Spotify CEO says company doesn’t see impact of economic downturn yet

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Shares of Spotify soared nearly 7% on Wednesday morning after the streaming audio giant said it beat Wall Street expectations for revenue, profit and user growth.

Why is this important: Several media and technology companies attributed slowing growth in the last quarter to macroeconomic headwinds. CEO Daniel Ek told Axios he remains “paranoid” about a potential recession, but said “so far we don’t see much of it at all.”

  • He noted that the war between Russia and Ukraine “looms like a kind of cloud on the horizon, but has very little impact on us.”
  • Spotify chief financial officer Paul Vogel said on a call with investors that macroeconomic pressure had no impact on subscription cancellations for its premium subscribers last quarter. In fact, the company saw less churn in the last quarter compared to the second quarter of 2021.

Details: Spotify added 19 million monthly active users (MAUs) last quarter, a 19% increase from the second quarter of the previous year.

  • The company exceeded its own user growth expectations of 5 million MAUs, largely due to product improvements over the past year as well as more localized marketing and content, Ek told Axios. . The company cited a spike in user growth, especially among Gen Z users in Latin America.
  • Spotify recorded a turnover of 2.9 billion euros in the last quarter, an increase of 23% compared to the same quarter of the previous year. Ad-supported revenue grew 31% year-over-year to €360 million, hitting an all-time high as a percentage of total revenue at 13% in the second quarter.

Yes, but: The company reported lower gross margins in the last quarter compared to a year earlier, due to its decision to write off the investment it made in a hardware product called “Car thing”, a control device in-car music that the company launched. This year.

  • Ek told Axios that while the experience provided some important lessons, like how sales cycles and recalls work for a hardware product, “frankly what we’re seeing now is that this hardware is useless.” , in part because automakers have gotten better at producing in-car entertainment products.
  • Automotive products will continue to be important to Spotify, Ek said, given that more than a third of the company’s monthly active users now use Spotify in cars.

The big picture: While the company expects developing countries to continue to lead user growth in the short to medium term, Ek said revenue in this period will continue to be drawn from developed markets, where Spotify can sell. more users in features like podcasting, and soon, audiobooks. .

  • The company says it will continue to invest in new verticals, like podcasts and audiobooks, because it believes these long-term investments will benefit its gross margins, even if they appear to be a drag in the short term. term – what investors expressed. concerns about.

What to watch: Increasing the amount of ad inventory available is by far the “biggest contributor to growth” in the company’s ad business, Ek told investors. The company will continue to push innovation in its free products to generate more engagement and therefore impressions.

  • In a letter to investors, the company cited high levels of growth in impressions sold and advertising rates within its Spotify Audience Network, an advertising network that combines all of Spotify’s music and podcast ad inventory into one. place.

And after: Vogel said the first iteration of audiobooks on the platform is expected to happen as soon as next quarter, but investors should expect to see more of its audiobook efforts in the first half of 2023.

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