Spotify Technology S.A. (SPOT) Management Presents at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference Call Transcript

Spotify Technology S.A. (NYSE:SPOT) RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference Call November 17, 2020 2:00 PM ET

Company Participants

Paul Vogel - Chief Financial Officer

Conference Call Participants

Mark Mahaney - RBC Capital Markets

Mark Mahaney

[Abrupt Start]

… joining me in interviewing Paul Vogel, the CFO of Spotify, thrilled to have him. I've got the -- love the background with the fire going on. Paul you've got it set up. And with the DJ, podcasting mike you are -- you play the real man. So, thanks a ton for joining us. We've only got 30 minutes. If anybody wants to ask questions -- there's already some that are gotten in here. So, just throw questions in the Q&A box. We'll do our best to bring them in.

Question-and-Answer Session

Q - Mark Mahaney

And Paul, I want to start off with you. This is -- for good or for bad. I don't want to be global [ph] about the vaccine conference. So, there are two major pieces of news that suggest that we may be reopening of culture, societies, economies, et cetera. How do you think that -- does that have any meaning for Spotify? Did the COVID crisis have a dramatic impact on your business? Which parts of the business were most impacted and which least? So, maybe answer that. And then whether the reopening is going to have -- should -- investors should think about that have any material impact on your business?

Paul Vogel

Yeah. Thanks, Mark and thanks for everyone who's on the webcast listening. Yeah. I mean, look, obviously, a very high level, vaccines are great. So, I mean, I think we all be super thrilled if the economy starts opening up again and people are feel safe and secure going out again. So that obviously goes without saying.

From our perspective, business has been really strong throughout the entire year. We've exceeded our expectations for users and subscribers from where we were when we started the year. So, we've actually added about 8 million more monthly active users in the first nine months of this year than we did in the first nine months of last year, about almost 3 million more subscribers in the first nine months of this year versus last year.

So, from a very high-level perspective, the pandemic hasn't really impacted our business. I think we've been really, really pleasantly surprised with how well we've continued to grow, both from a user perspective and a subscriber perspective.

As we've talked about the listening behavior has definitely changed, and we've talked about this. We've seen a lot more listening in-home, in-home speakers, game consoles have been really, really strong for us. And we talked about how car listening really dipped in that kind of March/April timeframe, it's come back, and now listening in the cars back above, but even with listening in the car, people are -- in their car for shorter periods of time. They're not commuting as much.

And what we've actually seen on the consumption side, while consumption again is back above pre-COVID levels. The mid -- the mid-week, so Monday through Friday looks more similar to a weekend than it did in the past, right? So, weekend, obviously, has a certain cadence to the day and the normal work week, get a cadence in terms of where you normally see really heavy commuter times in morning and afternoons, and how listening shifts. On a weekend, the listening tends to be more spread out throughout the day. And we've seen more of the weekdays look more like the weekends.

Again, overall consumption is strong and back above COVID levels, but we have seen those types of changes.

Mark Mahaney

I guess that's -- that gets -- it's actually pretty bullish. You have this dramatic impact on how people traditionally access Spotify during their commutes, during their gym workouts at the club or whatever. And -- but then it seems like the service was -- the value proposition must be highly resilient to people just figured out other ways to listen to their Spotify.

I guess that's the biggest takeaway.

Paul Vogel

Yeah. I mean, we feel really good about it. I think to your point, we -- so one of the things we've always talked about -- we've talked about this all the way back to before we went public and the Investor Day was ubiquity and right, how being ubiquitous across as many devices and platforms as we possibly can is really what's helped drive Spotify. And so, we're on over 2,000 devices. And so that ubiquity strategy has really lent itself to success, right?

So, as we've said, we've seen really strong growth in game consoles. The new PlayStation actually has a Spotify button built into the media remote, which is great for us. We've seen integrations continue to move forward with Xbox as well. So, we're seeing even more lean in from them and success on game consoles from us, which is great. There's -- you'd be surprised at how many people want to listen to Spotify on top of the music or the noise that comes with a normal game, which has been great. Smart speakers have been great. So that's actually been really great.

