Spotify Technology SA

NYSE:SPOT

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Julian and I will be your conference operator today. At this time, I would like to welcome everyone to Spotify’s Q1 2022 Earnings Conference Call and Webcast. Bryan Goldberg, Head of Investor Relations, you may begin your conference.

[Bryan Goldberg, Head, Investor Relations]

Thanks, operator and welcome to Spotify’s first quarter 2022 earnings conference call. Joining us today will be Daniel Ek, our CEO and Paul Vogel, our CFO. We will start with opening comments from Daniel and Paul, and afterwards, we will be happy to answer your questions. Questions can be submitted by going to Slido.com and using the code #Spotify Earnings Q1 ‘22. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. We ask that you try to limit yourself to one to two questions and to the extent, you have got follow-ups, we will be happy to address them time permitting. If for some reason, you don’t have access to Slido, you can e-mail Investor Relations at [e-mail] and we’ll add in your questions.

Before we begin, let me quickly cover the Safe Harbor. During this call, we will 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 materially differ because of factors discussed on today’s call, in our letter to shareholders and in filings with the Securities and Exchange Commission. During this call, we will also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our Investor Relations website and also furnished today on Form 6-K.

And with that, I will turn it over to Daniel.

[Daniel Ek, Chief Executive Officer]

Alright. Hi, everyone and thank you so much for joining us. So, I will kickoff by sharing a few of the highlights you may have seen in our shareholder letter. We delivered another strong quarter in Q1. And when you exclude the impact of our withdrawal from Russia, we came in line or ahead on every metric. And this performance builds on the momentum we saw in Q3 and Q4 of 2021 and I am very pleased with the continued acceleration we are seeing in user growth headed into Q2.

There are puts and calls in every quarter and this one was no exception. As I have said several times before, Q1 traditionally sees lower new user activations, but despite this, we delivered solid results. And I think this is a testament of our consistency of execution and clearly shows just how compelling our offering remains for creators, users and advertisers, even in the face of uncertainty provoked by world events. So, it’s safe to say that my overall confidence in the business continues to grow on all fronts. Case in point is the strength of our music business, evidenced by the recent release of new royalty data on our loud and clear websites. The data clearly outlines the role Spotify and streaming are playing in growing the entire music ecosystem. Not only is streaming driving record revenues in the music industry, but there are more artists sharing in that success than ever before.

In fact, the worldwide growth is truly staggering as more artists hit milestones across all revenue levels. So for the first time, over 1,000 artists generated over $1 million and over 50,000 artists generated more than $10,000 on Spotify alone. For those who are interested in learning more, I would encourage you to check out the loud and clear website. So, our core business remains incredibly strong. And this strength is built on the investments we continue to make in constantly enhancing our platform, which in turn elevates the experience for users and creators. We are especially investing in our core platform capabilities. These are multiyear investments to enable a constant iteration across our products, tools and services. And given the positive results we are seeing, you should expect this to continue for the foreseeable future. And I recognize that many of you want more clarity around when the benefits of all these investments will be realized, including when they will show up in our financial statements. And this is something we will unpack for you at our upcoming Investor Day.

But to give you a sense of the breadth and the impact of our investments are already having for creators, users and advertisers, allow me to offer a few examples of things we shipped this quarter. So, take our ads business, which continues to be a strong revenue driver, thanks to the investments we are making to modernize audio advertising, the recent third-party survey validate this belief showing that Spotify is the must buy audio ad partner in the U.S., and we are delivering more impact for advertisers and publishers through our acquisitions like Podsites and Chartable and we are already seeing the impact these moves are high on renewal rates and deal sizes. And these moves will bring important innovation to the marketplace and accelerate our ability to unlock significant revenue growth in both music and podcasts.

At Spotify, we are constantly testing and experimenting. And in Q1 alone, we ran almost 2,000 experiments, which is a 5% increase over the previous quarter. Some of those experiments led to full global product launches like the new updates and campaigns we rolled out for Blend, which drove 17x more new user registration than even our annual rap campaign. And in the first 20 days of the Blend campaign, we had 22 million users create Blend playlists. And we are also seeing incredible user engagement worldwide with over 60% of streams coming from Gen Z listeners on Blend. And these results are exactly the types of outcomes we aim to drive and we will continue to aggressively experiment with further user improvements.

And our podcast business also continues to surpass even our own high expectations, with podcast share of overall consumption hours reaching another all-time record last quarter. And we now have more than 4 million podcasts on our platform, up 53% year-over-year and up from 3.6 million last quarter, with emerging markets like Latin America and Asia driving a lot of this growth. And with more than 1,150 original and exclusive shows on our platform, overall podcast consumption is strong and increasingly sticky especially as we innovate with features like video, which more and more creators are taking advantage of as they seek to reach new global audiences and connect and interact with their fans in new ways.

