1 subs net add since 2020 and second highest ever, driven largely by emerging markets like Latin America and Asia Pacific, but also solid growth in developed markets. • Product improvements and best-in-class value-to-price ratio have been key drivers of subscriber growth. • Ads business has strong internal tailwinds with a unified ad stack, enabling more advertisers and various ways to buy ads (self-serve, APIs, programmatic). • Accelerated innovation with tools enabling faster execution, such as the Spotify Partner Program launched in January, expanded to 9 markets, and paid out over $100 million to podcast creators in Q1. • AI is being used in product development for personalization and in internal productivity for coding and prototyping. • Audiobooks in premium are being expanded to more regions with innovations driving higher user and author engagement.

MAU grew by three million to 678 million in total, and net subscribers added five million to finish at 268 million, up 12% year on year. Total revenue was $4.2 billion, growing 15% year on year on a constant currency basis. Premium revenue rose 16% year on year on a constant currency basis. Advertising business had currency-neutral growth of 5% year on year, with low double-digit growth excluding certain strategic initiatives. Gross margin came in at 31.6%, surpassing guidance by approximately ten basis points. Operating income was €509 million, and free cash flow was $534 million in the quarter.

• Q2 forecast: MAU expected to be 689 million, subscribers 273 million, total revenue $4.3 billion. • Gross margin forecasted at 31.5%, operating income €539 million. • Full-year margins expected to improve but at a more measured pace than last year, with Q4 seasonally stronger. • Q2 revenue outlook incorporates a ~$100 million headwind from currency movements.

• Broader macro environment uncertainty could impact the business. • Seasonality and volatility in ad-supported monthly active users (MAU). • Social charges in the quarter were €76 million, €58 million higher than forecasted, impacting operating income more than expected.

Q: Do you still expect fourth quarter 2025 gross margin to be up year over year and the high point for 2025? And secondly, do you expect 2025 MAU net adds to be within the range of the past four years? And if so, does this require incremental marketing investment?

A: Christian Luiga responded that they expect Q4 2025 gross margin to be stronger seasonally, and 2025 MAU net adds to be in the range of the past four years, with no need for additional marketing investment relative to previous years.

Q: Can you share more details about what makes you enthusiastic about the Super Fan product and when it may be available in the market?

A: Alex Norstrom and Daniel Ek discussed that creating higher tiers around new offerings has great potential to delight users and open new opportunities, but alignment and support from industry partners are needed.

Q: How are you thinking about AI as a means of enabling both product velocity and introducing more efficiencies throughout your organization?

A: Gustav Soderstrom said AI is used in product development for personalization and real-time interactivity, and internally for coding tools and prototyping, helping accelerate product development and reduce dependence on key resources.

Q: Can you provide color on the economics of the podcaster payouts business? What are the KPIs we should focus on to monitor this business? And how would you define success?

A: Daniel Ek and Alex Norstrom stated that the economics are factored into forecasts, with success measured by engagement in the segment and total engagement on the Spotify service, as it drives more time spent by users.

Q: Can you provide some commentary on your overall advertising business?

A: Alex Norstrom said the ads business has strong internal tailwinds with a unified ad stack, offering advertisers more choice (self-serve, APIs, programmatic), leading to momentum in revenue growth.

Q: How are you adding more subs while spending less to acquire them?

A: Alex Norstrom and Daniel Ek mentioned strong underlying performance, value-to-price ratio, organic media leverage, and AI tools for targeting and efficiency as drivers.

Q: As we head into a choppier macro environment where ad models could be pressured, are you thinking about investment levels to attract more creators?

A: Alex Norstrom said investment is dialed based on catalog maximization and driving engagement for creators, as more content drives more user engagement.

Q: Is there any reason why a free ad-supported streaming TV offering wouldn't work on Spotify?

A: Daniel Ek and Gustav Soderstrom said structurally there's no reason, with video content added because creators asked for it and engagement from music and podcast videos performing well.

Q: Do your first quarter results fully reflect any financial impact from your recent rights renewal with Universal and Warner Music?

A: Christian Luiga said yes, as all signed contracts are reflected in financial numbers according to regulations.

Q: What do you view as the next major product updates to make audiobooks more habitual and how important is non-English content for international growth?

A: Gustav Soderstrom said improving user experience through personalization and discovery using AI, and non-English content is important with work with Eleven Labs for text to audio and language translation.

Q: How big of an opportunity is pricing over the next several years?

A: Daniel Ek and Alex Norstrom discussed that pricing is a lever to pull as growth modulates, with focus on value-to-price ratio and segmentation in the future.

Q: What are your capital allocation priorities including returns to shareholders?

A: Christian Luiga said first priority is supporting growth opportunities and maintaining a strong balance sheet, with returns to shareholders considered when excess capacity arises.

Q: Do you still think the annual constant currency revenue growth target of 20% year on year is achievable?

A: Daniel Ek said focus is on increasing value to consumers, and confidence comes from past execution and potential for larger business growth.

Q: Can you elaborate on near-term noise and its financial impact?

A: Daniel Ek said noise refers to broader macro environment uncertainty, but no specific short-term issues for Spotify, with long-term outlook positive.

Q: Can you give an update on video podcasts on the consumption side? Does penetration currently stand as a share of total consumption? Based on trends, does your view on unit economics of podcasts have they changed in any capacity?

A: Gustav Soderstrom said there's tremendous growth in video podcast consumption, with 44% year-over-year growth in time spent, and unit economics focus on creator investment and engagement.

Q: What is curbing the first half 2025 growth in MAU, and how confident are you that product changes and marketing adjustments will drive more of a rebound in the second half of the year?

A: Alex Norstrom said MAU growth is driven by product improvements and content experiences, with majority of growth expected in the back half of the year, influenced by seasonality and wrapped outperformance.

Q: Can you discuss the current state of your relationship with the broader industry content providers? How should investors think about the prospect of more regular pricing actions, product tiering, and gross margin impacts in the years ahead?

A: Alex Norstrom said relationships with industry partners are better than ever, aligned on growing the industry, and expect improvements in pricing, tiering, etc., in the years ahead.

Q: Was the decline in ad-supported users quarter on quarter in the first quarter due to churn from wrapped, conversion to premium subs, or no longer chasing lower value MAU?

A: Christian Luiga and Daniel Ek said it was due to wrapped outperformance and conversion rates, especially in emerging markets impacting ad-supported tier.

Q: Would it make sense for Spotify to introduce a lower price subscription plan that offers more functionality than the current ad-supported tier but still includes some level of advertising?

A: Alex Norstrom said it's complicated due to industry differences, but considered in a value map combining willingness to pay and product SKUs.

Q: How are you thinking about striking a balance between forward growth investments and delivering increased operating margins and higher rates of conversion of operating profit from gross profit dollars?

A: Daniel Ek said focus is on lifetime value (LTV) and sector LTV, prioritizing growth initiatives while also showing a great business, with flexibility to invest in opportunities with strong SAC to LTV delta.