And then to your point, I think, when things do start to get back to normal, getting people back out into gyms and commuting in cars, is only going to be additive to where we are right now.

Mark Mahaney

And then Paul, there was one element part of your business though, that was negatively impacted by COVID, your ad revenue like that really chunked down in the June quarter latter part of the March quarter. And I think there's some very interesting things you're doing there. But that should be that should see a nice recovery for you. I assume it was negatively impacted. You would expect that to recover well going into next year.

Paul Vogel

Yeah. I mean, it was down pretty significantly the ads business in Q2. We saw return to growth in Q3. Our expectation is we'll grow even faster in Q3 -- sorry - Q4 year-on-year than we did in Q3. We exited the quarter feeling really good about the business. We have some strength in podcast advertising. A lot of strength in our ad studio business, which is our self-serve tool, which we feel really good about. And so we feel good about where the ads business is.

Obviously, we'll have to see. I mean, I think we're clearly not out of the woods yet with respect to the pandemic. And obviously, we've all seen kind of how the numbers of ad risen for the last couple of weeks and months, both in the U.S. and in Europe. But in general, I think we feel pretty good about where we are from an advertising perspective.

Mark Mahaney

Okay. I definitely want to ask you about podcast advertising and Megaphone deal. But first, just the impact of -- just remind us of the impact of podcasting on Spotify subscriber behavior and MAU behavior. This is -- I don't know why, but this will for a variety of, so this has really become the year of podcasting. Your podcasting was every year, last couple of years, it seems like it really hit an inflection points. So what impact has that had on your user growth retention engagement?

Paul Vogel

Yeah. So, it's been positive. And so, I think as we've talked about 22% of our monthly active users now engage in podcasts, which is great. That's pretty much ticked up every quarter for the last five or six releases, as long as we've been reporting it. So, that's really great.

We're seeing people who engage with podcasts and engage with more content, and in general, we believe that the higher you have -- the more engagement you have, the better you retain, the lower churn goes. Those are all things. We're still early enough in that kind of proving out all of the causality relative to correlation on some of those things. We're still working to prove out, but we feel really good about sort of the health of what podcasts is doing for the overall business and ecosystem at Spotify. So -- yeah, so I think we feel like we're definitely moving in the right direction.

Mark Mahaney

And then I'm going to ask you a simple question and a more specific question. Talk about how you monetize that podcast usage. It's probably some simple answers to that. And then how this Megaphone deal comes in to help you maybe better monetize podcasts usage.

Paul Vogel

Yeah. So, we think about podcasts in two ways, right? And so, there's the obvious and then there's the not so obvious. Well, maybe not so obvious in that it's hard for you guys to sort of discern what's going on.

So, the obvious is, is simply like we have podcasts, the more podcasts grow, the more ad inventory there is to sell across podcasts. It's -- from a business perspective over the long-term, it's a lot more fixed price content, which is great for us. And so, as we sort of grow it, we'll have the ability to grow advertising on top of a different type of cost structure, which is really interesting to us. And so for us, it's really about -- from that one side it's -- what's the overall bucket of cost we're going to spend. And what sort of the advertising revenue, that's sort of the obvious side.

And then the second side is sort of what you -- you talked about in your first question, which is what does it actually do for a user growth? What does it do for subscriber growth? How does it help with retention? How does it help with engagement? And those are all the things that we're working to track right now, and to understand the value of each piece of content we put on the platform. What is that overall value to us? How can we measure it in both the concrete way of what does it drive specifically for advertising, but also what does it drive for new users, new subscribers? Do they retain more? And then when you really think about it, there's more nuance in that as well, right?

So, for instance, you could have a show that is great because it's incrementally driving people to the platform, right? So, obviously, we have, Joe Rogan, who's now on our platform. It's going to become exclusive to our platform in December. And so, we've built in some expectations of new subscribers or new users who will come to our platform that previously weren't there. But will come now because of Joe Rogan, right? So that would be an obvious one.

