Spotify Technology SA (SPOT) 2019 Q1 法說會逐字稿

Welcome to Spotify's 2019 financial results question-and-answer session.

A copy of the company's shareholder letter issued premarket open today is available on the Investor Relations website, investors.spotify.com.

This call is being recorded, and an archived replay will be available on the IR site after the event concludes.

I will now turn the call over to Paul Vogel, Head of Investor Relations and FP&A.

You may now begin your conference.

Great.

Thank you, and welcome to Spotify'S First Quarter 2019 Earnings Conference Call.

With us today are Daniel Ek, Spotify's CEO; and Barry McCarthy, Spotify's CFO.

First, I want to thank everyone for joining us this morning.

We know it's been unconventional to do an earnings call premarket on a Monday, so we appreciate everyone making the time to be with us this morning.

The format of today's call will be similar to prior quarters.

Daniel will give a few brief opening remarks, followed by an online question-and-answer session.

Questions can be submitted either through the widget alongside the website or by e-mailing directly to ir@spotify.com.

We'll get through as many questions as we can.

The call will last approximately 30 minutes.

Before we begin, let me quickly cover the safe harbor.

During this call, we will make forward-looking statements, including projections or estimates about the future performance of the company.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ because of factors discussed on today's call and in our letter to shareholders and filings with the Securities and Exchange Commission.

During this call, we will refer to certain non-IFRS financial measures.

Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, on the financial section of the Investor Relations page of our website and also furnished today on Form 6-K.

And with that, I'll turn it over to Daniel.

All right.

Thanks, Paul, and thanks, of course, everyone joining today's call.

We had a very strong quarter as most of our key metrics were at the high end or exceeded the top end of our forecast.

In the quarter, we closed the previously announced acquisitions of Gimlet and Anchor and, in April, the recently announced deal for podcasts: 3 best-in-class podcasting companies.

These deals will help accelerate our goal of becoming the world's #1 audio platform.

We're also excited to share that we've reached 100 million Premium members.

This is an important milestone in our mission to connect over 1 billion users with millions of artists.

And we launched in India and -- in the first quarter, and we're really very pleased with the results there.

We got more than 2 million users of Spotify today in India.

Looking more broadly at the global music economy, it was really encouraging to see that 2018 industry data has shown strong growth across the music industry, led almost entirely by streaming, which accounted for 47% of all recorded music revenue.

With physical and download revenue in decline, the 34% year-over-year growth in streaming is the engine driving the train, and Spotify continues to be the driving force that has made the music a growth industry again.

Related to this, the number of creators that are engaging directly with Spotify's platform continues to increase, growing to over 3.9 million this quarter.

We're also seeing a significant growth in the discovery of new artists on Spotify.

In Q1, we saw a 20% increase in the number of artists streamed on our platform year-over-year and a 29% increase in the number of artists with at least 100,000 listeners.

We believe this engagement from artists, labels and publishers shows a strong sign that there's an increased appetite for more marketplace tools and services.

With more than 50 million tracks now available on Spotify and growing by close to 40,000 daily, the discover tools we're building has never been more important to consumers and artists alike.

Overall, we feel really good about our first quarter results and remain very optimistic about the rest of the year and our long-term opportunity to become the world's largest global streaming audio company.

And with that, let's open the floor for questions.

Great.

Thanks, Daniel.

Our first question comes from Ross Sandler at Barclays.

Connected speakers have been a nice tailwind for growth over the past few years.

Do you think that changes for SPOT if the larger platform owners introduce new services, like Ad-Supported streaming?

Or do you think it would continue to be accretive for growth rates?

Any thoughts on Amazon's recent move?

And how should we think about voice in general?

Well, we believe voice, really across all platforms, are critical area of growth, particularly for music and audio content.

And we're investing in it, and we're testing ways to explore and refine our offering in this arena.

One of the core pillars of our strategy, of course, is ubiquity.

So we want to be on all major platforms that you can imagine.

The only thing I would counter that saying is, while the growth rate of voice speakers is impressive, it's still very small when you compare it to mobile.

Our next question comes Matt Thornton at SunTrust.

In terms of music content cost, any update or color management can offer as the time line of negotiation of the deal with the labels, in appeal of the CRB ruling and the DOJ review of the consent decrees?

Well, as we've said before, the results of our renegotiations with the labels, the key pillar here is to drive the adoption of our marketplace strategy.

That is the future for our margin growth.

It's not about renegotiation of the deals.

We're doing really well in terms of the build-out of the marketplace tools.

We're doing really well with the music industry in the adoption and testing of those tools.

