Spotify Technology SA

NYSE:SPOT

Earnings Call Analysis

Strong Subscriber Growth and Increased Profitability

Spotify posted a robust Q2 2024 with a 21% year-on-year revenue growth, reaching EUR 3.8 billion. The company exceeded expectations by adding 7 million net new subscribers, boosting total subscribers to 251 million. Gross margin hit a record 29.2%, driven by favorable music content costs and strategic pricing, surpassing guidance by 110 basis points. Operating income reached a record EUR 266 million. Looking ahead, Spotify forecasts Q3 revenue of EUR 4 billion and gross margin of 30.2%, projecting continued subscriber growth and improvements in marketing activities.

A Strong Quarter of Growth and Monetization

In the second quarter of 2024, Spotify demonstrated robust business performance, particularly in its subscription services and monetization efforts. CEO Daniel Ek noted significant achievements, such as surpassing subscription targets and improving gross margins. These gains contributed to the highest free cash flow in the company's history, marking three consecutive profitable quarters.

Subscriber Growth and Revenue Gains

Spotify added 7 million net new subscribers, surpassing forecasted expectations by 1 million. This growth supported a 21% year-over-year increase in total revenue, reaching EUR 3.8 billion on a constant currency basis. The introduction of new subscription plans and price increases in key markets significantly enhanced Average Revenue Per User (ARPU), which grew by 10% year-over-year on a currency-neutral basis.

Advertising and Profitability Insights

The advertising sector grew by 12% year-over-year on a currency-neutral basis. However, volatility in marketers' spending on brand-related campaigns slightly dampened ad performance compared to Q1. The gross margin improved to a record 29.2%, exceeding guidance by 110 basis points, primarily due to favorable music content costs and strong marketplace performance. Operating income set a record at EUR 266 million, partly due to strong gross profits and controlled operating expenses.

Future Projections and Marketing Refinements

Looking ahead to Q3, Spotify projects 639 million Monthly Active Users (MAU), an increase of 13 million from Q2, and 251 million subscribers, a rise of 5 million from Q2. Expected revenue for Q3 is EUR 4 billion, maintaining a steady growth rate. Predicted gross margin is 30.2%, with operating income forecasted at EUR 405 million. The company plans to refine its marketing strategies and explore product enhancements to boost MAU growth further.

Challenges in Developing Markets

Despite overall outperformance, Spotify faced challenges in MAU growth, particularly in developing markets where user engagement and conversion rates differ from developed markets. The CEO emphasized the importance of only reinvesting in marketing if it meets Return on Investment (ROI) expectations. In these regions, Spotify aims to balance marketing spend with the unique user behavior and ARPU dynamics.

Focus on Product Value and Audiobooks Expansion

One area of focus is expanding the value of Spotify's offerings. This includes increasing the availability of audiobooks and other content types, which is expected to drive engagement and future monetization. While the audiobook segment follows a variable cost structure and is still in early stages, the company aims for long-term margin improvements similar to its past goals.

Stable Relationships with Music Industry Stakeholders

Spotify maintains strong relationships with the music industry, including record labels and publishers, ensuring ongoing growth in payouts. The company views these relationships as mutually beneficial, contrary to the zero-sum perspective often speculated.

Conclusion: A Promising Future

Ek concluded by emphasizing the company's focus on continuing to increase value for both consumers and creators. By doing so, Spotify aims to grow not just in market size but in profitability. This dual focus on innovation and monetization sets the stage for a promising future, aligning with the ambitious goals set for transforming Spotify into a top-tier business.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to the Spotify Q2 '24 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Bryan Goldberg, Head of Investor Relations. You may begin.

[Bryan Goldberg, executive]

All right. Thanks, operator, and welcome to Spotify's Second Quarter 2024 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; and Ben Kung, our Interim CFO and VP of Financial Planning and Analysis.

We'll start with opening comments from Daniel and Ben, and afterwards, we'll be happy to answer your questions. [Operator Instructions] Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. 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 question.

