Spotify: Partnering with TTD, gradually shifting from brand advertising to performance advertising (3Q24)
The following is the summary of the Q3 2024 earnings call for $Spotify(SPOT.US) . For the earnings report interpretation, please refer to Spotify: The Positive Feedback of the Leading Price Increase is Here .
1. Core Information Review:
2. Detailed Content of the Earnings Call
2.1. Key Information from Executives:
2.1.1 Business Progress
1) Personnel Changes: New CFO Christian Luiga has joined the company.
2) Quarterly Highlights: Q3 performance was outstanding, moving towards the annual profitability goal.
3) User Metrics: Monthly Active Users (MAU) and subscribers both exceeded guidance, growing by 14 million to 640 million, and adding 6 million to reach 252 million.
Business Expansion: Expanded audiobook business in Europe, launched new subscription tiers, and increased video content on the platform.
4) Long-term Goals: Balanced resource allocation between growth and profitability over the past few years, with record growth in MAU and premium subscribers in 2023. As the macro environment changes, the strategy will adjust to focus on cost efficiency while continuing business transformation.
5) Future Outlook: Will continue to seize opportunities from technological developments, such as the changes brought by AI, to create more value for users, achieve sustainable growth, and maintain commitment to long-term goals through innovation.
2.1.2 Financial Performance
1) MAU: Increased by 14 million to 640 million, exceeding the expected value by 1 million.
2) Subscribers: Increased by 6 million to 252 million, exceeding the expected value by 1 million.
3) Revenue Side
Total Revenue: Increased by 21% year-over-year at constant exchange rates, reaching 4 billion euros.
Premium: Benefiting from the continuous growth of subscribers and accelerated ARPU increase due to price hikes, Premium subscription revenue increased by 24% year-over-year (at constant exchange rates).
Advertising Revenue: Advertising business increased by 7% year-over-year (at constant exchange rates), reflecting quarterly fluctuations in market spending on brand-related activities
4) Gross Margin: Reached a record 31.1%, exceeding guidance by 90 basis points, mainly due to favorable content costs.
5) Operating Income: Driven by strong gross profit, reached a record €454 million.
6) Social Charges: Social charges amounted to €54 million, which was €39 million higher than forecast due to the rise in stock prices this quarter.
7) Free Cash Flow: Benefiting from improved operating income and favorable net working capital, reached a record €711 million. Free cash flow over the past 12 months was €1.8 billion.
8) Cash and Cash Equivalents: €6.1 billion.
9) Exchangeable Debt: €1.3 billion.
2.1.3 Q4 Guidance
1) MAU: Expected to reach 665 million, an increase of 25 million from FQ3.
2) Subscription Users: Expected to reach 260 million, an increase of 8 million from FQ3.
3) Total Revenue: Expected to be €4.1 billion.
4) Gross Margin: Expected to be 31.8%.
5) Operating Income: Expected to be €481 million, pointing to the company's first full-year operating income target of €1.4 billion.
6) ARPU: Considering the impact of price increases in 63 markets in 2023, expected to lead to a year-over-year slowdown of approximately 400 basis points in ARPU (at constant exchange rates).
2.2 Q&A Analyst Q&A
Q: With profitability continuing to improve, how do you view long-term capital allocation? Can you elaborate on the capital allocation priorities between growth investments and potential capital returns?
A: We currently have a strong balance sheet, focusing on continuing to monitor the ratio of LTV (Customer Lifetime Value) to CAC (Customer Acquisition Cost). Previous investments in areas like audiobooks are a reference for future directions aimed at creating growth and sustainable profitability.
Q: Can you elaborate on the factors driving the gross margin above expectations? What are the drivers for further gross margin growth going forward?
A: The improvement in gross margin is a continuation from the second quarter, benefiting from good market planning, scale optimization of streaming and delivery costs, and favorable impacts from U.S. copyright rates. Future drivers will not be detailed at this time.
Q: Now that you have reached the lower limit of your medium-term financial goals, how do you view the drivers of incremental leverage for 2025? Is it continuing the current market strategy, bundling price increases, podcast improvements, or other new initiatives?