And with that, I will hand it over to Paul to go a little bit deeper into the numbers and then Bryan will open it for Q&A.

[Paul Vogel, Chief Financial Officer]

Great. Thanks, Daniel and thanks everyone for joining us. While Daniel touched on most of our key KPIs, I want to add a bit of color on our operating performance, which was ahead of plan, excluding the wind down of our Russian business, which started in March. Please note, Russia represented approximately 1% of our total MAU and subscribers and less than 1% of our revenues at the start of Q1.

Let me first start with MAU. On a reported basis, our total MAU grew to 422 million in Q1. It’s important to note that MAU did see an estimated 3 million benefit from a brief service outage that logged users out of Spotify causing a portion of affected users to create new accounts to log back in. This had the effect of double counting these users in the month of March. We saw this reverse in April as we cycled the 1 month anniversary of the outage. With that in mind, normalized MAU was approximately 490 million in the quarter, still roughly 1 million ahead of plan. Our strength was led by strong results in Latin America and Rest of World led by Indonesia, Brazil and Mexico.

On the Premium front, we reached 182 million subscribers in Q1. As we shared in early March, our exit from Russia led to 1.5 million disconnects in that market. Adjusting for that impact, net subscriber growth finished ahead of plan and was aided by outperformance in Latin America and Europe. We also continue to grow ARPU nicely in the quarter, which was up 6% year-on-year and 3% on a constant currency basis. Revenue finished slightly ahead of guidance. We had a really great strength in advertising in the quarter at 30% growth. However, it’s important to note we are trending closer to mid-30% growth prior to Russia’s invasion of Ukraine.

With respect to gross margins, Q1 finished modestly above plan at 25.2%. The modest fee was a few small differences versus our forecast, but nothing material to call out. Additionally, our core margins continue to improve while we invest aggressively against new initiatives. Looking to the second quarter, we expect the remaining wind down of our Russia business to reduce Q2 MAU by an incremental 5 million and subscribers by another 600,000. Regardless, we are very encouraged by the trends we are seeing across the rest of the business. And on a like-for-like basis, we see very healthy gains in Q2.

Excluding Russia and the MAU benefit caused by the March service outage referenced earlier, our guidance for 428 million MAU implies an increase of approximately 14 million net MAU, a healthy uptick in organic growth versus the 9 million we reported last year and 13 million in Q2 2020. We continue to see promising growth in our largest developed markets, an ongoing rebound in developing markets like India and increased traction in our 2021 market launches. Our Q2 subscriber guidance of 187 million implies net adds of 6 million ex-Russia and reflects the benefit from our global campaign later in the quarter.

Lastly, our outlook for Q2 gross margin of 25.2% reflects our expectations for continued core operating improvement across our music and podcasting businesses offset by select growth initiatives. As a reminder Q2 2021, gross margins had a one-time benefit of roughly 200 basis points due to the release of accruals for prior period publishing royalty estimates.

As discussed on the Q4 earnings call, we continue to see a number of opportunities for investment. In light of the positive results we are seeing and the attractive long-term potential of these investments, we will continue to pursue many of these initiatives this calendar year. As a result, we expect to keep gross margins around Q1 levels throughout the balance of 2022. And while we aren’t providing guidance beyond Q2, our current expectations for next year would be a continued upward momentum in our core business and a smaller drag from new investments.

Finally, I want to conclude with an update on our upcoming Investor Day. We look forward to updating you on the progress we have made since our direct listing, sharing details about our roadmap and providing clarity on the financial progress that we expect over the intermediate and longer term. We are still finalizing plans for the Investor Day, so stay tuned for more information about timing, speakers and everything else to come.

And with that, I will turn it back over to Bryan for Q&A.

[Bryan Goldberg, Head, Investor Relations]

Alright. Thanks, Paul. And again, if you have got any questions, please go to slido.com #Spotify Earnings Q1 ‘22. Once your question is entered, you can edit or withdraw it by selecting the option in the bottom right and we will 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 Mario Lu and it’s on the current operating environment in streaming. Last week, Netflix mentioned market saturation and competition is two main factors for its slowed growth. Are these similar concerns for Spotify?