Before we begin, let me quickly cover the safe harbor. During this call, we'll 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 shareholder deck and in filings with the Securities and Exchange Commission.

During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, in the financial section of our Investor Relations website and also furnished today on Form 6-K.

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

[Daniel Ek, executive]

All right. Thanks, Bryan, and hello, everyone. I want to start by saying it was a very strong quarter across most of our team metrics. As you will recall, a few quarters ago I said that while many believe that Spotify has a great product, we needed to prove that we could also be a great business. I think we're really starting to show this now.

Thanks to the hard work of our teams, we beat on subs, we also expanded gross margin and had our highest free cash flow ever. This quarter also marks 3 consecutive quarters of profitability as we continue to execute on what you've heard me describe as a year focused on monetization.

So how have we done this? Well, we have expanded our subscription offerings to consumers who might be looking for different types of content. By introducing new subscription plans, we are successfully giving subscribers even more listening choices with options like the Audiobooks, access and basic tiers that also builds on our already robust list of Premium plans around the world, including Individual, Duo, Student, Family and Mini passes.

In addition to this expansion, we also implemented a price increase in several key markets, including in the U.S., which we're rolling out now with great success. In fact, we're seeing less churn in this round of increases than we did in our prior one, which was already very low by any measure. I attribute this to the tremendous value we've added to our service over the last several years. Our subscribers now get access to 250,000 audiobooks, more than 5 million podcasts, and of course, pretty much the world's entire music catalog in one experience. In the U.S. today, access to all of this content would cost a user approximately $26, significantly more than a Spotify subscription. Spotify remains a pretty outstanding deal.

But there's one exception to our overall outperformance this quarter and that's in our MAU, so I do want to get into that. As a reminder, the easiest way to understand Spotify's business is through the lens of our free and paid segments. Our paid subscription business is primarily anchored in developed markets where growth today is driven by net subscriber additions and strategic pricing. On the other hand, the growth of our free Ad-Supported segment is focused today on developing markets where we see potential to convert these users into subscribers, but on a much longer time horizon.

So looking at where we are today, the changing market dynamics play a role in how we think about our user acquisition strategy. And while we talked about the importance of reinvesting in marketing to attract new users to Spotify, we're only going to spend money to attract listeners if it meets our ROI expectations. And while our developed markets see high ROI from our marketing spend, we already have strong penetration and broad awareness in these markets. So it's really about carefully targeting our acquisition resources here. In these markets, paid subscriptions aren't showing signs of slowing down even from historically high levels.

On the flip side, we have significant potential to attract a large number of new users in developing markets. However, these users can be a little bit more inconsistent. Engagement looks different in these markets as do the channels to acquire them, and conversion to paid can be a bit slower. This makes it difficult to get the same level of ROI effectiveness from our marketing spend.

So to tackle our MAU challenge, we're doing 2 things. First, we're intensifying our efforts to improve the impact of our marketing and we believe there are a number of levers to pull over the upcoming quarters. Second, we are prioritizing enhancements in our free product pipeline that, based on existing performance in certain markets, should boost engagement and retention, especially in our developing markets. Further additional improvements will be integrated into our free experience in the coming months.

While I am disappointed with our MAU miss, I see the reversal as more of a when rather than an if. The reason I feel so confident is that overall we're seeing healthy MAU engagement trends year-over-year. So the users we are now acquiring we're also retaining, which is a great leading indicator for value and future monetizations.

I know the impact of MAU on our subscriber growth will be top of mind for some of you, so I want to discuss what I think this means in the short to midterm. Historically, our conversion funnel was quite straightforward: a listener would come in as a free user, and over time, convert to our standard Premium tier. This process has evolved given the bifurcation between developed and developing markets and the increased number of subscription offers we now offer. This means the relationship from free to paid is no longer a one-size-fits-all scenario, and we're less dependent on new free users to fuel our revenue growth in the short to midterm.