But then you have the not so obvious, which should be okay. What if there's someone who's already on our platform? Wasn't really a fan of -- or didn't know they were a fan of a certain piece of content, but now we have it. And so they didn't come to the platform, because the other piece of content. But because we have it, they've now found it, it's made the agreements that much better. And so now that user is also going to retain higher or churn lower. So, all of these components are how we think about measuring the value that each piece of content has to us on the platform.

And the second part was on, I think, Megaphone.

Mark Mahaney

Megaphone. Yeah.

Paul Vogel

So, look, I think for us, Megaphone is -- we're really excited about it. We think it's a way to accelerate our ability to grow our advertising business. By having incremental inventory, we think we're going to be able to sell more -- we're going to be able to lean in from a technology standpoint, we're going to be able to grow SAI, which is something that we've only offered on our own exclusive podcasts out to our wider range of advertisers. And so, we think it's just an accelerant to what we're already doing. We're super bullish on the technology we have and the products that we are developing.

And now you throw on top of it, all this additional inventory. that we think we'll be able to help monetize in an even better way. That would be really good for the business. And we're optimistic also from a margin structure this is something that will be helpful to the business over the long-term as well.

Mark Mahaney

And I'm sorry, dumb it down just a little bit, Paul, if not for investors, at least for me. The -- this accelerates SAI and accelerates inventory-wise, just stepped back a little bit -- little more basic on Megaphone, the win here for you.

Paul Vogel

Yeah. So, obviously, they have -- a ton of inventory that they have from people whose podcasts that are hosting and they're sort of selling that remnant inventory for. And so being able to add all of that into our ecosystem, we think will really be great in terms of helping them grow their business even more.

But then eventually, adding like SAI into their platform, which will then be another tool, another way to target for advertisers that will both benefit the creators of content, because we think it'll monetize at a higher rate for them, but also grow our overall ecosystem. We feel really good about the demand for podcasts and podcasts advertising on our platform. And so, it's really not a demand issue for us, right now, on the podcasting side. So, adding more supply into the ecosystem, we think will be really beneficial.

Mark Mahaney

Okay. All right. Let me switch gears a little bit and talk about pricing power. And I know people have been asking Spotify about this for years. And it seems like you've started to do a few price experiments recently. So just remind us or tell us what are these -- what are there some of the pricing steps that you've taken recently? And do you plan to do this broadly globally? And do you think you have pricing power?

Paul Vogel

Yeah. So, well, obviously, we get this question a lot. And so, we've experimented with pricing over the last couple of years. We've done a very -- a couple of very small ones, New Zealand obviously -- I think a lot of people have heard about the test we did in the Nordics where we saw very little impact on any of our metrics in a negative way. So those went really well. So, we've now leaned into an additional seven markets, where we're going to continue to test and learn and think about where we can have pricing, where we have pricing power.

And so, for us right now, it's really trying to understand we have -- where we are in terms of some markets with respect to overall streaming penetration, where are we in terms of market share in those markets to really understand sort of the type of pricing power we have. That's number one.

Number two is, when you look at it from sort of a value per hour standpoint, we've added a ton of value into the Spotify ecosystem. We haven't really changed prices at all since we've launched. Our goal has and continues to be growing top of the funnel, right? So, growing users and growing subscribers. But we also recognize that we've added a ton of value into the ecosystem. There might be some markets where we do feel like we're giving so much value to users and adding pricing that won't really be a big deal or hindrance. And so that's kind of where that. The first step was that's where this incremental step is.

And then we'll see about where it goes in 2021. I think, there's a potential for us to continue to raise prices in some additional markets. We're obviously going to be very mindful of COVID and the pandemic and sort of how people are doing and how the economies are doing, as well as seeing how sort of these next seven markets go in terms of performance. But, it's definitely something we talked about on the call. We have some markets we're testing and it's likely, but not guarantee that we'll -- we would test some more in the upcoming year.

Mark Mahaney

What's the biggest country market where you've actually raised prices?

Paul Vogel

New Zealand and Australia.

Mark Mahaney

Okay. That's probably -- Australia because I know that that's bigger than New Zealand. Should we expect a price increase in the U.S.? Does get reasonably controlled in the next 12 months? Should we expect a price increase in the U.S.?