[Daniel Ek, Chief Executive Officer]

Well, I will take this one. We had a really, really strong quarter. And again, pretty much all metrics are exceeding or in line with expectations. So, I feel really, really good about the business. Now all that said, I do want to almost take a step back and say that I think a lot of people are grouping us and Netflix together. And I have said this before, but I will say it again, besides both being media companies and being primarily subscription revenue companies, that’s kind of where the similarities end for me. With Spotify, for instance, we are a platform. Netflix is not. With Spotify, we have a free service. Netflix does not. We have hundreds of millions of pieces of content. Netflix makes its own original content solely and license a little bit. So, it’s just vastly different businesses. And again, we have seen competition in Spotify since 2015. And when I look at the video landscape, it seems like competition is heating up. So, there is a lot of other dissimilarities between the two businesses currently as well, but we feel really good about where we are and the business we are and we feel audio is an overlooked market that’s growing and it’s going to be really big.

[Paul Vogel, Chief Financial Officer]

The other thing I’d add to that as well is when you look at some of our – the metrics, not just in Q1, but our guidance for Q2, we are looking for on an organic basis, 40 million net additions for users. As I said in my opening comments, that’s above the 9 million last year, but that’s also above the 13 million we did in 2020 when I know a lot of people are going back and looking at how much was pull-forward due to the pandemic. So, we feel really good about the user growth as well as the subscriber growth coming out of Q1 and into Q2.

[Bryan Goldberg, Head, Investor Relations]

Alright. Next question is going to come from Rich Greenfield on podcasting. Investors have gone from being believers in your podcast strategy to penalizing you for the investment with no confidence it creates long-term value. Daniel, why are you convinced this is the right strategy regardless of the market’s concerns?

[Daniel Ek, Chief Executive Officer]

Well, I kind of think about it from all of our different constituents and stakeholders perspective. So, if you start with users, what we see very clearly in the data indicated in our shareholder letter too is that there is an enormous amount of appetite among existing and new Spotify users to consume podcast content. Separately from creators, there is an enormous amount of appetite to engage with our audience and create content and upload and use our tools like Anchor, like Megaphone and all these other tools, both for monetizing, growing their audience and engaging with their audience. For advertisers, we see enormous amount of appetite in audio in general. And when we added podcast we became a much stronger proposition for advertisers, increasing our order size both in music and in podcasting. And then lastly for investors, structurally, podcasting should be a better business model than music from a gross margin perspective. So, for all of those reasons, when you add them up, we feel really good about the investments we are making and the long-term implications that we will have for our business and our shareholders.

[Paul Vogel, Chief Financial Officer]

And I would just add to Daniel’s point again, if you look at the metrics, we see podcast MAU to total MAU hit an all-time high in the quarter. Streams on podcasting hit an all-time high in the quarter. So we are seeing that engagement across the platform. And then we will unpack some of this at the Investor Day. But when I look out over the long-term in terms of the benefits and the margin profile of the podcasting business over the long-term, nothing has changed at all in my mind in terms of the optimism in terms of both growth for revenue and the margin profile of the podcasting business in the long-term.

[Bryan Goldberg, Head, Investor Relations]

Alright. Next question is going to come from Deepak on our premium business. Can you elaborate on what drove the outperformance on subscribers in Latin America during the first quarter? Are you seeing improved conversion from free users? Is it specific to any country?

[Paul Vogel, Chief Financial Officer]

Yes, there is nothing really to call out. I mean we tend to call our regions and countries at times that do our strength. It tends to come in waves in terms of markets. So nothing to call out in particular. I think Brazil was strong in the quarter. But in general, nothing specific other than we just I think had a good quarter from a marketing performance standpoint.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Matt Thornton. As original content becomes more important, and as you think about amortization of content across a larger user base, does Spotify as a consolidator start to make sense; not to mention the audience network and marketplace synergies and cost synergies up and down the P&L?

[Paul Vogel, Chief Financial Officer]

Yes, so I’ll start with that one. I’m not sure I know exactly what you mean by consolidator, but I think in general, we’re going to continue to invest in content and podcast content because we’re seeing the returns there. You sort of mentioned amortization over a larger base. It will help, obviously, the more fixed content you have as a percentage and the more revenue you can grow, that will help the margins. I think I said in the last question that when I look at the long-term podcasting model, and kind of our growth in original content, it’s still pretty significant over the next couple of years. So we expect to continue to invest aggressively in that content, but we also expect the revenue to grow really nicely, and we will see that margin improvement over time and so consolidation, meaning either other players or not. I mean, again, we will see. I think for us, we are always going to look for what’s out there. We’re always going to look to be developing our own content, acquiring content, licensing content where we see fit and nothing has changed there. And yes, the more users we have, the more inventory we have, the better it is for the audience network, and we’ve seen that in the numbers.