Take, for example, our developed markets. With both the widespread awareness of our offerings and the strong affinity for Spotify products, we see many users subscribing directly to our paid tiers without any trial period. Additionally, the high engagement in these markets gives us tremendous confidence in our ability to raise prices, allowing for strong revenue growth even as those markets continue to mature.

To close, I want to go back to how I opened. We set out very ambitious goals to transform our business, and there are many ways to grow Spotify today. It's not a linear path dependent on any one metric. We have more options than ever.

But to also be very clear, I have no doubt that we will also capture the top-of-funnel growth over time while we continue to focus on monetization.

I'll now turn it over to Ben to provide more detail, and then Bryan will open it up for Q&A.

[Ben Kung, executive]

Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook.

Q2 marked another strong quarter for the business, led by robust subscriber trends, improving monetization and record strength across all of our profitability metrics. Although MAU variability was again greater than expected, our funnel continued to expand at a healthy double-digit rate of year-over-year growth. And our rate of subscriber conversion, particularly in developed markets where we've recently taken price, continues to be strong.

We added 7 million net new subscribers in the quarter, which was 1 million better than forecast.

Total revenue grew 21% year-on-year on a constant currency basis to EUR 3.8 billion. Our recent price increases and improving product mix shift accelerated Premium ARPU growth by 300 basis points to 10% year-on-year on a currency-neutral basis while our advertising business saw currency-neutral growth of 12% year-on-year.

Our ads performance was a bit slower relative to Q1 as marketers spend on upper funnel brand-related campaigns continued to be volatile.

Moving to profitability. The business continues to inflect nicely towards the targets we laid out for you at our 2022 Investor Day. Gross margin came in at a Q2 record of 29.2%, surpassing guidance by 110 basis points. As you're well aware, there are many components that can move our gross margin and Q2's outperformance was driven primarily by music content cost favorability and marketplace.

Operating income of EUR 266 million also set a new record, aided by gross profit strength and lower operating expenses. Operating income was impacted by EUR 59 million in noncash social charge accruals, which were EUR 46 million higher than our forecast, driven by share price appreciation during the quarter. As a reminder, we don't forecast share price movements in our outlook for the business since they are outside of our control.

Finally, free cash flow was a record EUR 490 million in the quarter. Performance here was largely driven by our improving operating income profile net of noncash items as well as fairly typical net working capital favorability.

Looking ahead to third quarter guidance, we are forecasting 639 million MAU, an increase of 13 million from Q2; and 251 million subscribers, an increase of 5 million over Q2. We are also forecasting a currency-neutral revenue growth rate that is sequentially consistent with Q2 pointing to EUR 4 billion in total revenue. We also anticipate a gross margin of 30.2% and operating income of EUR 405 million, setting the stage for another record quarter of free cash flow generation.

In terms of our MAU growth outlook, as Daniel mentioned, we are continuing to make adjustments to our marketing activities and also exploring potential product enhancements, both of which we anticipate will contribute to improving MAU net add levels as we progress through the back half of the year.

With respect to price increases and subscriber growth in Q3, our data continues to show that historical price increases have had minimal impacts on growth. However, much like Q3 of last year, we are baking in some modest levels of churn into our Q3 outlook.

Additionally, we anticipate another quarter of sequential improvement in year-on-year ARPU growth on a currency-neutral basis in Q3, likely in the 100 to 200 basis point range. This is a slight moderation compared to what we saw in Q2 as we start to lap last year's price increases.

From a profitability standpoint, we continue to expect the sequential ramp in gross margin through the balance of 2024 as well as improvements in operating income and operating margin.

With that, I'll hand things back to Bryan for Q&A.

[Bryan Goldberg, executive]

All right. Thanks, Ben. [Operator Instructions] We'll 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 Justin Patterson on monthly active users. As you evaluate the factors weighing on MAU growth, do you believe it's more a byproduct of expense reductions or simply being more penetrated in your end markets? What actions are you taking to drive more MAU growth?

[Daniel Ek, executive]

Yes. I'll take this one and maybe you can chime in, Ben, if you want to. Yes, I think the easy answer is it's definitely not an impact on TAM. We still believe that there's plenty of room left to grow.