A: 2025 will be a continuation of trends such as marketing strategies, bundling price increases, and podcast improvements, with potential new initiatives in the future. Spotify has always met consumer expectations through innovation, focusing on value-for-money to enhance value for consumers and achieve price increasesQ: Given Spotify's product innovation relative to its peers and the expectation of price increases in the industry by record companies, how do you consider the relationship between pricing and the broader industry? Is there a need for competitors to raise prices to support their own price increases?
A: Spotify is a price leader in many markets, but product pricing is also influenced by the competitive environment. The key is to continuously add value for consumers, focusing on metrics such as user churn and user engagement. When product value increases, there is an opportunity to raise prices.
Q: There have been reports that Spotify has established its own advertising trading platform and is collaborating with demand-side platforms. Can you explain the launch timeline, expansion speed, and when it is expected to have a significant impact on advertising revenue?
A: The advertising business has historically relied on direct sales and brand spending, influenced by macro trends. It has now diversified, establishing the Spotify advertising trading platform and piloting collaboration with The Trade Desk. Testing will take place in 2025, with expected impacts in 2026, and the rollout will be approached cautiously.
Q: For super premium products, while there have been discussions among record companies, it seems there is no consensus on the product content. What does Spotify envision this product to be? How do artists need to participate to make it successful?
A: Spotify's development is evolving from a single market to a diversified market, increasing more SKUs to meet market demand. The high-priced music tier is expected to drive growth in the music industry and is well-received by consumers. The principle is to create products that consumers love and that bring value to creators, such as meeting fans' needs for closer connections with artists and better sound quality, but specific details cannot be disclosed at this time.
Q: 2023 is the year of efficiency, and 2024 has demonstrated strong gross margin performance proving unit economics. What will be the focus of development in 2025?
A: 2025 will be about balancing growth and profitability, adding value for consumers through technological innovation while maintaining company profitability and pursuing more investment opportunities.
Q: Advertising revenue growth is slower than MAU, and its share of total revenue is declining. Is programmatic advertising the only solution to address advertising issues?
A: Programmatic advertising is an important part of the solution, but it also includes promoting more advertising measurement technologies and diversifying ad formats. The introduction of an auction mechanism in programmatic advertising greatly supports the development of the advertising business.
Q: Since Christian (the new CFO) joined the company a few weeks ago, what aspects has he focused on the most? How does he view your management philosophy? What aspects of the company have surprised you so far?
A: The first five to six weeks were spent learning and understanding the company's business, meeting with colleagues and external partners, and then focusing on mastering the data presented to the market and discussing future development directions with management. His personal style emphasizes attention to detail and understanding the situation deeply before making decisions. He is amazed by the achievements the company has madeQ: Can you provide the latest situation regarding the usage and engagement of audiobooks?
A: The development of audiobooks is going well, with the number of titles available doubling, and user adoption rates and average consumption duration increasing. For example, the average consumption duration of audiobook users on Spotify in the United States has increased by over 5 hours.
Q: With Amazon and Netflix entering the sports field to develop advertising businesses, does Spotify need to accelerate advertisers' demand and interest through audio content?
A: Spotify's main goal in advertising is to meet marketers' needs in the programmatic market, making it easier for them to purchase ads on the Spotify network. In terms of sports, the podcast The Ringer has performed well and has played a positive role in attracting advertisers and consumers.
Q: In the past six months, how have innovations in AI, video, and other areas impacted user engagement and retention metrics?
A: Spotify is continuously enhancing user engagement and reducing churn rates. Various methods such as AI, video, podcasts, audiobooks, and courses are adding value to the platform, and AI is expected to significantly enhance the way Spotify is used in the coming years.
Q: After changing marketing strategies, MAU net growth has returned to previous levels. Is this growth sustainable? Will it return to the past net growth levels of 70 million to 80 million per year?
