Spotify Technology S.A. (SPOT) Presents at 2023 Morgan Stanley Technology, Media and Telecom Conference (Transcript)

Spotify Technology S.A. (NYSE:SPOT) 2023 Morgan Stanley Technology, Media and Telecom Conference March 8, 2023 5:05 PM ET

Company Participants

Paul Vogel - CFO

Conference Call Participants

Benjamin Swinburne - Morgan Stanley

Benjamin Swinburne

All right. We're going to get started. Paul, just so you know everybody can see your face. We can't hear you, though. We'll get Paul's audio on while I read my disclosure statement. Please note that important disclosures are on the Morgan Stanley research disclosure website. If you have any questions, please reach out to your Morgan Stanley sales rep. Paul, can we hear you?

Paul Vogel

Can you guys hear me?

Benjamin Swinburne

Yes. There we go. Great. So, we're really excited to welcome virtually, which is certainly better than not at all, Paul Vogel, the CFO of Spotify, back to Morgan Stanley TMT. The reason Paul isn’t here is they had a pretty major event for the Company down in L.A., Stream On this morning. So with that, I'm going to hand it over to Paul to get us started.

Paul Vogel

Great. Thanks, Ben. So, as you mentioned, we're hosting our second Stream On event today here in Los Angeles. And as much as I'd like to be there in person with all of you and everyone else, this is a truly unique Spotify event.

At Investor Day, we talked about our ambition to be one of the truly unique creative platforms in the world. And today, we shared a variety of updates that build on our creator tools, features and programming, all of which will unlock new possibilities for more types of creators than ever before.

Spotify is coming to life in an entirely new way with advanced recommendations, new visual canvases and a completely new and interactive design.

So before we get into it, I'd like to roll a short video to set the stage.

[Audio/Video Presentation]

Paul Vogel

So that's just a sampling of what we announced today. It's pretty cool stuff. It's all about closing the distance between creators and fans, and helping creators get discovered by new audiences, build community, connect with fans and chart new pathways to success.

Today, we announced over 20 new features and updates to the Spotify experience including a new home feed, previews for music, podcast and audio books as well as a new discovery feed. And we showcased a re-envisioned Spotify for Podcasters, brings here the best of our podcast creator tools into a one-stop shop to create, manage, grow and monetize podcast content.

For music artists, we announced the evolution of our marketplace offering, including the addition of concert listings and merge to our Now Playing view. Discovery Mode is now available on a self-serve basis through Spotify for Artists.

Our investments have made these new updates possible and will fuel the next stage of our growth. So, as you can tell, we're all pretty excited about what we've announced. And now, I'm happy to take your questions, Ben.

Question-and-Answer Session

Q - Benjamin Swinburne

All right. Thanks, Paul. Appreciate you highlighting some of the stuff from this morning. I think there was a lot that came out. Maybe just to help distill it for investors, which is maybe not the exact audience you're targeting with Stream On, but there certainly were some relevant points, including, I think, an MAU update. What are the main things you want to highlight for this audience from Stream On?

Paul Vogel

Yes. I think you're 100% right. This really is an event geared towards creators. It's geared towards artists, podcasters and our users. So, it's really not a financial event per se. That being said, you're correct, we did mention that we've now already passed 500 million MAU. So, if you recall, our expectations for Q1 were to hit 500 MAU -- in our guidance 500 million. So, we've already passed that at the beginning of March, which is great. And it shows the momentum that we had kind of coming out of Q4 is maintained into Q1, which is great.

And then, you think about it from a financial perspective, I think this event is really focused on creators. But when creators are happy, when creators are engaging, when they're adding more content to Spotify, Spotify just becomes better. And the better it becomes, the more engaged users are. And the more engage users are, the longer they're on the platform. And the longer they're on the platform, the more they engage, the more we can monetize them, the higher the LTV is, the lower the churn rate is. So, it really does actually impact all the business side of Spotify. But the real goal is to how do we help creators really reach their fans, really gain new audiences and really monetize as best as they can.