With that said, a lot of that future growth will, of course, come from, as I noted in my introductory remarks, developing markets. And developing markets are trickier to get ROI positive because behavior looks very different in that relative to some of the developed markets. So channels are a little bit different. Engagement profile looks a little bit different. And of course, ARPU looks different, too.

And so the key constraint here is we're not just going to add back marketing for marketing's sake. We will do so only when it works on an ROI basis. And that will take some time to get the mix correct. So the actions we're taking is kind of in 3 buckets. One of the buckets is around improvements on the marketing channels that we're using. So partnerships will probably play a bigger role in these developing markets than in other markets. So we are doing more types of partnerships, which we believe will help.

Second is further improvements in the acquisition in developing markets. That is kind of optimizing how we do marketing in those territories and some of that will be adding back some spend, too.

And then third bucket is around the product side, which you heard me talk about there, too.

So we have things that are rolled out in certain markets already that has much better engagement profiles. And we believe that when we do roll those things out over the coming months, again, you'll see higher engagement. And if we have higher engagement, then the LTV increases, which then allows us to spend a little bit more on marketing to still get those ROI positive.

So it's really a bucket of many different things. And needless to say, I'm not happy about the miss in the quarter and we're working really hard to fix it. But I am confident that this is more of a question when than -- rather than an if. And it is something that if you go back to even our history as a public company, we've been in this situation many times and we come back from it each and every time and that gives me a lot of assurance that this will be the case this time, too.

[Bryan Goldberg, executive]

All right. Our next question is going to come from Doug Anmuth on gross margin. Can you talk about the drivers of improved music and podcast profitability leading to better gross margin? And how should we think about royalty savings related to bundling dropping down to the bottom line versus being invested in other areas?

[Ben Kung, executive]

Thanks, Doug. This is a great series of questions. As you know, there are a number of factors that go into what move our gross margins up and down each quarter. You're right to call out that the sequential improvement path has been fueled by improvements in music, including Marketplace growth. And podcast profitability has certainly played a part in the year-over-year story as well as what we said in past quarters about margin gains to other areas like our cloud and streaming delivery spend.

In terms of the outperformance compared to our guidance, as I said in my remarks, this quarter was primarily about music content cost favorability in Marketplace, although there are always moving parts within the contribution mix.

In terms of your question about sort of bundling, look, what I'll say here is that many platforms take bundled treatments, so we're not unique in that regard. We won't be commenting on the specifics of the mechanics of our deals. But all we can say is that we're very confident in our position and the path that we're on at this point.

[Bryan Goldberg, executive]

All right. Next question from Justin Patterson on podcasting. Now that major podcasters are largely nonexclusive, how has podcast engagement changed on Spotify? As more of the industry shifts to video podcasts, how do you attract more creators and grow engagement versus a platform like YouTube?

[Daniel Ek, executive]

Yes. I think first and foremost, we are seeing very healthy engagements on podcast, that has not changed. And we see where we do have video podcast, engagement is even higher than what we have seen when it's audio only, which is a really sort of positive testament. And I think this is also what sort of organically creates a bit of a word-of-mouth with creators. So we're seeing more and more creators now uploading video content, too. It's growing really nicely. We have about 0.25 million already as it is.

And I think long term, the way I think about this, I don't know where this will end, but I think consumers of today don't really care too much about format. They're actually moving in between of audio, video and even reading things sort of very effortlessly, especially younger consumers. And so creators will obviously respond to that and should make their content available in as many formats as possible.

And I think that the way we sort of attract more creators is kind of a bucket of 3 things. So I think the first bucket is things that are native to the Spotify platform. So things like podcasters already, like musicians. Those are sort of a prime bucket to convert and add more things because they'll see higher engagement and thereby higher monetization.