A: We are currently in the early stages, and MAU growth has recovered, mainly due to product improvements and enhanced marketing efficiency, such as multiple product optimizations, adjustments to marketing strategies, and increased marketing investments. The team will continue to focus on product engagement and marketing efficiency, pursuing a good CAC to LTV ratio.
Q: Regarding video podcasts, compared to YouTube, Spotify has a smaller scale, influence, and user engagement. How can this situation be changed?
A: Spotify has always faced competition from large companies and platforms, but is more focused on the needs of consumers and creators. Creators want to develop across multiple platforms, and Spotify will address their needs. For example, tomorrow's video event will showcase relevant ideas to attract creators to add more content and meet the needs of new creators.
Q: Will you consider charging a moderate subscription fee for ad-supported users in mature markets?
A: I cannot comment specifically on whether this will be done, but we will consider how to develop opportunities. In the music field, due to the regulatory rights environment being different from video, there is a lot of ad-supported music, so we will not simply replicate the practices of the video field. We will discuss with partners and consumer needs to seek the best solutions.
Q: Is it possible to achieve the 20% annual revenue growth target proposed on the 2022 Investor Day? What are the driving factors for achieving this target?
A: The company sets high goals and pursues innovation, aiming to become an iconic company. Achieving 20% growth requires strong user growth and an increase in average revenue per user, and there is still significant growth potential in the global music market.If about 3 billion people worldwide are interested in music, Spotify currently has only 640 million users. This year, progress has been made in terms of value-to-price ratio, and there is hope for further improvement in profitability in the future, including growth in advertising business and the addition of subscription business SKUs.
Q: With record companies focusing on superfan applications, what potential role does Spotify have as a distributor for other applications?
A: There is currently no content to announce, but the company's goal is to focus on the needs of consumers and creators. If there are popular superfan applications, we are willing to explore ways to promote their growth.
Q: The 7% growth in foreign exchange neutral advertising revenue is far below that of digital advertising peers. Can you discuss the product roadmap and how to diversify the advertiser base to accelerate growth while leveraging demand-side platforms and other advertising technology partners?
A: The ongoing changes and the goal of the Spotify advertising trading platform are to shift towards performance-based advertising services, reducing reliance on brand advertising to drive growth.
Q: Can you provide quantitative information on market platform growth this year? Are there any new products or features that could significantly drive growth in 2025 and beyond?
A: The market platform is developing well, with more and more artists and label teams using it, driving growth. Recent product features mainly give marketing teams more control. In the long term, there is still significant room for improvement in merchandise sales, such as optimizing the way music videos are displayed and providing more tools and control for label teams and artist teams.
Q: From Spotify's perspective, what are the pros and cons of shifting from variable pricing to fixed pricing (similar to the subscription pricing model of cable networks)?
A: The partnership is healthy, and discussions have been ongoing about how future models can provide growth for the music ecosystem, but we cannot comment too much on that speculation.
Q: How much impact do new features like music videos and AI DJ have on user engagement and satisfaction?
A: With Spotify's large user base, few features can have an overall impact. AI DJ and music videos are exceptions, as user engagement and retention significantly increase for those who use them. They not only perform well in quantitative metrics but also receive user love in qualitative metrics, showcasing Spotify's innovative strength.
Q: Can you explain the incremental investment situation to achieve long-term AI growth goals? Will there be periods of net investment increases when pursuing new opportunities?
A: It is difficult to predict investment patterns, but investments will remain cautious and not blind. Unlike other companies, investments are based on usage, related to user engagement and retention. If opportunities are found that can enhance these metrics, even if profit margins may decline in the short term, Spotify is willing to weigh investments but will strictly control the investment process.
Q: If podcasts like The New York Times use paywalls on Spotify to increase revenue, is there an opportunity for Spotify to share in that revenue?A: Due to restrictions from app stores, Spotify has limitations in its ability to collaborate on value-added sales. However, theoretically, if partners offer more products through Spotify, the company hopes to gain incentives from it; currently, there are challenges in terms of technology and app store policies.
Q: How does Spotify's current growth compare to major competitors like Apple Music?
A: Compared to its peers in the music sector, Spotify feels good about its growth rate.
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