Highlights from Spotify CFO Paul Vogel's Q&A Session at Morgan Stanley's TMT Conference
In this short article, I’ve highlighted the most interesting quotes from Spotify CFO Paul Vogel's Q&A session at Morgan Stanley’s TMT Conference in March 2022.
It’s been a turbulent 2022 for Spotify (NYSE:SPOT) and we haven’t even wrapped up the first quarter. Since I first published my thesis for investing in Spotify in January 2022, Spotify suffered a PR nightmare as several artists (e.g., Neil Young, Joni Mitchell) withdrew their music from the platform in response to concerns about Joe Rogan spreading COVID-19 misinformation, leading to media speculation of a mass exodus of artists/creators. Throw in a sharp sell-off after their Q4 earnings results along with the recent Russian invasion of Ukraine, and it’s been a rough period for Spotify shareholders, with shares down 42% so far throughout 2022.
Given the above business uncertainty and poor stock performance, I was eager to hear Paul Vogel participate in a Q&A session at Morgan Stanley’s TMT Conference on 9th March. In this short article, I’ve highlighted the most interesting quotes from this Q&A session. What stood out to me was: (1) Spotify’s rationale for removing annual guidance, (2) Spotify was performing ahead of their Q1 2022 guidance prior to Russia invading Ukraine, and (3) that podcasting revenue should be accretive to gross margins in the medium-term.
Adding new monetization opportunities for creators
“And so we’re going to continue to build out tools and services that will allow creators to monetize on our platform in different ways. And so obviously the most obvious would be just a podcaster you can bring on the platform and we can help them monetize through advertising, be musicians through merchandise and ticketing and adding all those things. So there is the benefit of both helping the creators monetize and then also monetizing for ourselves and then also just having a more robust platform, which will drive incremental users on to Spotify.”
Changing guidance from a range of estimates to a single point estimate
“One was we gave ranges, but we told everyone our goal was the 70th percentile. So in essence, we were giving you a point estimate anyway, that’s number one. I think number two is I think quite frankly we’ve performed better than sometimes the metrics have … if we said we’re going to do something in a range, but our point estimate to 70th percentile, that’s literally what we were trying to do. So when we come in, in the 90th or 95th percentile to us that’s actually a stronger quarter with an outperformance, but to a lot of people you’re still in the range of outcomes. And so it was kind of in line. And so we felt like there was this perception that we historically were a company that never outperformed. And yet relative to our internal metrics, we actually felt like we had outperformed a lot.”
Removing annual guidance
“We felt like every quarter we were constantly tweaking our full year guidance up or down, depending on how a quarter did or if we were shifting a marketing campaign … And the second part is we don’t really run the business for a specific one-year plan, right. And so everything we do is long-term, all the models, I see everything on green light, tends to be minimum two to three years and last time three to five years in nature.”
“And so while we are very diligent about looking at our business plans and seeing how they hold, we may decide in any period of time to – because we have so many initiatives going on to the company. We may at any point in time decide, hey, actually, this would be better if we launched this in Q3 or we should pull this up in to Q2. It's not always a bad thing, right. Sometimes by pulling something forward, you're actually gonna accelerate revenue. You're going to accelerate users or sometimes by pushing back a quarter, you may, in the grand scheme of again a two, three to or five year LRP, it doesn't really matter.”
“And so we just felt like, again, that false precision of a year-end estimate that we don't really manage to wasn't super helpful.”
Cutting off all monetization in Russia
“But with the Russia’s invasion of Ukraine, we have decided to pull all of our employees outside of - out of Russia and we are no longer charging for premium users within Russia. And so the premium users we do have in Russia will churn off, the majority of them in Q1 a little bit in Q2 … We do expect probably a churn of about 1.5 million users out of the subs business.”
“We are continuing to operate our service in the area. We think it's really important that information is still flowing there. Podcast usage has gone up in that region. So we're trying to continue to provide information and non-propaganda information as much as we can.”
“We’ve cut all monetization off in Russia, so there’s no advertising and no premium revenue in Russia coming up.”
Tracking ahead of Q1 guidance … despite the Joe Rogan controversy
“Obviously we're going to have a little bit of a hiccup with a kind of 1.5 million turning out in Russia, but if you isolate Russia aside, the quarter was performing above plan, which we felt really good about.”
“But without getting too specific, based on what I said, that we were above plan for both users and subs kind of before Russia’s invasion of Ukraine, that should give you some indication of the overall impact that some of the issues we deal with in the first month or two [relating to Joe Rogan].”
Insight into Spotify’s pricing power
“I think one is we definitely do have pricing power and pricing power in some markets. Most of the price increases we did was on the family plan. And there were some markets, particularly in the Nordics where we did raise standard plan … I think we’ve talked about in the past about how we didn’t see any really material impact on either churn of subscribers or gross intake in the markets where we raised prices. So that’s great.”
“We think the ability to raise ARPU across the platform is still a lot in front of us.”
Medium-term gross margins from podcasting
“It [podcasts] will still be a drag in 2022, but we see the inflection point is not too far away in terms of when we’re cross that. And when we look out sort of at our five-year model, the steady state gross margins on the podcasting business should be really nice and will definitely be additive to kind of where we are from a consolidated basis right now.”
Optimising gross margins for the long-term
“And so it’s a combination of, we’re trying to be thoughtful about how much to invest, but we think there’s a huge opportunity in front of us. And while we could clearly show even more gross margin expansion in the near term if we wanted to … We’re not managing necessarily to optimize gross margin right now. We’re optimizing to build a business that’s going to optimize gross margin three to five years from now.”
Taking ownership for poor stock performance
“Yeah, I don’t like to say the market’s missing anything, because I think at the end of the day, it’s incumbent upon us as a company to make sure we’re telling our story properly and that it’s understood by investors. And so if the stock’s not performing well and yet we feel like the numbers have been strong, that’s on me, that’s on my IR team and that’s on the company to make sure that we are telling the story in a way that resonates.”