Then I think there's a second bucket, which is if you're already uploading video to other platforms today, you've taken most of your costs already. So it makes a lot of sense for you to try to amortize that cost against as many platforms as possible. And you see this already where a lot of people on the short side are uploading not just to one platform, but are uploading to many platforms. And we're starting to see some of that behavior happening on Spotify, too.

And then I think, lastly, there's things that will perform a lot better on the Spotify platform than perhaps on other platforms. For instance, what we do see is longer-form content tends to do really well on Spotify on the video side because people go back and forth between backgrounding and foregrounding and that is something that works really well on Spotify because, of course, our sort of lean-back history as a platform goes.

So overall, it's looking very nicely and with lots of improvement, of course, and more and more creators are coming to the platform for each and every day.

[Bryan Goldberg, executive]

All right. Our next question is from Rich Greenfield on advertising. Advertising growth is decelerating given the large base of MAUs and increasing engagement. Why is advertising not growing dramatically faster? How does it ever get to 20% of revenues as Daniel had hoped?

[Daniel Ek, executive]

Yes. Why don't I begin and then, Ben, you can sort of chime in a little bit more on the macro story of what's going on. But maybe to start, Rich, I think, an important part here as well is our subscription business is probably doing a little bit better than we expected it to do. And as a net consequence, one of the things that are happening is we're taking some of our best customers on -- best -- highest engaged users and turning them into paid subscriber, which, of course, diminishes some of that potential that we have on the advertising side, too. So a part of this is also that the mix is improving in favor on the subscription side.

And then the second thing I would say is that overall, on the platform side, we have been making a lot of investments over the past few years. It is still pretty much of a heavy lift that we have been doing and that's, of course, to enable more programmatic. It's not something that we're still doing to the extent that we would like to do. So you should definitely expect us to keep investing in that and bring more and more programmatic and automated buying onto the platform.

[Ben Kung, executive]

Yes. And just to add on to that. As you all know, our ads business is direct sales, enterprise-heavy in its current state. And on top of that, we are sort of, in our current state, an upper funnel kind of brand-focused platform. And it's exactly that quadrant that we're sort of seeing choppiness and volatility in the market.

But as Daniel said here, I think that also highlights really what is a tremendous opportunity for us to basically diversify away from that and create agility for ourselves. I think it just emphasizes sort of everything Daniel said around programmatic, tapping into new demand pools and I think, in particular, being able to access kind of the spend in the market that's presented by small- and medium-sized businesses as well. I think these are all forward-looking opportunities that we're excited about.

[Bryan Goldberg, executive]

Okay. Our next question is going to come from Batya Levi on the music industry. Can you provide an update on your relationship with the labels against the backdrop of legal action taken by the MLC? And can you also clarify accounting for the lowered CRB rates?

[Daniel Ek, executive]

Why don't I start and then, Ben, maybe you can chime on. I can't really comment anything about any sort of ongoing legal processes. But I will comment on something I've talked about quite a lot before, which is the sort of nature of our relationship with the labels.

And I think a lot of people want to make this sort of a zero-sum game where we have to win in order for them to lose or they have to win and then we sort of lose. It is not fundamentally how we view this at all. We look at it much more of a win-win. So overall, whether on the publishing side or the label side, when I look at our numbers, we keep increasing our payouts year-over-year. So last year, on the publishing side, we had record payouts in 2023. This year 2024, we will beat those numbers and have even more payouts going on. And the same will, of course, be true on the label side. So it is not as much of a zero-sum game as people make it out to believe.

That's not to say that we don't quibble around various things at various points. That is the nature of all sort of supplier and distributor relationships. But overall, I would say we have had healthy relationships with the music industry for the better part of now 18 years, as I've been here at the company. There's always things that we're arguing about, for sure. But overall, the music industry is growing. We are spending a lot of time and effort in making sure that it keeps growing. That is our primary thing that we're doing as a company and something we deeply care about as the core mission of this company. And I think that is recognized across the entirety of the music industry as well, and we feel good about that.

You will always see us, over time, get into these sort of arguments about various things over time. But that said, the music industry is growing, and we're all as an industry focused on keeping that healthy growth, keep growing.