So, it really is the creative platform, and that's all the tools we showed were ways for creators to really engage with their fans in a more directly distinct way. The financial benefits will come as we have more creators on the platform and the users are there longer and they're happier and they engage more.

Benjamin Swinburne

And Paul, obviously, the new Home Feed, the pretty big revamp. I mean this is like one of the bigger product relaunches, revamped, everyone is describing it in a long time, which you guys would only be doing if you thought it was going to be good for the business. So anything you would want to share for us in terms of what that product looks like? I tried -- I haven't been updated yet. So, I must be on the lower tier upgrade list.

Paul Vogel

Yes. I don't know, maybe [indiscernible] I don't know. But yes, so it is, it's probably the largest change we've made to the home -- to Spotify UI in our history, probably since we went mobile. So, this is a really big change. It's really exciting stuff. The ability to sort of preview playlists, preview podcasts, scrolls to see what's in there to get an update before you commit to listening something, it's really a brand new and re-imagined Spotify.

You can still access things the old way you want it to. If you just want to go to your playlist or listen to music or podcasting, but this is a really new way to engage. And the beauty about what we're doing is it's not about getting someone to be stuck in to something where we're trying to monetize you, because you’re on it for a longer period of time. What we're really trying to do is get you to engage to find the right music and find the right content, so you can engage with it however you want in whatever way. So, it has that component, which is really exciting.

We launched a couple of other things. One, we launched about a week or so ago, but we kind of previewed it even in greater detail at this event was our new DJ, our AI-inspired DJ, which is actually a tremendously cool product. If you haven't tried it yet, you should try it. Go into the music side of Spotify and try. And it's basically a DJ one. It customizes the DJ, an artificial intelligence DJ for you with your music, it has lead-in, it tells you about the artist. It gives you interesting facts, and it's a really, really cool evolution of music listening and discovery.

Benjamin Swinburne

So Paul, I want to continue our conversation as we move through sort of the business and some of the big investor debates, and I'm sure we'll be able to weave the Stream On news from this morning into that. Maybe to start, I think one of the biggest things that has helped the stock this year has been, I guess, what I would describe as a shift in tone from Daniel and the team around investment spending. Daniel described 2023 is the beginning of the next chapter for Spotify. So, talk a little bit about the changes you've made at the organization, the reorg and how that's gone so far, how the organization has absorbed that? Yes, let's start with that.

Paul Vogel

Yes. So I think -- well, if you go all the way back to the beginning of 2022, and we said it was an investment year. So, first off is you're seeing a lot of the benefits of that investment in all of the things that we announced in Stream On in 2023. And so, one of the things that we were doing was we were adding engineers, adding R&D capabilities to be able to launch all of these products, right, whether it was ad products, new things with Discovery Mode in Marquee, whether it's a new Home Feed, whether it's DJ and all the other products. That is all in investment that a lot of it started sometimes even before 2022, but really kind of took hold there.

And so, I recognize the time particularly for an investor base, it can be frustrating when we talk about investments, and we don't necessarily say what those investments are going to and you have to wait until it happens. But you can see a lot of what we launched, we think it's innovative, it's new. It's not things that we would have wanted to tip our hands to our competitors before we were ready to launch it. And so that said, natural tension of 2022 was investing to be able to launch all the products in 2023, but we didn't really want to share too much for all those competitive reasons. So, let's just kind of take that as sort of one bucket.

And the second bucket is, yes, I think we believe and know that we can become a very good business and a great business and not just a great product, and I think we've talked about in the past. I do think the Company has a much greater focus on efficiency and how can we do things to be as productive as we possibly can, but do it in a more efficient way, which means not necessarily always having to add the incremental resources that we've added in the past, but do with the existing resources we have and just be more efficient about it.

You talked about the reorg. I'm super optimistic about the new structure of the business and how we're running the business for all of those same reasons, right? We're now a more efficient business. The reporting lines are more streamlined, the accountability is there, the ability to get things done with fewer number of people is there. And when you become a business as big as we've become, you sometimes have to make changes. I've been at Spotify for seven years. This is probably the third big reorg we've done. It's the first one that was sort of to the point where it kind of reached the outside world and the press. And obviously, it's probably the biggest one we've done since we're a public company.