Paul Vogel

Yeah. It's tough to say. We haven't obviously announced any additional markets. But like I said, I think right now we're testing some bigger markets and smaller markets, and some markets in different geographies, different languages. And so I think we'll take the learnings from that. And then from there, figure out what makes sense for potential increases in additional markets.

Mark Mahaney

Okay. Let me switch and ask you a couple of P&L questions. The subscription gross margins, where do you think about where they can go long-term? And I know there's a series of different drivers. If something become materially bigger as a driver of subscription gross margins in the last 12 months.

Paul Vogel

Yeah. I would say -- and look, I think at a high-level, we don't really -- well, we think about gross margins as a consolidated basis, right? And so, I think, as a lot of people know the entire cost of the podcasting business as being -- the brunt of that is, is being impacting the advertising gross margin and not the premium gross margin, right? And there's obviously a benefit from a retention standpoint and a conversion standpoint on the premium business, even though it was just more financial perspective, we account for all in advertising. So, I think there's a little bit of a mismatch there that we try and just want to -- I just wanted to highlight.

And I really think about it just as a consolidate what's our gross margin, right? And so, call it, plus or minus 25% right now. And the question is how are we going to get higher? I think we have a couple of avenues to do it, right? I think advertising growth, in general, is one both on podcasting in general, where as I said earlier, the model could be a little different; two, advertising where there's some markets where we really are under monetizing. We actually take a little margin hit in some markets where we don't generate enough advertising. So, just growing advertising in some of those markets where -- that would really benefit gross margin.

We're optimistic about the two-sided marketplace and the opportunities there from a monetization standpoint and at benefit to gross margin. New to us, but Megaphone and what that potentially could do on a margin side. And then as we go further along, how we can work with the labels kind of in smarter and different ways that potentially could benefit us and benefit them as well.

So, we think there are a number of factors that will help gross margins, over time. As we've talked about, we are continuing to invest in the podcasting business. And so, as we think about the investment in 2020, but what we might want to do in 2021 and 2022, that could impact it. And again, that will be really driven by some of the successes and learnings we have from the current investments, which will then help us dictate how much we continue to spend. And I think as we've also said, a number of times, if you see us continue to spend aggressively in podcasting, it's probably a good indication that we feel like the benefits to the overall business, both from an advertising standpoint, but also from a user growth and retention insurance standpoint that we're seeing that as well.

Mark Mahaney

At the time of the IPO, you talked about long-term gross margins of 30% to 35%, any particular factors that have made you more confident in that range or less confident over the last two years?

Paul Vogel

Yeah. We haven't really updated that, but I don't -- we haven't changed our views on where margins could go. I still feel like there's a lot of opportunity for us to move margins up over time.

Mark Mahaney

Okay. Okay. Let's see. Any thoughts on whether any competitive offerings, Apple One bundle, things like that have had any impact on you?

Paul Vogel

Yeah. I mean, we haven't really anything to date. I think for us -- I mean, I'd say a couple of things. One is most of the things that transpire, are things that you can imagine we've already assumed or thought about what would likely happen. So, it's not a surprise to us that some of our competitors are going to want to bundle their offering with other offerings they have within their existing ecosystems.

But for us -- going back to what we said or I said very early in this conversation, having ubiquity is really helpful for us because we work across everyone's platforms just as well. And as many people know, most people now have multiple different operating systems within their home. So the fact that we work seamlessly across all is actually a huge advantage for us. That's number one.

Number two, continuing to lean into product innovation, both on the UI side, on the algorithms on the discoverability, we think has been -- will be continued to benefit us. And then obviously on the content side and having original content and unique content, particularly in the podcasting side.

So, for us, it's all about being the number one player in audio. We think we -- we're audio first company. We think having that focus on audio and solving audio needs, that actually gives us a really differentiated platform. And that's how we're going to continue to compete. So, we're always well aware of what our competitors are doing. Doesn't really change how we operate our business and we feel really good competitively about our position.

Mark Mahaney

Okay. Super. I mean, I'm going to pull from a couple of the questions, because there are a lot that have come in all -- popular. The double-sided marketplace, what's preventing other labels that it's Universal, that you've struck that deal with, that they have a two-sided marketplace elements in that deal. What's preventing the other labels from participating and then just want to level set our expectations about how big the double -- the two-sided marketplace could be for the company?