[Ben Kung, executive]

Yes. And just to add to that, I think, to clarify, I think, obviously, we're talking about sort of two different sides of the rights holder coin here. There's obviously the side with the labels. And what you're asking about with respect to MLC and CRB, that obviously pertains to the publishers.

Look, all I'll say here is that it's quite a complex matter that we spent a lot of time scrutinizing and where we net out has been and continues to be that we're confident in our position. We never get into the specifics of how we're accounting for specific licensing matters, so I won't be able to do that here today. And I'll leave it at that.

[Bryan Goldberg, executive]

Okay. Another question from Doug Anmuth on pricing. While it's still early in rolling out, can you talk about initial consumer reaction/churn related to the recent U.S. price increase, the second in a year? How do you think about the cadence of price increases going forward? And should we expect more raises across international markets this year?

[Ben Kung, executive]

Yes. There's a great series of questions here. Look, as sort of a general principle, we don't ever talk about our forward-looking plans. I think what we'd like to say and what we can say here is that we're very encouraged by what we're seeing in the 3 major markets where we've taken price now. That's basically about 2 times in the last 12 months. And so I think we see that as a great data point for sort of what might be possible kind of in the rest of our territories.

But for now, it's obviously still early days. We've only just taken this action and so we're obviously monitoring this quite closely. But we're encouraged by all of the right signals that you would -- that one would expect to see here, which is sort of the cancellation rates basically being better than expected. And I think that's what we're going to continue monitoring as time goes on here.

[Bryan Goldberg, executive]

Okay. We've got another question from Justin Patterson this time on future growth opportunities. Daniel, you outlined back at the 2022 Investor Day how Spotify is focused on lifetime value. As gross margin expands and lifetime value increases, how does this influence where you invest for future growth in both the core music business and emerging areas like Audiobooks and education?

[Daniel Ek, executive]

Yes. You're right that LTV or lifetime value is the North Star metric that we keep optimizing for. And why we're so obsessed about it and why we like it so much is the fact that it is an all-encompassing thing where it measures everything from, of course, retention. It measures everything from ARPU, across a bunch of different other things, too, in a pretty nice way when you're operating a business like Spotify.

So overall, the most impactful thing I can probably state around where we're focused on is we're focused on solving problems in the intersection between creators and consumers. If you want to understand what makes it on to our priority list, the easiest way is to look for things that are a win-win. So the highest thing on our priority list is when we look at a group of creators and we look at what would be a win for them and then we look for something where our existing base of consumers where adding that thing to them would be a win-win for them, too.

So a great example of this point will probably be the work we're doing right now on concerts. So it's very early days for that side. But on the music side, concerts and live shows is a very big revenue source for a lot of artists. Meanwhile, we also know that consumers love going to concerts. But one of the big consumer problems is they don't always know what to go to and when.

And so because of us having this base of loyal fans listening to that artist, we thought very early on that we could probably make an effort where we could have the artist promote their concerts on their artist pages and across their different surfaces at Spotify and thereby also create great opportunities for the real fans to go to shows.

And this is something that we've been expanding that program that we call Fans First quite widely across the base on Spotify. And we're seeing great artist support and we're seeing great consumer support of that.

So that gives you an idea of something that then creates value. But overall, the way we believe we create higher LTV is by creating win-wins. We want to both do things for the existing creators we have in more new ways like concerts, and potentially when we see things we've already invested in and other groups of creators finding value in that will expand into other verticals as well, where, of course, Audiobooks and education are great examples of that.

[Bryan Goldberg, executive]

All right. Our next question is going to come from Doug Anmuth on ARPU. There are many moving pieces across bundling, price increases and plan or tier optimizations. How will this impact currency-neutral ARPU growth through the second half of the year and into 2025? What is the right balance of volume and pricing to achieve a 20%-plus revenue growth rate over the next 1 to 3 years as laid out as a goal at the Investor Day?