But this is what happens. I mean I started -- we were 1,500 employees, we are now just under 10,000. And orgs need to evolve and orgs in need to change. And I think it's actually a real benefit and a real positive that we're willing to always re-look at our business and say, okay, what worked at 1,500 employees isn't going to work at 5,000. And now that we're close to 10,000, that's not going to work either. And so, I think it's actually a testament to Daniel and his leadership to say, hey, we're going to always be looking forward and we're always looking for ways to be the best business and the most efficient. And so, we're bigger, we're going to be more efficient. We're going to get more done. We'll be able to do it without having to add the same level of incremental resource as we did in the past.

Benjamin Swinburne

You've already sort of touched on my next question, which is around cost and headcount. You grew your headcount, I think, overall by 26% last year. 1,000 engineers were hired. Is this now you think an employee base you can really start to leverage?

Paul Vogel

I hope so. I do. I mean, I think we spent -- a lot of those personnel as you said went on R&D side on personalization, all the things you've kind of seen with the personalization side, with platforming and being able to have a platform where advertisers or podcasters and music can all plug into. This thing is -- don't forget, we made a number of acquisitions last year that closed in 2022, which also added to headcount and cost base. One that I’d call in particular was the acquisition we made of Sonantic, right? So Sonantic is the AI business that actually is the voice AI that allows us to do the new DJ, right? We bought that last year. We had to integrate it to people, the process of the structure and all that cost and all of that integration is what has now allowed us to launch the DJ product in '23.

And so, again, you've seen a lot of that incremental growth where we're now leveraging it in '23.

Benjamin Swinburne

We've talked a bunch -- I've given you some grief about LTV to SAC trends, which came down last year. Marketing was another huge area of investment last year. Same kind of question, I think you're planning to moderate marketing, you talked about that. Is that the expectation? And are there implications for MAU growth, which I say, no and that you've already exceeded your Q1 guidance.

Paul Vogel

Yes. Well, when you said you gave me grief, I thought it was going to be about the Eagles losing the Super Bowl. So I appreciate you’re not doing that. So, thanks for that.

Benjamin Swinburne

That's too personal.

Paul Vogel

But yes, I do think we'll see LTV to SAC improvement. It did come down over the last year a bit as we really stepped up marketing. But again, if you take a step back, I think, again, one of the things we wanted to do last year, and we sort of tried to signal to be start of the year, maybe way do as well as we should have, was there was really going to be an investment year. It was really going to be -- we were in so many new markets. We wanted to get a foothold in a lot of those markets. That comes with marketing, it comes with branding, it comes with sometimes having to figure out what works in certain markets. And so, we found as we've kind of done that and moved forward, we're starting to see some of the leverage of the marketing. So that flywheel, that word of mouth where you start to grow incrementally without as much incremental marketing has been helpful. So, we've seen that on the one side.

In the second time, you get more efficient with how to spend your marketing when you've been in market for a few years. And so, it was actually the last three months that we announced that we were launching in the entire world, right? So, it's between then and now, a couple of years of really growing in those markets. And so, we've seen efficiency, and I think you mentioned, right, we haven't seen -- we've seen the momentum in the MAU side continues to be strong, as you said. And I mentioned earlier, we've already passed 500 million users, which was our target for all of Q1. So yes, we're seeing the benefits all around, which has been great.

Benjamin Swinburne

Great. I want to give you a chance to talk a little bit about the guidance you laid out last June, I think it was at your Investor Day, where you really committed to gross margin and EBIT margin expansion, which is probably more important to stock today than it's been. One of the things that have -- that need to happen in the business from a revenue and cost point of view to deliver on the 30% gross margin, 10% EBIT margins over the medium term, which we think of as sort of 3 to 5 years.

