Spotify (Minutes): Develop non-linear growth, with a greater focus on lifecycle value
The following are the Minutes of the FY25 Q2 earnings call for$Spotify(SPOT.US) compiled by Dolphin Research. For an interpretation of the earnings report, please refer to "Spotify: Price Increase Failure, Can High Valuation Still Hold?"
I. Review of Core Financial Information
1. Monthly Active Users (MAU) and Subscription Users
This quarter, MAU increased by 18 million, reaching 696 million; net increase in subscription users was 8 million, bringing the total number of subscription users to 276 million, a year-on-year growth of 12%
2. Revenue
Total revenue was 4.2 billion euros, a year-on-year growth of 15% at constant exchange rates; Premium service revenue grew by 16% year-on-year, and advertising business grew by 5% year-on-year; exchange rate fluctuations had an adverse impact of approximately 104 million euros on reported revenue this quarter.
3. Gross Margin
Gross margin was 31.5%, an increase of approximately 230 basis points year-on-year, mainly driven by Premium revenue growth and expansion of ad-supported gross margin
4. Operating Profit
Operating profit was 406 million euros, 133 million euros below guidance, mainly due to social expenses exceeding expectations by 98 million euros this quarter, and lower-than-expected advertising sales contributions
5. Free Cash Flow
Free cash flow for the quarter was 700 million euros, improving year-on-year, benefiting from operating profit growth and net working capital improvement; by the end of the quarter, the company held 8.4 billion euros in cash and short-term investments, with healthy year-on-year growth in free cash flow expected in 2025, maintaining strong liquidity
6. Third Quarter Outlook
MAU is expected to reach 710 million, subscription users 281 million; total revenue is expected to be 4.2 billion euros (including approximately 200 million euros of exchange rate headwinds); ARPPU is expected to remain flat year-on-year at constant exchange rates;
Gross margin is expected to be 31.1%, operating profit 485 million euros, with third-quarter gross margin guidance including 40 basis points of regulatory fees, flat sequentially after exclusion;
Free cash flow for the full year 2025 is expected to achieve healthy year-on-year growth
7. Full Year Profit Margin Outlook
Gross margin for the full year 2025 is expected to continue expanding, but quarterly fluctuations will be more pronounced, with seasonal recovery in the fourth quarter, and the company will make strategic investments to support the achievement of long-term growth goals
II. Detailed Content of the Earnings Call
2.1 Key Information from Executive Statements
1. Performance Evaluation and Future Guidance
Management expressed satisfaction with user and subscription growth this quarter, but the advertising business execution was slower; 2025 is still expected to be an outstanding year, although the third-quarter forecast is "weaker than expected" in some indicators, long-term goals remain unchanged.
2. Strategy and Execution
The company adheres to a decision-making approach centered on "lifecycle value," balancing short-term performance with long-term strategic investments, not sacrificing long-term returns for single-quarter results; meanwhile, it continues to advance the reconstruction of the generative AI technology stack to enhance personalized service levels
2. Capital Allocation and Spending Plans
The board has approved an increase in the total stock repurchase authorization to 2 billion dollars, with approximately 100 million dollars used before the second quarter; convertible notes maturing in March 2026; if there are excess funds, priority will be given to returning to shareholders
3. Business Advancement Pace
1) Advertising: Our monthly active advertisers grew by over 40% year-on-year, and we will continue to drive this growth in the second half of 2025, focusing on improving execution. With the heavy lifting of advertising technology largely completed, we are now focused on driving adoption rates, launching more new advertising tools, and enhancing the performance of all inventory to fully monetize our new bidding channels. By accelerating automation processes and enhancing our world-class brand operations, we are building a stronger, more sustainable advertising business.
2) Accelerated pace of generative AI product: AI playlists expanded to over 60 markets, with millions of users participating, achieving continuous iterative improvement through "preference optimization";
3) Full investment in video podcasts starting in 2024, with over 430,000 video podcasts already on Spotify. Video performance continues to be excellent, with consumption steadily rising, growing at more than 20 times the rate of pure audio consumption since 2024. Over 350 million users on our platform have watched video podcasts, a year-on-year growth of 65%.