[Ben Kung, executive]

Thanks, Doug. Look, I think you've highlighted a bunch of variables here that, I think, are all the right kind of inputs once you think about in terms of revenue equation. But what I might actually also highlight and not called out kind of in this list here is actually perhaps the most important factor of all, which is are we seeing continued growth and engagement on our Premium plan because I think -- on our subscription offerings really because I think that, that's sort of like the real sort of leading indicator that leads to basically the flexibility across all the other levers that you're seeing here.

I'm not necessarily going to say that there's a magic formula across these things that are going to necessarily kind of pave the way for the next 3 years, but I think it's going to be leaning into different parts of this equation at different points in time. I think the important part is that we're now talking about a portfolio and the portfolio gives us sort of flexibility and optionality here.

[Bryan Goldberg, executive]

All right. Our next question is going to come from Rich Greenfield on Premium add-ons. There's been increasing noise that an ultra-premium tier is coming that would cost an additional $5 or more above your current Premium tier. Can you help us understand what the consumer would be getting and how you determine what features should be in this new offering?

[Daniel Ek, executive]

Yes. Sure, Rich. So first off, I think it's worth noting now that we're at 246 million paid subscribers. So we're one of the largest subscription services on the planet. And interestingly enough, a huge part of that success were really driven by a very simple proposition of one-size-fits-all proposition.

But part of why I believe the subscription business in the last year or 2 has been doing better is because we've moved from that one-size-fits all to a much more tailored proposition where consumers now have everything from the basic tiers to Duo to Family plans to Student plans. There's just many more options for you to subscribe to Spotify.

And what we do see is that there's a good subset of that group now of 246 million subscribers that want a much better version of Spotify. And those are huge music lovers who are primarily looking for even more flexibility in how they use Spotify and the music capabilities that exist on Spotify.

And so I talked about that sort of relationship to the music industry and our commitment to growing the entirety of the music ecosystem. And so I think this is a great way where I think we can create a win-win both for the creative ecosystem, but also for consumers as well.

So the plan here is to offer a much better version of Spotify. So think something that could be something like $5 above the current premium tier like you include. So it's probably around $17 or $18 price point, but sort of a deluxe version of Spotify that has all of the benefits that the normal Spotify version has, but a lot more control, a lot higher quality across the board and some other things that I'm not ready to talk about just yet.

But the reason why we're doing it is where I began, which is we think it's something consumers really are asking us to do and we believe there's now a very large subset of that 246 million subscribers that want it, but also that it will be a net positive for the entirety of music industry and will further enhance the growth that the music industry is seeing. So we're quite excited about it, but it's early days.

[Bryan Goldberg, executive]

All right. We've got time for a couple more questions. Our next one is going to come from Benjamin Black on gross margin goals. So no good deed goes unpunished. You hit the gross margin targets you gave us at the Investor Day in 2022 well ahead of plan. If we were to do a postmortem, what specifically broke your way? And now that this milestone was hit, how should we think about gross margins going forward?

[Daniel Ek, executive]

Yes, I'll take it and maybe Ben can chime in. I love how you guys are straight away when we have accomplished something move on to the next thing. It keeps us honest.

Joke aside, yes, what happened, if I do a sort of postmortem. I think the primary thing is we really focused as a business. You heard me say this, but this has been a year of monetization on our side. So we've stepped up our ability -- in our efforts on monetization. But on the bottom line, of course, also, we've done a lot of things to become more resourceful as a company.

So it's really a function of those two things at the same time and with the intensity that have exceeded even our own expectations on how fast we've sort of transformed the business to one that's not just focused on growth at all costs, but really kind of growth with profitability in mind to it.

And I think the better way to think about gross margin is probably to go back actually to what we said at Investor Day as well. I don't have any new targets, but you hear us talking about sort of first getting to that 30% and then long term, of course, the ability is a little bit higher than that as well. So I would just encourage you to go back to what we said at Investor Day, that is still very much top of mind for myself and the team.