Paul Vogel

Yes. So, nothing's really changed in terms of our expectations, right? So, when we gave out those expectations that -- when we gave them out at the Investor Day, they're always sort of longer-term targets for us, right? So we get the question a lot, which I'm sure you'll probably get there too, is like what has to happen from an advertising perspective from the podcasting business, right? We've talked about podcasting being a big drag on our business, but that -- I said 1 to 2 years to become breakeven and then be profitable and eventually hopefully additive to gross margins overall. And so yes, a healthier ad market would always be easier to get there, but there's nothing that has changed in terms of our expectations in terms of getting the path to podcast profitability from where we were 6 or 7 months ago. So, nothing has changed there. Nothing has changed on the music side, our ability there and nothing has changed on some of our optimism about audio books in some of the new verticals.

So, we feel really good about the numbers we laid out. I think that hopefully people are starting to see that we deliver on what we say we're going to deliver. I know sometimes, again, and I know this and I admit this that we try and be as transparent as we can. There are certain things where maybe we're not as transparent about spending because of, as I said, some of the competitive reasons we're doing. But hopefully, over time, we'll be able to show -- and investors will end up believing in us that there is a process that -- we thought this out that because we think longer term, sometimes we may have a year where an investment year and then we reap the benefit the following year, but that the path to getting to those long-term targets are kind of laid out, and we still have all the optimism that we'll get there.

Benjamin Swinburne

Great. Last year was a record MAU year for the Company, which is obviously a huge positive. It did skew a lot towards emerging markets, which we've noted. Investors are obviously focused on that mix and what that means for premium conversion and sort of the LTVs. What's your perspective on the value of growing the business in the emerging markets over the long term?

Paul Vogel

Yes. I think we have a really good balance right now. So, I think you're right that we are growing faster in some of those kind of developing markets, and that will continue to be the larger percentage of our growth moving forward. It's just kind of obvious, when you sort of look at the numbers and TAMs and those types of things. But we still think there's a tremendous opportunity to monetize in our developed markets and improve the monetization over time. And so, we have this balance where I think the monetization abilities are really there, particularly in our developed markets, while our developing markets are growing, and that will give us the time to sort of grow in to actually monetizing those even more over time.

And so, there's this nice balance where we have great penetration in developed markets. And I think there's plenty of room to grow in those markets. Don't get me wrong. Those are not fully saturated by any stretch. But they're not going to grow as fast as our developing markets. They can grow very fast in terms of monetization opportunities. That will help us continue to grow in the developing markets and give us the time to come up with more creative ways of monetizing in some of those areas.

Benjamin Swinburne

Okay. I want to shift to podcasting and the advertising market generally. This is another area where you guys committed to running podcasting, going to get to breakeven within 1 to 2 years, which would suggest it's coming up probably in 2024. Can you achieve that if the end market remains at kind of current levels? Do you need a lot of top line re-acceleration? And what's your general optimism around podcasting today?

Paul Vogel

Yes. I mean, nothing's changed in terms of our optimism. I think everything -- I'll rear what I said, everything we said at the Investor Day still holds true. Yes, obviously, in a very point ad market, it always makes things easier. But we think we have a path to hit the targets that we laid out at Investor Day with respect to breakeven and then profitability on the podcasting side. We're still super optimistic about the business and where it can go over time. Again, four years ago, we were nowhere in podcasting. Now, we’re the global leader in podcasting. And so, we've had a tremendous amount of growth in that business, a tremendous amount of innovation in that business. I think a lot of what we're doing now that we announced on Stream On for creators and their ability to really innovate, have chapters on podcasting now and different types of things to really highlight and monetize what they do. The previews, we think, will be really helpful on podcasting as well, so you can go and look and see what a podcast is going to be before you click and say, I want to listen to it, so it'll help you figure out what you want to listen to.

We're adding auto play into podcasting as well. And so, let's just say you're in the car, you're on a run in your podcasting end, just like music will now auto play with something that we think you're going to want to listen to, if you're music playlist ends, we're now going to auto play your podcasting as well. So, you got a mile left on your run, I think you said the example that Gustaf [ph] used today at Stream On, we'll start another podcast for you that hopefully is something similar to what you've listened to that you'll enjoy as an auto play.

So, we're adding new features and functionality in the podcasting, which I think will help the creators want to really participate. And so, we're still super optimistic on podcasting.

