Spotify Technology S.A. (NYSE:SPOT) Q4 2022 Earnings Call Transcript
Spotify Technology S.A. (NYSE:SPOT) Q4 2022 Earnings Call Transcript January 31, 2023
Operator: Good morning, and welcome to Spotify's Fourth Quarter 2022 Earnings Conference Call and Webcast. All participants are now in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead, Mr. Goldberg.
Bryan Goldberg: Thanks, operator, and welcome to Spotify's Fourth Quarter 2022 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; and Paul Vogel, our CFO. We'll start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarningsQ422. 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 ir@spotify.com, 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 letter to shareholders 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 letter to shareholders, 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: All right. Hey, everyone and happy new year and thanks for joining us. We had a great Q4 and ended 2022 strongly. Our user and subscriber numbers continue to climb, showing the value of our investments in the platform over the past few years. We're now in an even stronger competitive position, and I'm confident in our future prospects. And I'll let Paul fill in on more of the specific details. However, a notable call out in the quarter was our eighth annual Wrapped campaign, which was a big contributor to our Q4 success, and we broke all sorts of records and reached several all-time highs with an increase of over 30% in user engagements. Wrapped was trending all over social media, but it wasn't just about Wrapped.
So, by the end of the year, we had more than 100 million tracks on our platform and more than 5 million podcasts and more than 300,000 audio books being enjoyed by almost 0.5 billion listeners. In 2021, we said that 2022 would be an investment year, and it was. And in light of our recent news on cost and staff reductions, I'm sure some of you are wondering if we believe that, that investment was a mistake. And the answer is, no and yes. I still believe it was the right call to invest, and I would do it again. So, for instance, in the last 12 months, we grew our users substantially, enhanced our capabilities, developed a better product and brought more content to creators and users around the world. And we also made tremendous strides in setting Spotify Park from everyone else in our space.
In addition, my expectation was never that these investments would have a great impact in the short term, yet they have. But more importantly, for our share owners, I fully expect that they will continue to pay dividends in the months and years to come. But things change, and the macro environment has changed significantly in the last year. And in hindsight, I probably got a little carried away and overinvested relative to the uncertainty we saw shaping up in the market. So, we are shifting to focus on tightening our spend and becoming more efficient. This remains consistent with the plan we outlined at Investor Day, but you should expect us to execute on it with even greater intensity given what I just said. However, to be clear, this doesn't mean we're changing our strategy.
Photo by Nadine Shaabana on Unsplash
We will continue to work to build the platform of the future, and that will take investment in new opportunities that we outlined like podcasts and audio books. And if anything, thanks to our position in users and subs, this should allow us to both increase revenue per user over time as well as improve our stickiness with consumers even more. But going forward, we will do it with an intense focus on efficiency, and that marks a pretty big shift in how we will act. And to meet this objective, we are also rethinking how we operate. We've set up a new org structure that streamlines decision-making and prioritizes speed and efficiency. 2023 marks a new chapter for us, but our commitment to achieving our goals remains the same. And I'm really optimistic about the direction we're headed in, and we'll continue to focus my efforts on guiding the long-term success of the company.
And with that, I'll hand it over to Paul to go deeper into the numbers, and then Bryan will open it up to the Q&A.
Paul Vogel: 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. Let's start with Q4. User growth was very strong in the quarter. Total monthly active users grew to 489 million in Q4. This was 10 million ahead of guidance, up 33 million quarter-over-quarter and the largest Q4 net additions in our history. Moving to premium. We finished the quarter with 205 million subscribers, 3 million ahead of guidance, thanks to broad-based strength across several regions, particularly Latin America. Our revenue grew 18% year-on-year to approximately EUR 3.2 billion in the quarter. Reported results were aided by a 600-basis point currency benefit.
However, this was 200 basis points less than forecast. So, while reported revenue was a touch below forecast, our organic growth on a currency-neutral basis modestly outperformed due primarily to advertising. Turning to gross margin. Gross margin of 25.3% was above guidance by 80 basis points due primarily to lower podcast content spend, along with broad-based favorability in our core music business led by strength in Marketplace. Moving to operating expenses. Growth in the quarter was lower than forecast due mainly to currency movements and to a lesser degree, lower marketing spending. When combined with our better gross profit, our operating loss was ahead of guidance by EUR 69 million. As we previewed last quarter, free cash flow was negative in Q4 due primarily to timing shifts around certain payments.
However, we continue to generate roughly $200 million in free cash flow on a trailing 12-month basis and we expect to be free cash flow positive for the full year of 2023. Looking ahead, we are pleased with our momentum into 2023. When combined with our increased focus on speed and efficiency, we are confident in our ability to continue our double-digit top line trajectory in conjunction with improvements in profitability. With respect to first quarter guidance, we continue to see strong momentum in MAU and anticipate reaching half a billion users by the end of Q1. On the subscriber front, we expect to add about 2 million net subscribers, bringing total subscribers to 207 million. We're also forecasting EUR 3.1 billion in total revenue, a gross margin of roughly 25%, excluding severance charges and an operating loss of EUR 194 million with the latter reflecting EUR 35 million to EUR 45 million in severance charges within our operating expenses.
While we no longer give full year guidance, full year 2023, we see strong growth for both users and subs. So, we are feeling good about the momentum exiting 2022. Gross margin and operating expenses are expected to improve throughout the year, as we have mentioned previously, while free cash flow is expected to be in line with historic averages. Given many of the adjustments we made at the start of 2023, including our decision to reduce our workforce by 6%, we see our operating expenses growing slower with a material improvement in our operating loss compared with 2022. This is according to plan. As Daniel mentioned, we are entering a new area with even more focus. And with that, I'll hand things back to Bryan for Q&A.
A - Bryan Goldberg: Thanks, Paul. And our first question today is going to come from Matt Thornton on subscribers and pricing. Has Spotify seen any lift to subscribers from recent competitor price increases? If not, does this give Spotify increased confidence to take price? And what are the reasons, if any, Spot would not take price?
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