Paul Vogel

Yeah. I mean, there's nothing preventing the other labels from doing it. And it -- and the fact that we sort of explicitly called out Universal doesn't mean we haven't at times work with the other labels and experiment with them as well. The unique thing about Universal is that because they're willing to sort of lean in more aggressively, they're -- in the room working with us more to help figure out which products are working and which things they really want to lean into from a product and a growth standpoint. But like we think that the tools that we have will be additive to everyone in the ecosystem. We think it's just -- we'll take some time for some folks understand exactly what that means, how it can benefit them. And we'll move forward.

So, we're super excited that Universal has leaned in. Our hope and expectations will that other labels, both the big ones, small ones will lean in more aggressively over time. And we've had successes both at the major labels and the independent. So, that's kind of where that one stand.

Mark Mahaney

A couple of questions on a high definition subscription, like Amazon. Has -- do you think is there a market for that?

Paul Vogel

Yeah. I mean, it's something we always think about. We're always looking at different products and different services. So, nothing to announce at this point in time, but obviously, we look at everything to figure out what makes the most sense for us and what could be really value added for our users.

Mark Mahaney

Okay. Let's see. Sorry. Okay. There's a couple that came in on HD. So, I guess, you got those. Can you use the Joe Rogan brand as part of your subscriber marketing once the exclusivity period starts?

Paul Vogel

Yeah. I mean, I don't see why not. I mean, yeah. I mean, it will become exclusive in December. So, we're really excited about that. I mean, just taking a step back in general, we've been very pleased with how the performance of Joe Rogan has been already to date. I think, we've -- it's done better than expected. We're in a non-exclusive period. So anyone who was listening to Joe Rogan, another platform, didn't necessarily need to or have an incentive to move over to Spotify. That being said, I think we feel really good about how it's going so far. We're really optimistic about what happens in the exclusive period of time.

And it's interesting, part of that was the ability for us to develop sort of this vodcast thing, a tool as part of Joe Rogan. And so, we know that there's a significant portion of Joe Rogan listeners who also like to watch the video. And so having that sort of video part of the podcast has really been something that we had to develop in order to sort of make this marriage work. And so far, we've been really pleased with that as well. And that's something that potentially we could transport it to other podcasts over time.

Mark Mahaney

Let me ask you one more question, I will spin it to Jen [ph]. Talking about some of the more important international markets for Spotify in the next year or two, Russia is still a recent launch. I think you've said that it's been the best launch, I guess that's in terms of new MA use and new subs. Is that what you meant? And is -- are there any other, mark -- country markets that could be as big as Russia that could be potentially on the slate for the next year or two?

Paul Vogel

Yeah. So, with Russia in particular, it has been -- it was probably the most successful launch we've had just in terms of the speed with which we added users and subscribers. It really far exceeded our expectations. And so to us, it really was a nice indication that there really is significant pent-up demand in a number of markets that we operate in.

I think the two areas that we've talked about that we're not in yet, would be South Korea and Africa. And our goal is to be in every market that makes sense for us. We plan to be in those markets. And so just it's a question of when's the right time to launch and when do we have the right product and product market fit and licensing setup to get there. But those would be the big ones.

Mark Mahaney

Jen?

Unidentified Analyst

Great. Thanks, Mark. I want to circle back on kind of -- you talked about just adding video element into podcasting, which probably creates more engagement. In terms of just the product innovation, both in terms of music and podcasts -- and this is combining a question that came in as well -- is there an opportunity for Spotify to go into like live streaming, either like music or live streaming, audio in general, is this something that you guys have considered.

Paul Vogel

Yeah. I mean, we get this question a lot. Look, I think for us, for the most part sort of the on demand component of Spotify is really what set us apart. And so, I think we will continue to offer tools and services that really work for artists and their teams, and help them in any way that we can. I don't know if live is something we would do or not. But again, for the most part, it's really been about helping and find ways for them to sort of grow their businesses and sort of the on demand world that we've operated in. That's probably the best way I can answer it.