And that's what I can share at this moment.

Sorry, let me just jump in on the CRB time line.

That will be a long drawn-out process.

It's just the nature of the beast.

Our next question comes from Eric Sheridan at UBS.

On advertising, can you provide more detail on the ad pricing commentary from the earnings release?

What happened and what was corrected in the go-to-market approach?

And how should it impact future periods, starting in Q2?

Second part, how would you contrast, frame the North America versus global ad opportunity on the platform?

Well, part one of the question, the softness we saw in the quarter, primarily in the U.S. business, was related to our sponsored sessions, which had been using performance pricing, which worked extremely well in Q3 and Q4 in high-demand periods and priced out of the marketplace in a slow-demand period in Q1, and we were slow to react and adjust our pricing, which we did in the third month of the quarter, but too late to fix the revenue shortfall.

In any event, as I said in the commentary, the fix is in, and we're seeing strong revenue growth in Q2.

So I'm relatively optimistic about that.

As it relates to the second part of the question, U.S. versus rest of world revenue opportunity, well, it's -- U.S. is a large percentage of ad revenue base, so at least in today's world, as goes the U.S., so goes the -- the overall performance of the ads business.

As we continue to grow in new markets and in Asia and in India, there will be some challenges in keeping pace with the growth from a revenue perspective, because those markets just simply don't have as developed an ad market as we have here in the U.S. And secondly, at least initially, our reach in those markets, it will be relatively small until we build critical mass.

And until we build critical mass and have reach, the attractiveness of the platform to advertisers is relatively limited.

So it's true in the United States as well.

We will grow into the demand.

Great.

The next question comes from Mark Kelley at Instinet.

You talked about better-than-planned promotions in the U.S. and Canada.

Are there anything new you tried, whether it was a new acquisition channel or shifting ad budgets?

Or is the strategy the same, but perhaps more effective?

It was strong across the promotional base.

Sometimes, some quarters, you have wind at your back, and we have the wind at our back this quarter.

Next question comes from Doug Anmuth at JPMorgan.

Can you help us understand the structure and economics of the Samsung partnership and how it shows up in SPOT financials?

It's really a distribution partnership across the -- whereas Samsung's main promise is, obviously, improving their product and our main promise is, of course, bringing more music to more products.

It's a natural partnership.

In terms of economics, I don't really have anything to share.

Yes, we don't talk about the specifics of any of our deals from a financial perspective.

Our next question comes from Anthony DiClemente at Evercore.

If ARPU declines are moderating, does that mean mix shift to Family plan, Student plan is getting into the later innings?

Well, it means that we launched them a year ago, so we're a year in and so -- because we're lapping the launch of the plan, it has mathematically less of an impact on ARPU than it's had historically.

So now the go-forward influence will have much to do with the geographic expansion of the business and not at all related to the rollout of Family plan and Student plan, which is daunting.

Our next question comes from Justin Patterson of Raymond James.

More companies are investing in competing podcast product.

How does that change content acquisition cost and the bid/ask spreads in deals you're evaluating?

How do you feel about your competitive position?

Well, first and foremost, I think that there's a lot of podcast players out there, and that's certainly been true for quite some time.

I think last time when I checked on the App Store, there were more than 60 or 70 of them.

The truth is, while it's not that difficult to build a podcast player, it doesn't mean it will be successful.

And as we've seen before on the App Store, it is really a very much -- a top of the pyramid game where there are few apps that have the majority of the traffic and we happened to be one of those apps.

As we're looking at building this out, I think it's way too early to talk about pricing of deals.

This is a very, very early market that we're seeing.

And our view, obviously, is that while users are starting to flock to listen to podcasts, there's still tremendous amounts of growth, both in the U.S. and internationally.

On the demand side and on the supply side, we don't think yet that the best talent has come to the podcast format, and we're seeing stronger and stronger growth on that side as well.

Next question related comes from Ben Swinburne at Morgan Stanley.

Daniel, how would you assess Spotify's ability to curate and help users find podcasts they will enjoy?

And is improving as nonmusic engagement a priority for the company?

Yes, it's definitely a priority.

Personalization is one of our core pillars of our strategy.

And there, we are obviously really, really far along in music.

Podcast is a much newer space for us.

The way we merchandise podcast, the way we recommend podcast is completely different.

We are working on that and improving quarter-over-quarter, and I think you can see it today in the product compared to last quarter that there's a tremendous amount of new things that are shipping.

I think we went, in all honesty, from being an okay product at the beginning of 2018 to now a year later being best-in-class in this area.

