SPOT - NYSE

At this time, I would like to turn the conference over to Bryan Goldberg, Head of Investor Relations. Please go ahead.

Thanks, Operator, and welcome to Spotify's first quarter 2026 earnings conference call. Joining us today will be our Co-CEOs, Alex Norström and Gustav Söderström, and our CFO, Christian Luiga. We'll start with opening comments from the team, and afterwards we'll be happy to answer your questions. We will be taking questions today via Slido. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code #SpotifyEarningsQ126. 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 email investor relations at [email protected] and we'll add in your question. Before we begin, let me quickly cover the safe harbor.

Thank you, Gustav, and thanks everyone for joining us today. Let me cover the quarter one results, and then I'll provide some perspective on our outlook. Unless otherwise noted, all reference growth metrics are presented on a year-on-year constant currency basis. Additionally, this quarter, we have implemented a minor reclassification of non-advertising activities from our ad-supported segment to premium. This is to better reflect the performance of our core advertising business. Just for reference, in quarter one last year, we shifted EUR 12 million in revenue and EUR 7 million in gross profit from our ad-supported segment to premium. Any comments on the segment growth rates are on a like-for-like basis. Overall, we were very pleased with how the business performed in the quarter. MAU grew by 10 million to 761 million in total, surpassing our guidance by 2 million.

Our growth rate accelerated 12% year-over-year, up from 11% in Q4. Our performance was led by rest of the world in North America, where we continued to benefit from our enhanced free tier rollout. We added 3 million net subscribers during the quarter, finishing at 293 million in line with our guidance. We saw no surprises with respect to price increase related churn following our January U.S. price increase. Total revenue was EUR 4.5 billion, growing 14% year-over-year, which was an acceleration from 13% we delivered in Q4. Premium revenue rose approximately 15% year-over-year versus 14% last quarter. This was driven by subscriber growth and ARPA expansion of 5.7% year-over-year. Our ad-supported revenue grew approximately 3% year-over-year.

Our new automated sales channel continued to grow fast and now represents over 30% of our ad-supported revenue in quarter one. We also saw some continued choppiness in our legacy direct sales channel. While this dynamic will likely continue in the near term, we still expect improved growth in the second half of 2026 as our billable channels continue to scale. Gross margin came in at 33%, surpassing guidance by approximately 20 basis points, which year-over-year, with a year-over-year expansion of approximately 133 basis points. Favorability versus guidance was driven by better other cost of revenue and revenue mix. Other operating income, the operating income of EUR 750 million was EUR 55 million above our guidance of EUR 660 million, delivering an operating margin of 15.8%.

Our outperformance was driven primarily by social charges, which had a positive impact approximately of EUR 49 million relative to our forecast due to share price movements in the quarter. Excluding the non-forecasted social charge favorability, we came in approximately EUR 6 million above guidance driven by the gross margin outperformance. Free cash flow was EUR 824 million in the quarter. Performance here was a bit stronger than our typical quarter one due to some timing factors, which will likely reverse in quarter two. On capital allocation, we repurchased $361 million in shares during quarter one, continuing our focus on opportunistically offsetting dilution from employee equity programs. We also settled our $1.5 billion in exchangeable note, and that was due in March with cash on hand rather than issuing new shares.

As of the close of the quarter, we have EUR 8.8 billion in cash and cash equivalents and no debt other than lease liabilities. If we look ahead into Q2, we see continued momentum and healthy global funnel and are forecasting MAU of 778 million, an increase of 17 million from Q1. On subscribers, we are forecasting 299 million for Q2 or a net addition of 6 million. This is modestly below the significant outperformance we saw in the prior year quarter, which benefited from items such as favorable adjustment to our iOS app in the U.S. We reiterate on our previous statement that we expect another full year of healthy subscriber growth, weighted more towards the back half of the year.

We are also forecasting total revenue of approximately EUR 4.8 billion in quarter two or 15% growth. This reflects the ARPA increase of 7%-7.5% year-on-year, as we see additional benefit from the recently announced pricing action, partially offset by the lapping of pricing actions last year in the Benelux region. We anticipate the quarter two gross margin of 33.1%, approximately 160 basis points above the prior year. Our gross margin outlook incorporates continued strengthening in our core business alongside with the reinvestments into new products and initiatives that we believe set us up well for future monetization potential. Moving to the operating income, we are guiding to EUR 630 million in quarter two. This reflects the above, along with the timing of marketing of our latest features.

This also reflects R&D related to strategic AI initiatives that is already driving engagement. We expect operating expenses to remain at these levels for the next quarter or two, and we're confident that it will enable healthy LTV returns. Although we do not provide full year guidance for gross margin and operating margin, we continue to expect both to improve in 2026 on a full year basis, with quarterly progression being variable and dependent on the timing of our investments. We also continue to expect meaningful year-over-year growth in free cash flow in 2026, reflecting our improved profitability, our working capital profile, while we're also progressing towards a normalized tax rate in 2027. In conclusion, Q1 was a strong start to 2026.

Revenue growth accelerated and profitability improved as we continued to reinvest our future growth potential. We remain really well positioned to continue compounding growth and profitability. With that, I hand it back to you, Bryan.

Great. Thanks, Christian. Again, if you've got any questions, please go to slido.com #SpotifyearningsQ1 2026. We're gonna be reading the questions in the order in which they appear in the queue with respect to how people vote up their preferences for the questions. Our first question today is gonna come from Ben Black. Oops, I apologize, Ben. I just accidentally resolved it. We'll get that question back in the queue.

Who's that?

Should I just give you a little bit more flavor on the second quarter gross margin guide as you ask about that? I mean, we do have a very strong gross margin expansion, 133 basis points in quarter one and 160 basis points in quarter two. I got a comment earlier today on it's not growing quarter-over-quarter. It didn't do that last year either, and we have talked about the variability, and then we wanna invest when we can and see the opportunity and we will expand over time, and we do that, but it may not just look like that in each quarter. It actually looks like that. We are growing year-over-year, both quarter one, quarter two.

We have reinforced the statement that we will do it for the full year. We do invest in the same time on the base, on the top of our core that is going really well, and that we do in quarter two in smaller minor investments in different things, and some of them you will see today, and some of them you will see when we get to Investor Day, and some of them you maybe will see later. It's a good flow we have right now and we're very disciplined and working very hard in our weekly bets board to actually update ourselves to see what we wanna do.

What we highlighted, and I did in my script, was that the next two quarters will be a little bit elevated from this. We do have a different pattern on our launches this year of products, and that's what Alex talked about. The R&D, of course, is extremely important for building the tech stack that we are delivering to our customers. I just wanna say with that also that what we did say and we reiterate is that the operating margin will improve year-over-year.

Just chiming in, I guess you also have then read the, the numbers and maybe a little bit surprised that the, in the quarter was one of the few times we had a negative development on the year-over-year gross margin on the ads business. But that is really coming back to the great engagement we have, and where the engagement is driving more content costs right now than the income on top line. But the beauty in that and the healthy thing with that is that, of course, that means that we will be able to monetize that as we go into the future quarters, and that will be then a positive push going forward. That is really a short-term issue.

I just wanna reiterate that the quarter one gross margin dip we had was a very small one in ads, was a short-term issue. We reiterate, which we have said now for six months, that we see that the second half of 2026 is where we see the growth picking up. I think, I just wanna say that again and again as it was some kind of a lot of questions around it today, that we have said that quite for a long time now, that it is the second half where you see the progress coming through.

That concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks everyone for joining.