Mark Mahaney

Jen, you want to go ahead with one more question and I'll take it back over.

Unidentified Analyst

Yeah. Sure. And maybe -- let see. Another thing is just, have you considered any collaborations? I think recently in the app, there is more of a kind of an Instagram like feature, alongside the music streaming. I'm wondering if you have kind of considered adding like a social element to it, either in partnership, was the social platforms or maybe creating a more kind of in app experience, that's more social.

Paul Vogel

Yeah. I think, for us -- so I think social is an interesting one, because I think what we have found historically with respect to social is, it's been less about consumer to consumer social. So that has never really been a big driver. And we've experimented with that in the past. Social media can be helpful as connecting the creators and the artists to their fans. And so for us, I think what we'll continue to do is lean into ways that artists and creators can connect with their fans in more in different ways. It doesn't mean we wouldn't necessarily do something on the other side of the social. But historically, at least on our platform and the way people consume music on our platform and audio, it's been really more about finding ways to connect the creators to their fans.

Unidentified Analyst

Great.

Mark Mahaney

Last two questions, Paul. Paul, just from a user perspective, are there any new features that you think investors may not appreciate that have been rolled out and that have been extremely popular, increased usage or engagement?

Paul Vogel

Yeah. I mean, look, we always have new stuff. We catch hundreds and sometimes thousands of things every quarter. We have our sort of new mixed media playlist that combined sort of talk and music, which is sort of an extension of things we'd done in the past. I think we're really excited about the ability to have that all in, in different types of playlists. So, I think that's a new one that we're really excited about.

If you think about sort of the Daily Drive, which was a mixed media playlist, it's sort of an extension upon things we had done in that world where you'll have sort of that talk component and that music component. And within that music component, the artist will be able to get paid for the music within those playlist, which is a really exciting opportunity for us. So, I'd say that's a big one.

And then, other than that it's always continuing to evolve, the product in the UI and for us, particularly the discoverability. We still think there's a lot we can do to improve discoverability both on the music side, but also increasingly on the podcasting side so that users and subscribers have easier and better way of finding, discovering new and exciting audio content.

Mark Mahaney

One of the challenges I think for Spotify and other streaming services is that overall music listening was so heavily geared towards back catalog. Has that changed at all in the last five years, because of discoverability, because of recommendations that you've been able to get people to expand their musical horizons?

Paul Vogel

Yeah. So, we've seen -- I think the top -- the top 90% and went from about 15,000 to 50,000 artists over the last couple of years, which is a really exciting. It means that there's that many more artists sort of hitting that top tier level. And then when you look at sort of that the middle ground as well that is really expanded materially as well in terms of the number of artists who are being discovered in that middle tier as well. So, we believe actually -- it's been actually great for the overall music ecosystem because you've got them even more artists who are actually able to crack into sort of that top tier. And then you have even more artists who are being discovered in terms of getting into sort of a mid level tier of success and listenership. So, yeah, we feel really good about sort of how we've actually been able to broaden out listenership.

Mark Mahaney

And then -- I'm sorry, the last question. The possibility of creating if -- as podcasting becomes more and more popular, is there interest in just a podcast only service either from your side or for consumer side?

Paul Vogel

Yeah. We'll see. I think for us, again, it's still be a lot of testing and experimenting about what works and what's going to be the right thing for creators and certain creators and what might work for the consumer. So, I don't know. I think we'll have to see. But I think for us, it's -- we will likely test and learn on a whole number of features. I'm not sure if that's going to be one of them or not.

But I think the one thing I would say is for us, we're constantly evolving. We're constantly going to take risks and we're going to continually look at ways to improve the product. It may be small tests, it might be big tests and it might be things that you guys kind of pick up and the precedent might be things that just sort of never even make it to the light of day. But I think you can assume that we'll think about lots of things, what we ended up doing or not doing. I think it was just time will tell.

Mark Mahaney

Okay. All right. Paul Vogel, CFO of Spotify. Thank you very much for your time. Paul, hope you stay safe and healthy and look forward to seeing you in-person next year.

Paul Vogel

Awesome. Thank you, guys.