2.2 Q&A
Q: How do you evaluate the balance between the number of tiers and user experience when introducing product tiers (such as Superfan or others) on a global platform? How many tiers can be created without complicating the experience?
A: We are very excited about attracting Superfans and are creating unique and high-value features for them. When introducing new tiers, we always adhere to high standards to ensure that each release significantly enhances user value rather than increasing complexity. Currently, we have launched audiobook add-on subscriptions in 13 markets to meet Superfans' demand for more listening content, and for the first time, provide audiobook access to sub-accounts of family plans. This not only expands our product tiers but also validates the flexibility to introduce new tiers while ensuring a clear user experience. In the future, we will continue to deepen in the fields of music, podcasts, and videos to meet the expectations of different segmented users with a diversified tier combination.
Q: The gross margin this quarter did not exceed expectations as it usually does, does this reflect a change in guidance strategy? How do you view the gross margin trend for the rest of the year and 2026?
A: Our philosophy has never changed: to provide guidance with certainty and pursue gross margin improvement within foreseeable ranges. Investments in the infrastructure of operating businesses and future growth are steadily advancing. When we set quarterly guidance, we focus on the certainty in authorization agreements, market conditions, or other factors that may affect profit margins. We usually do not provide a gross margin guidance that we feel uncertain about. Therefore, we adjust to a more certain level when providing guidance. If we do so, the result is usually higher or meets the target. Now we are just meeting the target, which means there is almost no issue with uncertainty this quarter.
In terms of the music business, we will enhance revenue through marketplace and advertising monetization; in podcasts, we will leverage advertising scaling and SPP (Spotify Publisher Platform) monetization; in the audiobook field, we will continue to optimize the experience and create more monetization models.
Meanwhile, cost scaling brings marginal improvements to other income costs (such as customer service and payment services). There were approximately 40 basis points of temporary factors affecting this quarter, but they will not exist in the fourth quarter. We will not provide specific guidance for the fourth quarter or 2026, but expect the seasonally strong fourth quarter to still contribute to gross margin improvement.
Q: How does generative AI affect productivity, product development, and consumer experience, and how will it evolve in the future?
A: Generative AI brings significant acceleration in prototype development, widely adopted across departments, enhancing overall productivity. This spring, we held a "hack week" to enhance the skills of the entire workforce, interestingly, not only engineers, product personnel, and designers adopted this approach, but non-R&D departments also actively participated. In fact, we see high adoption rates in finance and other departments.
This validates the universal benefits brought by AI. In terms of product delivery, "Google eval has become the new PRD," meaning the boundary between evaluation sets (eval) and product requirement documents (PRD) is dissolving, and product iteration is faster. In terms of consumer experience, generative AI introduces natural language interaction, allowing Spotify to obtain a new dataset—ordinary statements associated with songs, which will profoundly change recommendation algorithms, driving a shift from predictive experiences to "reasoning" experiences. In the coming years, users will be able to have real-time conversations with Spotify, experiencing more interactive and intelligent experiences.
Generative AI has a fundamental difference from previous AI. Previously, we mainly relied on user signals, such as skipping, playing, and collecting. You can imagine these signals are quite rough. For example, skipping a song may mean you really like it but are tired of it, or you like it but the occasion is not suitable, or you really don't like it. All these situations ultimately lead to skipping.
So, these are direct signals, and the development of generative AI allows users to finally communicate with Spotify in plain English or any language. You can see it as us obtaining a new dataset.
User experience will become more interactive. You can now write to Spotify, talk to Spotify, and in the future, you will see this interaction further expand. Finally, I want to say this technology transforms user experience from being primarily predictive to reasoning. We predict what songs, playlists, podcasts, or books users might want to listen to, and now it's reasoning based on their listening history, even reasoning what they said in the case of a DJ.
Q: You just increased the stock repurchase authorization to 2 billion euros, with 1.9 billion euros remaining; will it be fully executed before it expires in April 2026? How do you consider capital usage in the next three to five years?