And of course, we want to expand on that and become an even better experience.

And in there, personalization is absolutely key, and we think that there's -- we're still in the early innings.

Next question comes from Heath Terry at Goldman Sachs.

You took steps with regulators to address what you see as anticompetitive issues with Apple.

What responses have you seen from regulators to date?

And what do you see as being the right outcome of this process?

Well, we -- as everyone know, we filed our complaints with the European Commission.

We cannot yet say what the results will be, because it's really under evaluation on their end, and we will probably know as -- because they have the same time as the rest of the market knows.

What I can say personally from speaking to lots of regulators in and around that time as you think that there -- this is the moment where these issues needs to be debated, and I think that there's a willingness to engage on these questions.

And I would say lastly and while all that is pending, we continue to remain focused on winning in the marketplace.

Next question comes from Rich Greenfield at BTIG.

On Google, what's the key takeaway from the Home Mini partnership, especially in light of its expansion?

Can it drive faster uptake of Family plans?

How is consumption impacted in homes with or without Google devices?

Simply put, what drove your desire to expand the partnership?

Well, we saw a strong growth in Q4, and that led to the expansion of the partnership.

In Q1, we didn't grow as fast as we were expecting, because of some inventory shortages in the markets where we launched, which resolved itself later in the quarter.

But overall, we think that promotional program has been quite effective for us to accomplish the strategic objective of expanding into voice-enabled products, and it drives user growth.

And we like to like that value.

Next question comes from Lloyd Walmsley at Deutsche Bank.

Can you help us understand why the MAU number came in below the midpoint of the guide?

To what extent is that weaker new MAUs versus attrition in older MAUs?

Are some of the deals you're doing, like Google Home, Hulu bundling and Samsung, effectively increasing the pace of conversion from MAU to subscribers?

Yes, we think there's really not much news about MAUs.

We're mostly in the upper end of the range that we guided to.

When came in at 217 million, I think The Street was at 218 million.

Sometimes rounding helps you, sometimes rounding hurts you.

So it's one of those quarters where we fell short, but it's of no consequence.

Next question is from Nick Delfas at Redburn.

You've increased the number of artists on editorial playlists by 30% and number of songs discovered by 35%.

Over what time period?

And what effect has this had on the 3 majors' market share?

We don't break out the numbers of any of our rights holders.

What I can say and just to kind of up level the conversation as well, personalization is one of the core pillars of our strategy.

So what we see is the user satisfaction is closely related to discovery.

So if we are able to get customers to discover or rediscover content on Spotify, it drives a better user experience and better engagement, which, of course, leads to lower SAC, which, of course, leads to lower churn and higher lifetime value.

It's really the same strategy that we apply to podcasts.

So you should think about our podcasting strategy in the same way.

If we have podcast content increases engagement through discovery, which leads to lower SAC, lower churn and then higher lifetime value.

And it's a repeat-and-raise strategy.

The next question comes from Matthew Harrigan at Buckingham.

Anymore thoughts on how Article 17, formerly Article 13, could help Spotify to constrain free YouTube Music video usage in Europe?

I think it's really too early to say what the exact impact will be of Article 13 or 17, depending on which provision you're looking at.

Now, our view is obviously that we want a landscape where we're competing on a level-playing field and where our rights holders are getting paid for their content.

If Article 13 or 17 leads to more of that, we think we will do better.

If it's -- if the question is how material is it, I think it's way too early to tell you.

Next question comes from Sumant Wahi at Fidelity.

How are India subs growing?

Why has your ARPU declined low single digits, given geo mix shift to lower ARPU geographies?

Let me -- 2 parts.

One is we're pretty excited about the growth in India, and it's faster than we were initially expecting.

Two, price points in India are significantly lower than they are in the U.S. and that's true in Asia as well.

And so if on day 1 we had 0 on and day 2 we had lots, the day 2 average company ARPU will be lower than it was on day 0. But margins across regions, independent of price points, are relatively equal.

And so from a margin perspective, expansion in those regions works for the business, which is part of the launch there.

Next question from Maria Ripps at Canaccord.

It's nice to see Spotify evolving different subscription plans.

Can you comment on how has the duo plan been received so far and when we might expect to see the planned launch in the U.S. and other markets?

Well, just to level set with everyone, we piloted a Premium plan called Premium Duo for -- it's really built for 2 people living under the same roof, and we tested this in 5 markets, which is Colombia, Chile, Denmark, Ireland and Poland.

And we're -- it's still early, but we're really encouraged by the early response and that we believe it's going to be accretive to our MAU and sub number, if we roll out this more widely.