[Bryan Goldberg, Head, Investor Relations]

Alright. Another question from Deepak on premium, other subscription businesses have seen elevated churn due to weakening macro in certain geographies. Can you talk about the churn trends you’re seeing currently? More broadly, how do you think about the elasticity of spot subscription to a weakening macro environment?

[Paul Vogel, Chief Financial Officer]

Yes. I mean I think for starters, we don’t give churn numbers out anymore, but there was nothing out of the ordinary in churn in the quarter. As mentioned in the subscriber base numbers alone when you sort of adjust for the – for our exiting of Russia, we exceeded our subscriber numbers in the quarter. So I hope that gives you an indication of kind of the overall strength of the subscriber business. We definitely think Spotify is a product that people want to continue to have. Any sort of uncertainty, whether it’s war or macro, it’s always going to be there. We see like everybody else. But at this point in time, there is nothing that we’ve seen in the numbers indicated having the impact on our business.

[Daniel Ek, Chief Executive Officer]

The only thing I would add to that is we’re continuously investing behind increasing our value per hour for our subscribers. And as we said in the opening here, we’ve gone from being a music business to an audio business, and more and more of our users and subscribers are finding more and more value on Spotify with all the podcasting comps and all the news content, all the educational content that now exist in addition to the music content. So that’s definitely strengthened that value for our users and the value per hour. And that’s a metric we watch closely because we think that is definitely correlated with the strength of long-term health and strength of the subscription business.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Doug Anmuth. Do you expect – do you still expect 2022 MAU and premium subscriber net adds to be in line with 2021 levels? And what levers can you pull to drive upside to net adds?

[Paul Vogel, Chief Financial Officer]

Yes. So again, all my comments will be after adjusting for the impact of our exit from Russia. But I think as I said last quarter, we expect similar levels of growth for subscribers and users in 2022, and that hasn’t changed, again, notwithstanding the impact that Russia will have on those numbers. And the levers, I mean, the levers are many. I mean, obviously, there is marketing and how we think about marketing and promotions in different regions. We’re getting better with respect to some of the market launches we had in 2021 and getting the right product market fit and the right marketing messages there and growing in those regions as well. We’ve tweaked some of our campaigns on the sub side. We historically did them twice a year, and they were kind of long and now we’ve done 3-year and they are a little bit shorter. And so we’re always constantly adjusting and testing what will and won’t work for us. But again, I think the team feels really good about the growth in users and subscribers. And I think I’ll – again, just going back to what I said, when you look at kind of our outlook for Q2, I think it’s a pretty healthy growth for both users and subs.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question comes from Jason Bazinet on profitability. Your outlook for a second quarter EBIT loss is quite large, even though you are guiding to record revenues and relatively flattish gross margins. While you note some is FX related, can you please expand on the nature of the investments you’re making and when you expect EBIT to turn positive?

[Paul Vogel, Chief Financial Officer]

Yes, so a couple of things. Just to kind of reiterate what you said, there was about $50 million of negative impact from currencies in Q2. When you look at our business, our revenue and cost of revenue pretty much aligns from a currency basis. So when currencies move, our gross margin isn’t impacted all that much from those changes. We have grown significantly in terms of the percentage of our operating expenses that come from U.S. dollar-based costs. And so that’s risen pretty significantly, and that will be up in Q2. So that’s a big part of the FX change. We do have – we have been hiring aggressively against the investment. So hiring is up pretty significantly in Q1 and it continues to be up in Q2. We’ve talked about that, that’s all about our initiatives on the investment side. We lead with technology and product. And so more than 50% of the people we bring are all R&D. So we continue to really grow and invest in that area. And then we do have some increased sales and marketing based on some of the timing of some stuff. And that will be part of the growth as well. So it’s kind of head count, it’s sales and marketing and then it’s FX. And then the other thing I would say is despite the loss, we are investing because we have $3.5 billion of cash on the balance sheet. We’re a free cash flow positive business we will be free cash flow positive again this year. And we look at this as just a great opportunity to continue to double down on all the things that are working for us. And so we’ve talked about this in the past, but we see the core business that’s been around for a while, having steady, consistent growth with improving trends. And we’re going to continue to invest against the business that we think is setting us up for not just the next couple of quarters, but the next 5 to 10 years, and that’s what you’re seeing in some of those numbers.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question is going to come from Steven Cahall on gross margins. Within the ad-supported gross margin of negative 1.5%, can you give color on music margins versus podcast margins? And it seems like podcast engagement is still growing but more slowly. Do you see a natural engagement ceiling? And how does that shape podcast investment plans?