[Ben Kung, executive]

Yes. And to add on to Daniel's point about sort of focus, right? It's truly been a full court press from every corner of our company, I'd say. And what that's resulted in is actually the ability to find kind of multiple engines here for gross margin expansion.

I've probably sounded like a broken record at this point, but sort of talking about kind of improvements in music and Marketplace growth. It's the podcast profitability path. It's efficiency in things like cloud and streaming delivery. There are even smaller areas like how we're optimizing our payment fees and traffic with our payment service partners.

All these different things sort of ladder up to a gross margin story that we are sort of very proud of. And I think going forward, it's going to be that same mindset where it's going to take a village to contribute and sort of continue laddering up to our long-term goals.

[Bryan Goldberg, executive]

All right. Our next question is from Michael Morris on our recent pricing adjustments. How have subscribers responded to the Premium plan price increases? Can you share detail on how many have churned and how many have opted for the basic plan relative to how many have retained the Premium service? Have you seen any difference by market?

[Ben Kung, executive]

Yes. Thanks, Michael. As I have said before with respect to pricing, I think all this is still such early days. Again, highlighting kind of the uniqueness of all this, right? Again, it's 3 major markets for us the second time we've raised price in 12 months. And so we're kind of watching all metrics like a hawk here.

But early days suggest that signals are encouraging. We're seeing kind of better-than-expected cancellation rates despite the fact that it's now a successive moment that we've taken price here. And obviously, having basic kind of in the portfolio now gives us a new sort of like pathway to mitigate churn.

We don't have specific numbers to share on this call right here, but we are very encouraged by all the signals that we have.

[Bryan Goldberg, executive]

All right. And our last question today is going to come with a follow-up from Michael Morris on Audiobooks. How does the Audiobooks business impact your cost structure? What is the basis for cost recognition? What does the current gross margin on Audiobook revenue look like relative to your Investor Day goal of 40%? And is that still the right margin? And what's the time frame to reach that target?

[Ben Kung, executive]

Yes. Great question here. I'll share two things. I think first, let's talk about sort of Audiobooks, in general, following a variable consumption-based cost structure. I think that's an important thing to continuously kind of keep in mind here as you think about that business.

And second, again, in the sort of scheme of Spotify, it's really early days still. And getting into sort of this new content vertical and establishing ourselves, we'll always start with investment before we focus on sort of margins and profits. We're still learning how to optimize, but we don't have further detail to share on that today in terms of the mechanics or the time lines. We feel very good about what we laid out for you at Investor Day with respect to the margin goals longer term for that business.

What I would continue to encourage you all to think about is how we think about this internally. The most important thing in the near term is just making sure that Audiobooks are driving incremental engagement for the platform, and we're seeing this happening in a way that makes us feel good about the path that we're on here. It's central to how we think about audiobooks or really any other content vertical being a contributor to the health of our business as more engagement paves the way for accretive monetization.

[Daniel Ek, executive]

Yes. And my only addition is the primary thing here that we're focused on is adding more and more value constantly. So Audiobooks is just another testament to that. And I think when you look at Spotify today relative to where it is 2 years ago, we can see in pretty much every metric, whether it be engagement, whether it's the number of items of content we have on our platform, the diversity of content and how people are consuming, the people are responding really well to the Spotify offering. And if those metrics are true long term, we will also build a really great business.

[Bryan Goldberg, executive]

All right. Great. That's going to conclude our Q&A session. I'll hand the mic back to Daniel for some closing remarks.

[Daniel Ek, executive]

All right. Well, thanks, Bryan. It's really an exciting time at Spotify. We keep on innovating and showing that we aren't just a great product, but increasingly also a great business. And we're doing so on a time line that has exceeded even our own expectations.

I think this all bodes very well for the future. The primary objective for the team now is to continue delivering against these goals while increasing our innovation to the benefit of consumers and creators all over the world. If we can do this, even more great things are in store for Spotify. Thanks, again, for joining.

[Bryan Goldberg, executive]

Okay. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks, again, everyone for joining.

[Operator]

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.