Next question from Amy Yong at Macquarie.

There seems to be increased competition, with Amazon looking to launch a subscription-based service and Apple bundling music and video.

How do you prepare to face this?

Yes, I just think, again, competition is something that I've experienced, really, throughout the entire life of the company.

It started back in the day with MySpace and Lala and a bunch of different competitors.

But even back then, Apple, obviously, had iTunes and Amazon had a CloudWalker service and Google had not only YouTube, but a bunch of different streaming services.

The point I'm trying to make is, we've always had competition.

Competition has always come in the form of much larger player.

That's not unusual to us, yet we keep on doing what we said we are going to do and keep on growing at more than 30% per year.

And the point with that, I think, is that the music industry market is just way bigger than most people realize.

There are billions of customers out there in the world that are consuming music today.

Most of them are yet not in streaming.

We are all, of course, trying to get the music industry into streaming.

And that is the trend -- a secular trend that will keep going for at least another 5 to 10 years.

And so competition is just not a big factor for us.

It's really all about growth.

Next question comes from Michael Morris at Guggenheim.

Did minimum guarantees to record labels for newer market launches, including India, negatively impact gross margins in Q1?

If so, can you help quantify the impact and how long a drag it will be?

Yes.

It did, and we won't quantify it.

But in every market where we launched, including the U.S. when we first launched, there are minimum guarantees that are paid.

We initially lose money in those markets.

We grow our way into the MAU to breakeven and then eventually to profit building.

So this is history repeating itself.

And as long as we are able to achieve the growth objectives we set for the business, and we have consistently, then the markets where we are growing the business become profitable.

The next question comes from John Egbert at Stifel.

Your letter discusses your ambition to develop a more robust advertising solution for podcasts.

We've seen after the Luminary launch that some top podcast creators can be sensitive about where they host their content.

Can you speak to top podcast creators whom you don't have an exclusive relationship with?

What is their acceptance to Spotify potentially is selling incremental ad spots on their content?

And how do you feel about the analytics they're able to see from listening on your platform?

So just to level set with everyone, this is certainly still in the early innings, this whole space.

But we see a tremendous reaction from the community of podcasters, both now in the recently rolled out tools, Spotify for Podcasters, where for the first time, really, podcasters are getting actionable insights into who's listening to their content.

Most of the cases before, it ended up being regionally they could see that maybe there was someone in Russia or maybe there was someone in Spain that was listening to their content, but it really didn't have more actionable detail.

Because Spotify is a logged in environment where we do have demographic data, we can share that.

It's been very well received by the podcasting community.

When it comes to monetization, it is true that a lot of podcasters are struggling and have to set up their own sales forces in order to succeed, creating revenue for themselves.

We look at that long term as a massive opportunity, and podcasters are eager for us to get into this space.

And I think advertisers alike is very eager for us to get into this space with all of the measurability tools and all those things that we're bringing to the industry.

Let me add that Apple, of course, has historically been largest player in the podcast space.

They don't have an advertising business, and there's been no innovation in podcast advertising in its entire history.

So ads gets baked into RSS feeds and delivered to all listeners, regardless of their interest in or their demographic profile and any particular interest in any particular ad.

So we're working hard on building digital ad sourcing technology, and we'll use that technology to dramatically revolutionize the ad experience of podcast for listeners.

Next question comes from Brian Russo at Crédit Suisse.

So far, your podcast investment team focused on English-language content.

Can you talk about how you plan to benefit from your podcasting strategy in parts of the world that do not speak English?

Well, our podcasting initiative is very much a global initiative.

And as pointed out, I think, in our release, we had more than 15 shows that were exclusive to Spotify in Q1.

Of those, I think, around half of them ended up being international ones, including in Poland and in the Nordics.

So while our acquisitions have been focused on English-language content, I don't think you should read in too much to the fact that that's an English-only strategy.

It's very much a global strategy.

Next question comes from Robert Coolbrith from Wells Fargo.

Could you comment on churn?

Why are you no longer seeing improvement in the churn rate?

Are you still seeing churn rate improvements with newer user cohorts?

Do you expect improvement in overall churn rate to resume at some point in 2019?

Yes, I think the long-term trend for churn will continue to be downward.

Family plan, Student plan, it has lower churn.

So if continue to see strong growth in those plans, you would expect that average to -- churn to decrease and due to aging in the base.

Only reasons for -- the couple of reasons for increase in churn would be acceleration in growth, and we saw an acceleration in growth this quarter versus prior quarter.

And then, secondly, we in some of our newer markets have gravitated towards shorter subscription plans.