[Paul Vogel, Chief Financial Officer]

Yes, so Q1, we tend to have margins around this level. This is a reminder, all of the costs, all of the content costs for podcasting goes into our ad supported business and Q1 while – it was one of our strongest Q1s ever from an advertising as a percentage of revenue. It still is a relatively small quarter from an advertising. So when you put all of the cost and the stuff we’re adding into Q1 into 2022 into Q1 on a lower ad base, that’s what impacts the ads margin. The music margin, as I said, overall has been kind of trending higher, so that’s great. And so that’s the impact on ad-supported gross margin. It was actually slightly better than we thought. Content spending was a touch later than we expected in Q1, but overall, pretty much in line with where we thought and how Q1 tends to be for the mix between advertising and content spend. And then I’m not sure why you think podcast engagement is growing more fully. That’s actually not something we said. Broadcast growth has actually been really strong for us. Podcast MAU as a percentage of total MAU had an all-time high. It was actually up pretty nice sequentially. And we’re seeing minutes of use in terms of podcast engagement hitting all-time highs as well on the platform. So the podcast numbers are actually really good on the platform.

[Daniel Ek, Chief Executive Officer]

Yes. And the only addition I would like to make is that when we look at even some of the more mature markets for us and the music growth and now the growth with podcasting, and we look at the comparisons like radio, i.e. audio consumption patterns, we still see the sort of ceiling being probably 2x to 3x from where we are today in hours. So plenty of growth left ahead. And this is in some of our more mature markets. So obviously, massive growth opportunities left in that, too. So definitely, no engagement ceiling in sight for us.

[Bryan Goldberg, Head, Investor Relations]

Alright. Next question from Maria Ripps. On Barcelona, are you able to comment on your marketing partnership with FC Barcelona and the stadium sponsorship? Anything you can share on the economics of the partnership or investments needed? And what are your thoughts on ROI here compared to more traditional marketing campaigns?

[Daniel Ek, Chief Executive Officer]

Yes, I’ll start, and maybe Paul can chime in. So I think this is a good one to kind of take a step back. If you look at the landscape of advertising over the past sort of decade, I would say it’s really grown from being offline to more online, dollars has moved online. And a lot of the things has been in more efficiency in tools. So early on in that journey as a market tier, just by using tools, you were able to create a lot more value because it simply was – from a value perspective, these digital channels were very effective because of these auction-based pricing mechanics. And as more and more advertisers have started adopting them and growing the number of advertisers that are able to use these tools because they are so simple to use, obviously, you get to a point where efficiencies – you find the sort of supply-demand equilibrium in the marketplace. And it’s gotten harder and harder for advertisers to gain value. I think what you are seeing in our ad business model is that we’re bringing on entirely new supply, which is audio ads that didn’t exist in the marketplace before and were just available offline. That’s why I think you are seeing so much success in our ad business. But when we, as marketeers are thinking behind this trend, what we’re looking at is actually in a world where everyone can perfectly price ads and see efficiency of that, what matters? Well, we think what matters as marketeers is creativity. So when we look at that, we think an even bigger portion of our marketing is about finding creative partnerships where we can make one plus one equal three or more. And that’s why we’re excited about this FC Barcelona partnership. We have a lot of shared values with them, we’re talking about an opportunity, and I know a lot of you are Americans, but let me just state sports is a massive thing globally. And football or soccer is the number one sport in the world, and FC Barcelona is the number one team in the world. So we are talking about hundreds of millions of consumers. Many of FC Barcelona games are 3x or 4x the size of even Super Bowl. So this is a massive opportunity where we’re front and center with them and where it’s not just about the brand Spotify, but it’s about all of our creators and all of our consumers coming to life. We like a lot of things about this partnership.

[Paul Vogel, Chief Financial Officer]

Yes. I would just add, Daniel touched on some of those things. But based on our numbers, Barcelona attracts over 700 million unique viewers per year. So that’s just an incredible number. They have games, multiple games a year that attracts an audience that’s 4x to 5x the size of the Super Bowl, which is amazing. And so we feel like the reach is great there. Again, our data was just two-thirds of their audience is in emerging or developing markets in where we are growing and expect to grow the fastest. It’s such a great audience to have. Even just from a cultural standpoint, I mean they had at their stadium the largest ever attendance for a women’s soccer game in history. And so they are driving cultural change there, too, which we want to be a part of. So we think that’s great in general. And so we’re really proud to be partnering.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Justin Patterson on Marketplace and podcasting, Daniel, how would you gauge the progress you’ve made in the two-sided marketplace in podcasting today versus where you’d like it to be? And what do you see as the next steps to attract creators and help them build and monetize their audience?