A: Our primary task is to invest in growth opportunities that bring attractive returns, and repurchase is just one tool to enhance flexibility. We are committed to maintaining a healthy balance sheet that supports long-term strategies, and the stock repurchase authorization provides us with additional flexibility. The specific execution time and amount will depend on the attractiveness of investment opportunities and market conditions, but it does not affect our continued investment in growth and innovation. We will not disclose further details of the repurchase to maintain decision-making flexibility and focus on creating long-term value for shareholders.
Q: What are the pros and cons of FX-neutral ARPU in the third quarter? How will ARPU evolve in the fourth quarter?
A: ARPU was generally flat under currency neutrality in the third quarter, affected by the dual impact of ARPU improvement in developed markets and dilution from the influx of users in emerging markets. Subscription prices and user value improvement in developed markets supported ARPU, while strong growth in emerging markets diluted overall ARPU in the short term but created significant value for the platform in the long term.
Regarding the fourth quarter, we will update guidance in the fall, considering market dynamics and operational certainty. Alex Norstroem added: We always focus on long-term value, raising prices at the right time through a combination strategy, and closely monitoring churn rates. Price increase tests in France, Belgium, the Netherlands, and Luxembourg show that user retention rates have not been abnormal.
Due to time factors, there will be fluctuations in the short term, but we always prioritize subscription users, and this has been very effective for us so far. As for pricing, we will raise prices when the business is appropriate. I also want to remind everyone that we adopt a combination strategy. In a sense, you could say we are always raising prices.
Q: How do you balance business investment to support future pricing as you expand into audiobooks, video podcasts, and education?
A: We are extremely optimistic about the growth prospects in multiple verticals such as music, video, and books. Currently, about 3% of the global population are paying users of Spotify, and there is huge potential for penetration to increase to 10-15%, which is the basis for setting a new target of 1 billion subscription users.
We already have a 45% subscription share in the markets we operate, and Spotify accounts for 65% of global music streaming consumption. Based on these strong indicators, we will continue to make precise investments in the three major verticals to support long-term pricing strategies and user experience optimization, driving sustainable growth.
Q: In the context of overall music industry growth slowing in developed markets, what new products or bundling strategies can reignite industry growth?
A: Over the past four to five years, user engagement with Spotify's multi-format content (music, podcasts, videos) has continued to rise, injecting vitality into growth. Our bundling strategy aims to help users easily access multiple content, achieving higher stickiness and duration. By continuously optimizing the multi-format experience, we believe we can stimulate the recovery and acceleration of the overall market while maintaining industry leadership.
Q: What impact does the promotion of alternative payments in the US have on subscription conversion? What new opportunities does it bring?
A: After the Epic case, alternative payments on US iOS significantly improved subscription conversion rates, and eliminated the "black box" experience for users when payments failed. We can now directly prompt users to take action within the app, rather than relying on external emails or advertising remarketing. This change also provides the possibility for "on-demand purchase" models, allowing future media platforms to monetize through advertising, subscriptions, and point-to-point transactions simultaneously. We are closely monitoring the progress of EU DMA/DMCC and look forward to replicating this success in more markets.
Q: What is the organic growth rate of advertising business sales in the second quarter at constant exchange rates after excluding the impact of non-exclusive podcast removals?
A: After excluding the strategic short-term impact of inventory removal and SBP (Spotify Brand Platform) adjustments, our advertising revenue growth rate is in the low double digits. Alex Norstroem further pointed out that the growth rate of video content on the platform is 20 times that of pure audio, and the consumption duration of video consumers is 1.5 times higher than that of users who only listen to podcasts, highlighting our success in content investment and product portfolio adjustments.
Q: What are the main drivers of gross margin expansion after 2025?
A: Future gross margin expansion will be driven by advertising monetization (music and podcasts), audiobook experience optimization, and "on-demand purchase" as the three pillars. Meanwhile, as scale effects become apparent, customer service and payment service costs will be further diluted. We remain confident in medium to long-term profitability and will continue to invest to achieve sustainable expansion.
Q: Does the departure of global sales director Lee Brown reflect dissatisfaction with the progress of the advertising business, or is it an unexpected change?