We're experimenting with weekly and daily, by way of example, which may cause us over time to rethink the definition of subscription, but -- so we see people coming in and out quickly.

One last comment, and this is particularly important.

In the latest quarter, we saw a dramatic increase in the number of rejoins.

So 42% of gross adds in the quarter were previous users of the service, which means that more and more frequently, we're seeing former users come back and rejoin.

And some of them may have left because their prepaid debit card expired.

It looked like churn, but they re-upped the card and came back.

Some are coming back just simply because it's a better service.

So just to put that in perspective, the rejoin rate grew at 36% year-over-year, which is more than twice the rate year-over-year in gross additions.

So yes, churn ticked up slightly, but more and more previous users are coming back, which will be an important contributor to growth.

I'd just add one other thing.

We did mention on the call -- on the Q4 call, that given the number of subscribers that came in, in Holiday period of Q4, as well as the uncertainty around how the Google Home campaign would go, that we did expect a slightly higher seasonal uptick in churn than we normally experience.

It was actually a little bit better than expected on both of those fronts.

Yes, we had a slightly higher mix of 30-day promotions and 60-day promotions in some of those and 60 days, instead of 30, seen at the calling in the churn rate.

A follow-up question from Ben Swinburne at Morgan Stanley.

Can you earn economic rent from podcast you distribute, but are produced, owned by competitors?

In other words, where will the value accrue longer term, the podcast network producer or the podcast distributor?

Well, again, just to kind of level set, we're early in this space and the evolution of this space.

Historically, however, on the Internet, charging for distribution has been a very difficult business model.

And I would think that would be very unlikely.

Now our strategy, in general, is our marketplace strategy, where we want to build better and better tools for creators to connect with users.

We definitely think that the same marketplace tools and services that we're building out can be applied to podcasters as well and that's an opportunity, even on content that we do not own.

And I would add from 40,000 feet, historically, what we're seeing is whoever -- the gross margin flows to whoever owns demand creation.

So if you're the NFL, you don't need DIRECTV.

You're going to own that margin wherever you get distributed.

On the other hand, if you're one of now 500,000 podcasts going to 2 million podcasts, if we're able to own the consumer insights that inform us about where the demand is for that content, then the margin will flow to Spotify.

We have time for just couple more questions.

The next question comes from Robert [Elliott] from [Well Known] Partners.

Given you're focused on being the leading player in audio-related media, how are you thinking about audiobooks?

Right now, we're focused on podcasts.

I think when you look at podcasts, however, the distinction of what is a podcast and what is an audiobook remains fairly opaque to us.

As an example, one of the categories that tend to do really, really well in podcast that we're now a major player is in true crime.

So what are true crime podcasts?

I would say that they are very similar to audiobooks in that they're scripted contents, episodic, almost like chapters in a story.

So I think that the definition of what is an audiobook, what is a podcast will more and more start blending, and we're going to see new formats at the end of this journey.

And that's the exciting factor for me, certainly, as I look into and talk to podcast creators.

It's just all the content and all the new innovation that's coming out there.

Our next question comes from Richard Kramer.

Guidance implies a large increase in COG/decline in gross margin in the second half of '19.

Can you break that down to spending on content podcast, the effects on expected changes in licensing or other costs which scale with business growth?

What we've said previously is that if we weren't expanding in podcasts, you'd see margins remain steady.

So none of the erosion in podcast relates to our expectations.

For label renewals, we see that as steady as you go, at least in 2019.

And then as we grow marketplace-related services, we expect to see margin improvements.

So all the deterioration relates to a combination of geographic expansion in markets like India and the payment of minimum guarantees and, importantly, very importantly, increased investment in becoming a leading player in the podcast space.

Next question comes from Justin Patterson at Raymond James.

Is Hulu's international expansion an opportunity for Spotify?

With Disney evolving its strategy for its streaming brand, how is the Hulu relationship changing?

We have a great partnership with Hulu.

We're really excited about the prospect of them starting their service internationally.

We're obviously in discussions with them and the number of other partners to see if we can help them support their growth.

We'll take our last question from [Posnit Hegno].

How will the absence of 2 major labels in India impact your growth capabilities there?

Well, I think as evidenced by our growth, we're doing quite okay, and we're -- it's about expectations.

So we're happy with the growth that we're seeing.

Obviously, as before, the more content we could get on the platform, it typically leads to even faster growth.

Great.

With that, everyone, we appreciate your time, and we look forward to speaking with you on our second quarter call in a couple of months.

Thanks, everybody.

This concludes today's conference call.

You may now disconnect.