[Daniel Ek, Chief Executive Officer]

I feel really good about both the progress on the marketplace side and on the podcasting side. As every entrepreneur, however, I would obviously have loved the things ship even faster and for us to push even harder. And that’s my job. I keep coming into the office every day, pushing the teams to think bigger, work harder and ship more things that delight more of our consumers and creators around the world. But I feel good about where we are. We will take some of the time during Investor Day to unpack more concrete, lead some of the benefits we’ve had in marketplace because it’s looking really good. And on podcasting, obviously, we’ve already spoken quite a bit about it during this earnings call, but you should expect us to really, on a foundational matter, grow the number of consumers, grow the number of creators, increase the opportunities for creators to grow their listener base, engage with their listener base and monetize that base. And we’re early on in particular, tools that allows creators to grow their audience and engage their audience and monetize their audience in new ways. So if anything, I would not say even if I’m pleased with the impact it’s having, it’s early days in terms of that. And that, I think, will transform the entire perception of Spotify in the marketplace, both from creators and consumers alike.

[Bryan Goldberg, Head, Investor Relations]

Next question from Rich Greenfield on the Google deal. If after downloading Spotify from the Google Play Store, you are presented with a choice to pay either with Spotify’s payment system or with Google Play billing, why would an Android user with all their billing info stored with Google to Spotify and can it be cheaper?

[Daniel Ek, Chief Executive Officer]

Well, maybe I’ll start, and then Paul can chime in more. We feel really, really good about this partnership with Google. For many investors, you may know that this is something we’ve been talking about for years. And we think this is a very important step in the right direction for the entire sort of app development ecosystem as well. And just to kind of, again, reiterate what it is we’ve been asking for all these years, it’s very simple. It’s about a level playing field. And that level playing field has three core tenets. We want to be able to communicate with our consumers the way they want us to communicate and us as a developer to be able to do that. Two, we want to be able to monetize that relationship the way it makes sense for that consumer and for us. And three, we want to get access to the same tools and services, i.e., APIs that this platform offers its own services. So that’s the kind of key tenets, and we feel really good about Google because it kind of takes the box on all three of those for us. And we think this is kind of a landmark deal that sets a new precedent for what a platform should be able to do. And then coming back to that considerable consumer behavior point, in fact, there is a lot of consumers that today are choosing to do direct building with Spotify today because it’s an easier service experience. And frankly, because there are different cost structures associated with some of the payment alternatives. So, you can imagine being in a market where there may be a certain price offering by going direct with Spotify and where there is a different price mechanic, if you go with the Google Play billing because it has carrier payments. And this is all we are asking for really. It’s choice. And again, we feel really good, even if that consumer decides to choose the Google Play billing service as well. We are only asking for shores, and we feel great about what this deal does for us.

[Paul Vogel, Chief Financial Officer]

Yes. And the only small thing to add is, we obviously can’t talk about the financials of the deal, but I would say from our perspective, I think in part of your question, we are pretty indifferent if the consumer decides to use Google Play billing or Spotify billing.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Matt Thornton, another one on marketplace. Can you talk about marketplace progress, including with merch and live events and where you are focused through 2022? And is there an opportunity for power users and Spotify as the marketplace to monetize playlists they create?

[Daniel Ek, Chief Executive Officer]

Yes, so feel really good about marketplace progress, as I mentioned before, and we are doing a lot of experiments, over 2,000 in the quarter alike. Some of these are live events, digital and physical ones where we are helping enable those. And of course, merch, NFTs, we are experimenting across a lot of different things to provide more value for creators and consumers alike. And we will unpack more of the details about the marketplace and where we are. But just going back to one of my previous answers, I definitely believe we are in the early innings of our platform evolution. And yes, of course, this is something that we have been on for a while. I think you are starting to see a lot of the benefits because of our core platform investments. But truthfully, when you look at the sort of consumer and creator journey, it’s still – you publish content to Spotify and people consume it, but there is not a lot of interaction happening between creators and consumers on the platform. You are starting to see some experiments, but no sort of massive rollouts yet. And that’s what we are focused on in ‘22 and ‘23 is to take some of those experiments, double down on them and expand on them so that more and more consumers and creators are using these tools.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Jessica Reif Ehrlich on gross margins, can you identify the types of projects or investments in second quarter and beyond that are weighing on gross margins?