Benjamin Swinburne

We've heard a lot at this conference about the ad market right now and that there's -- the macro has been called out as certainly an area of pressure for a lot of businesses. Any update you could provide us, Paul, on sort of how things are trending relative to the earnings call a month ago?

Paul Vogel

Yes. I would say the same. I mean, nothing related to update. I'm not going to change anything I'd said, but it was choppy coming out of Q4. It's still been choppy in the Q1, but that's pretty much in line with what I think what we said on the Q4 call and into Q1, so no real change.

Benjamin Swinburne

Marketplace was a nice story last year in terms of driving some gross profit dollars. It grew faster than I think your 30% plus growth expectations from Investor Day. I think you actually announced some stuff today on Marketplace. Can you tell us a little bit about the opportunity you see there, whether you can sustain those kind of growth rates? And are you getting more sort of engagement from the record label touring side of the equation?

Paul Vogel

Yes. So, to your point, Marketplace grew really nicely. I think as you mentioned, we said -- I think at the Investor Day, we expected to grow 30% last year, and it did grow faster than that, which is great. And we launched some new things today. So one is, for instance, we've talked about Marquee and we've talked about Discovery Mode. Discovery Mode is now available to all podcasters as part of Spotify for Podcasters, which is great. So, on a self-serve type of a mechanism. So, we see a lot of opportunity for Discovery Mode and Marquee.

We talked today about giving creators ability for merch and having their tickets listed and having their concert venues listed. So, they can holistically manage their entire experience on Spotify in their music, on their merch, on their concerts and all those things. And so we're just going to continue to add more and more value into the ecosystem for our Marketplace users, and we think we're really excited about it.

Benjamin Swinburne

Great. Let's shift to Premium. We obviously talked a lot about the expense side of the equation this afternoon. The other clear opportunity for the Company to drive profits is pricing. So, I guess, the question, Paul, is what are you waiting for to raise prices on Spotify?

Paul Vogel

Yes. Look, I think we've talked about this. I think Daniel has said repeatedly, we believe we have an opportunity to raise pricing, and we expect to raise pricing over time. I think for us, there's always the natural attention of what's the best thing for us and our partners in terms of raising pricing. And I think that's how we're going to continue to think about it. But look, we obviously -- our competitors have raised prices. So -- and we think we have a better product than most of our competitors. So if our competitors are able to raise prices and we think we have the best product in the business, so it obviously bodes well for our ability over time for pricing. And so nothing new to announce here, but we think it's an opportunity. We've added a tremendous amount of value into Spotify over the last 5, 10 years without really materially changing pricing all that much.

We have raised prices in a number of markets over the last 12 to 24 months. And we have raised prices on family plan and student plan and in some areas, even the basic plan, but we'll see where it goes over time.

Benjamin Swinburne

Okay. I tried. All right. Let's shift gears to AI, which has been another big theme at this conference. What's been the feedback on your AI DJ so far?

Paul Vogel

Yes. Feedback has been great. To your point, it's actually -- when you think about AI, there's a number of components that are going into the DJ, right? So, on the one hand, you've got the AI that goes into the playlisting and making sure you have the best playlist as part of the DJ in the AI component with respect to Sonantic and the acquisition we made there on the voice on the AI. And then obviously, the stuff on the open AI side that's helping source some of the other parts of it.

So there's a lot of AI even within that, and that went into the DJ product. And we feel great about it. I mean it's too early to sort of give out any metrics. But I think so far, we're pretty pleased with how it's rolled out. And I think it's a very cool product, if you haven't used it, I can't really see the audience, but hopefully, folks are there and go into your music tab, and you'll see the DJ right there. It's super, super cool. And honestly, you forget that it's not a real person.

Axavier, we call him Ax, he’s Spotify employee for many, many years. He's the voice of the DJ. And he's just like the best guy in the world and you forget -- like I feel like Ax is actually the actual person -- is actually narrating my DJ. I forget, it's just an AI-generated -- his voice. And so I saw him today at the Stream On event, and I'm like, I feel like you're in my life every day, like every day I'm listening to you. So, it's very cool, and I think it's been -- it's widely successful. Well, we hope it'll be widely successful, but I think it's been a really good start.