A: In 2025, we continue to accelerate the transformation of the advertising business, completing the parallel layout of programmatic and direct sales, and gaining widespread industry recognition. Feedback from multiple advertisers indicates positive feedback on the new advertising stack. Given the need to further accelerate execution, we decided to make leadership adjustments to ensure the speed of advertising business transformation is consistent with expectations. Lee has achieved remarkable results over the past six years, and we deeply appreciate his contributions.
Q: What growth indicators have different categories of user engagement shown over the past year? How do you monetize high engagement?
A: Music subscription share, video viewing volume, and audiobook categories have all grown significantly; we have over 400,000 audiobooks and have launched add-on subscriptions in markets such as Germany, Austria, Switzerland, Liechtenstein, New Zealand, and Australia. In terms of monetization, we are simultaneously advancing premium subscription price increases, advertising monetization, and single-point purchases to meet the diverse needs of different users and enhance overall revenue.
Q: Considering the timing shift of operating expenses in the second half of this year, how should we view expense growth in the coming quarters? What incremental investments do you currently expect in employee numbers, marketing, or technology in 2026?
A: We are in a volatile business environment, so we need to maintain a dynamic balance between "personnel-driven expenses" and "compute-driven expenses" when planning operating expenses. In terms of employee investment, we will continue to focus on the engineering team's demand for computing resources, ensuring that internal tools and new product development meet innovation needs while avoiding resource waste.
In marketing spending, we use the SAC (Subscriber Acquisition Cost) and LTV (Lifetime Value) ratio as the core measurement standard: when a marketing strategy investment can bring considerable long-term returns, we will decisively increase investment, otherwise, we will remain cautious.
Regarding technology investment, we are accelerating the construction of infrastructure that supports generative AI and real-time reasoning to further enhance product delivery efficiency and user experience.
Overall, expense growth in the coming quarters will not blindly rise, but will be flexibly adjusted around the primary goal of promoting "lifecycle value" to achieve the best balance between short-term efficiency and long-term growth.
As for 2026, we expect to make incremental investments in the following three areas: first, upgrading the technology stack for core products, second, new business experiments driven by data and AI capabilities, and third, high ROI marketing projects. Through this "value-driven budget" principle, we ensure the necessary innovation while maintaining financial stability.
Q: What is the key significance of video expansion for advertising growth in the second half of the year and beyond?
A: Video is our natural response to user demand, and the platform has witnessed a significant increase in video consumption. Although video is not life-or-death, as high-stickiness content, it brings new inventory and diversified formats to the advertising ecosystem, helping the advertising business and industry growth remain consistent.
Q: Why can't Spotify raise prices faster like NBC Peacock in developed markets with high daily engagement?
A: We always focus on the value-to-price ratio, prioritizing user retention over short-term gains. We adopt a combination pricing strategy, flexibly adjusting according to market, usage, and users' perception of value. Recent price increases in several European markets have not shown abnormal churn rates, validating our pricing framework. Daniel Ek added: In large-scale subscription services, improving retention is better than solely pursuing new user growth, so we focus more on long-term user value.
Q: Advertising-supported sales have grown in single digits for a year, competitors are growing faster; is advertising business important to Spotify?
A: Advertising business is a core pillar of our transformation in 2025, and we have built a new advertising stack and promoted it globally. Advertisers' adoption rates of programmatic and direct sales parallel models continue to rise, and we have made significant progress in new formats (such as insert ads and videos). Although execution needs to be accelerated, our long-term strategy and investment direction are clear.
Q: How has Spotify utilized large language models in the core product experience to achieve reasoning capabilities over the past six months? Where are the long-term opportunities?
A: We have fully transformed the technology stack, using MCP (Model Context Protocol) to integrate all APIs with models, achieving real-time reasoning capabilities. For example, when users ask specific song background questions in natural language, small "artificial software engineer" programs can retrieve, parse, and generate accurate answers online. Additionally, the infinite improvement brought by generative AI means that the platform with the highest engagement will iterate the fastest, putting Spotify in a unique advantage. Long-term opportunities include intelligent dialogue, dynamic curation, and innovative paid products.
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