[Paul Vogel, Chief Financial Officer]

Yes, I mean it’s a couple of things that we have talked about. One is obviously content and original content, which will continue to grow this year and we have talked about the dynamic of the drag will be less moving forward, but as it grows as a percentage of our business, there is still a drag. And so that’s the biggest chunk of our original content. There is another bunch of initiatives we have for the back half of the year on product and innovation that some of that will hit positive revenue for a period of time before improving. And so – some of it’s product and things we haven’t talked about, but are coming and the biggest chunk of it is on the content side with podcasting investment.

[Bryan Goldberg, Head, Investor Relations]

And another question on margins from Rich Greenfield, is there a way to think about where music-only margins are today, if not for all of your investments in other forms of audio? Are you ahead of your plan that you laid out in 2018?

[Paul Vogel, Chief Financial Officer]

Yes. We will unpack more of this at the Investor Day, but I will say the music margins are definitely higher and a decent amount higher than the current overall Spotify margins. And when I talk about music, I am talking about pretty much what the business we had in 2018 went public, that’s music and the question Daniel answered about marketplace and the impact it’s having on there. Our marketplace has had a nice impact on us. They are great tools. They are great advertising tools that more and more traders and their partners are leaning into. And so we see marketplace have a nice impact on the overall margin structure of sort of that business that we – that sort of core business that we operated back in 2018. And yes, most of the reason the margins in general haven’t expanded from a consolidated basis is all the incremental investments on top of it.

[Bryan Goldberg, Head, Investor Relations]

Next question from Steven Cahall on ARPU. 3% constant currency growth sounds like it reflects price and mix – product mix. Can you provide a little more color on those components? And how should we think about price and mix for the rest of 2022? And did price increases drive any uptick in churn?

[Paul Vogel, Chief Financial Officer]

Yes, I just told it earlier, so let me just talk about the pricing. Q1 was probably the last quarter where we got the big benefit of some of the price increases we had last year. And so we will kind of anniversary that. So, I wouldn’t expect the same level of ARPU growth in the next three quarters that we saw in Q1. That being said, we do expect our operate to be sort of flat up for the full year, but not quite as far up as it was in Q1.

[Bryan Goldberg, Head, Investor Relations]

Another question from Doug Anmuth, when you think about the next wave of MAU and subscriber growth for the company, what markets stand out most to you?

[Daniel Ek, Chief Executive Officer]

Well, it’s really based on different ones in different time horizons. So, the big MAU opportunity we are certain in the near future is in Southeast Asia. And we have spoken about India and Indonesia and some of those markets where we are doing incredibly well. But obviously, if you look at that, the TAM in that region, your – India alone is over a billion. So, it’s just massive, massive opportunities from an MAU perspective. From a subscription point of view, I think you should expect the core markets to keep growing for a while longer, even though we are adding more and more subscribers in some of the emerging markets as well. But revenue growth is definitely more of the sort of core markets still empowering the train for a while longer. And then eventually, some of the emerging markets will pick up that pace of growth.

[Bryan Goldberg, Head, Investor Relations]

Next question from Ben Swinburne on podcasting. How would you assess your progress on podcasting at this point? How quickly is usage growing on the platform? Are CPMs and margins holding up in SPAN? And do you have a line of sight into profitability overall in podcasting?

[Paul Vogel, Chief Financial Officer]

Yes. Let me just try and unpack all that. So, the progress is going great. The usage is growing great. So, as I think I mentioned earlier, when you look at our podcast to total MAU, it was up pretty significantly year-on-year. It was also up nicely sequentially quarter-over-quarter. When we look at podcast listening hours year-over-year, also up really significantly, so really strong growth in listening hours and usage and the number of users are engaging in podcasting. So, all of that has been great. CPMs have held up really well. SPAN is going great. One of the things we have seen in SPAN, and I think I have mentioned this a couple of times in previous quarters is SPAN is performing really well. There is a ton of demand for podcast advertising. And what we are seeing is the publishers continue to opt in more inventory into SPAN as they are seeing the results. And then as we have more inventory it’s actually attracting even more advertisers because there is more of an audience they can reach and there is more inventory for them to spend again. So, we saw that dynamic continue to play out on the SPAN side. And in terms of line of sight, in terms of profitability overall in podcasting, I do. We will try and pack a little bit more of that in the Investor Day. But as I said, I think it’s not super far off. It will still be negative in this year. And we – as I said earlier, I think to Richard’s question, the overall kind of long-term margins on podcasting, we still think will be really favorable to the overall Spotify.

[Bryan Goldberg, Head, Investor Relations]

Okay. Next question from Justin Patterson on the ads business. Paul, ad supported revenue was lower than most envisioned. How should we think about the puts and takes around the macro environment, M&A and comps in your forecast? And have you seen any changes in advertiser behavior?