Benjamin Swinburne

Is AI an area where you guys need to invest a lot of capital over time to continue to benefit from that technology?

Paul Vogel

Yes. I don't know. I think like everybody else, we'll try and figure it out. But we already have made some investments. Like I said, we've been investing in AI with our own employees for years kind of on the music side. We made the acquisition of Sonantic, which was an investment, right? It was a pretty big investment for us, an acquisition that is now paying off. And so, if we see the need, we'll continue to invest. And like everybody else, there's just so much innovation going on and so much changes even in just terms of cost structures and how you access data that -- I think it’s like trying to predict beyond the next couple of quarters or years is pretty tough.

Benjamin Swinburne

The other area of AI debate on music, of course, is what generative AI may mean to music creation and obviously, there's a lot of focus from the labels, especially universal on sort of what's happening algorithmically on Spotify and other places. How do you think about the opportunity with AI-generated music in terms of creating content and driving engagement and making consumers happy with what they're hearing on Spotify, but also obviously addressing the artists concern around generative AI.

Paul Vogel

Yes. Look, I think the real concerns, I think we all see how it plays out. I think at the end of the day, like our number one focus is how do we maximize creators and how do we maximize users, right? And so, we will -- we want to create a product where creators are able to create and users get the best experience for them. And how that evolves, we'll see. I mean, music has evolved for years. I mean, at the end of the day, the initial publishing rates were basically set on player pianos, which ironically where pianos played by not a human being, right? They're actually maybe the first non-human played music. And that's somewhat -- where some of the mechanicals -- the publishing rates come from.

So you've seen that evolution from hundreds of years ago to where we are now from different types of music, electronic music and everything else. And so, I think it will just evolve and we'll have to evolve along with it.

Benjamin Swinburne

Okay. Makes sense. Maybe last question, just on the competitive environment. Obviously, there's always been this debate about Spotify's ability to compete with these much larger tech players, increasingly vertically integrated, Apple has their Apple bundle, YouTube seemingly has some success with their music and premium product. How would you compare your position, your strategy? What is allowing you to succeed from an MAU and Premium point of view against those companies, which are obviously pretty significant in size and expertise.

Paul Vogel

Yes. I think for starters, there's a couple of things. One is, this is all we do, right? And so, our singular focus on streaming audio and giving the best possible experience to users, I think, separates us. So, that's number one. I think number two is we have more engaged users. And so, like the average user spends 2 times on Spotify than a user on another streaming platform. So, we're seeing that like our product and our innovation, it's just a better product. And so, therefore, people spend more time on Spotify and they're more engaged with Spotify.

I think you saw today from Stream On that we're going to continue to innovate. We're going to kind of drive innovation, everything that's best for creators, and best for users in ways that nobody else is doing. And then ubiquity. I think this goes all the way back to one of the things we talked about at our first Investor Day in 2018. We have over 2,000 partners and we're ubiquitous on every product and every device. And so yes, while some of those players definitely have an advantage in terms of controlling hardware and operating systems, we have a huge advantage in terms of being ubiquitous across every product, and you can go from your phone to your smart speaker to your car to anywhere else, and it just picks up where you left -- you left off, because of what we've been able to do in terms of building out ubiquity. And we feel really good about it.

And just going back to what we've talked about a couple of times that we're seeing it in continued growth in our business. We've now passed 0.5 billion users. Competition is tough. But the good thing for us is we've been competing with these guys when we were much smaller and had much fewer resources. And so, it's never going to go away. It's never going to be any easier, but I feel like we're in a really good position to continue to innovate and just have the best product out there in the market.

Benjamin Swinburne

Okay. Well, Paul, I really appreciate you spending time with us. I know you had a busy day today, and on to the next 500 million MAUs.

Paul Vogel

Awesome. Thank you for accommodating the virtual. I really appreciate it.

Benjamin Swinburne

All right, Paul. Take care. Thanks, everybody.

Paul Vogel

Thank you. Thank you.