[Paul Vogel, Chief Financial Officer]

Yes. I mean advertising in general, was strong. It was up over 30% for us in the quarter. As I think I said in my opening comments, we were trending kind of more towards that 35%, 36% before Russia’s invasion of Ukraine. And like a lot of people, we did see a couple of weeks there where some advertisers paused a little bit and there was some uncertainty on how much they wanted to advertise. So, we did see that in the last month of the quarter. We see kind of similar levels of advertising growth that we saw in Q1 into Q2. There is probably – I think others have probably said this it’s probably a little bit less visibility than we have had in the past. But overall, the team is still super optimistic on advertising and kind of advertisers’ desire to spend on Spotify and our CPMs and our inventory and SPAN and all those. And so we still have a pretty optimistic forecast for advertising growth in – for all of 2022. Like I said, it was really strong in Q1, definitely saw a little bit of an impact as a result of the war in the back half of the quarter, and we see pretty good growth in Q2 as well.

[Bryan Goldberg, Head, Investor Relations]

Question from Mario Lu on podcasting, can you provide an update on how paid podcast subscriptions are performing on the platform in terms of creator adoption and user engagement? And can you confirm a 5% take rate is still expected to take effect starting in 2023?

[Daniel Ek, Chief Executive Officer]

Yes. So overall, early days in terms of podcast subscription, but the ones we have on the platform are additive in terms of user engagement, and we look at that as a very positive thing. So, we are bringing lots of content onto the platform that otherwise wouldn’t have been available to us and again, users are loving that they are able to consume that content on to the Spotify service. And yes, we still plan on charging 5% take rates in 2023 when that introductory offer passes.

[Bryan Goldberg, Head, Investor Relations]

Okay. We have got time for one or two more questions. Next one is going to come from Benjamin Black. Could you help us understand the economics of your new agreement with Google for user choice billing? How does this impact your outlook for subscriber growth and does it unlock new business models like buying audio books, pods, etcetera?

[Paul Vogel, Chief Financial Officer]

Yes. So, I will kind of echo a few things I already said and maybe add a little bit. One is, obviously, we are not going to talk about the financials of the deal. But as I did say, I think we are pretty indifferent to whether or not a user wants to use Google Play billing or Spotify in terms of how they pay. In terms of outlook for subscriber growth, it’s hard to really know, I would say, to Daniel’s earlier point anything that eliminates friction in the process is great for us. And so we have talked about more fairness, more openness, more choice. We think all that is great for users, for subscribers. And so that – it’s only going to be good news for us how much we will have to see, but there is only goodness in that. And does it unlock new business models, I mean it potentially could. I think in lots of markets, this is how people are going to want to pay. This is how they are going to access it. So, I definitely think it could unlock incremental potential for us by having this as an offering.

[Bryan Goldberg, Head, Investor Relations]

Alright. We are going to take one more question from Jed Kelly. Can you talk about how you are thinking about utilizing the live shows to increase engagement and would you think about doing more live content around sports talk and sporting events?

[Daniel Ek, Chief Executive Officer]

Yes. We are definitely experimenting quite a lot with live shows, both paid live content, sort of music live content, and allowing more and more creators to post their own live rooms and having engagement with fans. So, we are in the early days of this. This quarter, we engaged and really took sort of the Spotify Greenroom, rebranded it to Spotify Live and needed a core part of the listing experience on the service. I think you should expect us to keep integrating that service into the main Spotify experience and allow for creators to do more and cooler things. And I think you are entirely right. It’s hard to say how big live as a form is versus time shifted. My expectation will probably be that time shift that is by far the biggest thing. And if you think about the Internet, that’s kind of the big innovation that we enabled, this time shifted content versus having to listen to things live. But that said, there are certain content formats. You mentioned sports and sporting events being the prime examples of where live and being closer to real time makes sense. And there is probably a few other occasions where consumers care about that too. And in our experience and from what we are seeing, those sort of must-see, must-have things can be huge from user growth perspectives. But in total hours of listening, we expect time shifted content to be far bigger.

[Bryan Goldberg, Head, Investor Relations]

Alright. Thanks Jed. That concludes our question-and-answer session. I guess I will hand it back over to Daniel for some closing remarks.

[Daniel Ek, Chief Executive Officer]

Yes. Thank you for joining the call, everyone, and I look forward to sharing more at our upcoming Investor Day that we talked about. And in the meantime, we will share more about the quarter on our For The Record podcast. So, I really hope you guys will tune in. Thank you so much.

[Bryan Goldberg, Head, Investor Relations]

Okay. And that 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. Thanks, everyone, for joining.