Spotify Technology S.A. 2026 Q2 Earnings Call

You may begin. Great. Thanks, operator, 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. Afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O dot com, and using the code hashtag Spotify Earnings Q226. Analysts can ask questions directly into Slido. 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 ir@spotify.com. 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 differ materially because of factors discussed on today's call, in our shareholder deck, 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 shareholder deck, in the financial section of our investor relations website, and also furnished today on Form 6-K. With that, I'll turn the call over to Alex.

Thank you, Bryan. Hey, everyone. Thank you for joining us. I hope you're having a great summer. Today, we'll pick up where we left off at our investor day in May, updating you on what we said, what we've shipped since then, and also what the early signals are telling us. Q2 was another quarter of healthy, broad-based growth. Revenue grew 15% year-over-year on a constant currency basis, accelerating from 14% in Q1. Gross margin hit a record of 33.4%. Free cash flow continued to strengthen. We beat our subscriber guidance, crossing 300 million subs for the first time, all while continuing to grow engagement with the number of active days for global subs increasing. What pleases me the most is the shape of the quarter. More people are choosing Spotify, they're engaging more deeply, and they're converting.

We've been working on turning our outperformance in MAU into revenue growth. To capitalize on this opportunity, we are adjusting elements like product optimization and ad load, among other things, in select emerging markets. This strategy carefully increases friction in our free service with a goal of driving higher user conversion and revenue growth down the line. This will show itself in our Q3 MAU, but we believe it's well worth it. As we've shared previously, the free to paid conversion cycle in emerging markets grows differently than our established markets. While a move like this one will take time to play out, the opportunity is vast. This will be additive to our potential over time, and as you will hear soon from Christian, we do not expect it to come at the expense of our subscriber growth.

We've talked before about rebuilding our ads business, and the results are really starting to show. On the supply side, our audience of very attractive global users keep expanding our inventory. On the demand side, the enhanced technology we've deployed is making it much easier for advertisers to reach these engaged users. Just one example, our automated channels represent nearly 40% of ad-supported revenue in Q2, up from just over 30% in Q1. Active advertisers grew 60% year-over-year. We're now set up in a way we weren't a year ago, and we will keep building from here. Another development from the quarter worth calling out, our launch of Reserved. At Investor Day, we called it one of the most wonderful improvements to Premium in our history, and the early signs really back that up.

Since launching in the U.S. in June with Live Nation, Reserved has supported multiple tours with nearly 100,000 tickets reserved through Spotify. For some tours, we sold through 100% of our allocations, and Live Nation upsized them mid-run. The biggest fans get first access, artists get their most dedicated audience in the room, and every seat we fill makes a Spotify subscription just more valuable. I'd like to use the remainder of my time on something that Gustav and I think about a lot, Spotify's position. These are unique times. Business history has produced just a handful of companies with hundreds of millions of recurring paying customers worldwide. Spotify is proud to be one of them. Like many of the others, we built that scale on a single product. That is unique territory to be in.

I'm a student of Charlie Munger, who once said that the one structural advantage that matters disproportionately is scale. If you're choosing a music streaming service for the first time, it matters that one brand comes with several hundred million passionate ambassadors. Perhaps most consequentially, the scale and the cash generation we now have lets us innovate and invest in building a much better product, adding more value for every subscriber around the world in the most cost-efficient and competitive way. The point is, scale matters. In the past five years, we've added more than 25 million net subscribers every year, growing in developed and emerging markets alike. With over 300 million subscribers and 777 million users, we have achieved consequential scale. Our financial picture tells the same story.

Since our last Investor Day in 2022, revenue has compounded at 18% a year, reaching EUR 17 billion in 2025. Gross margin went from 25% to over 33% this quarter. We became more disciplined with OpEx, which has turned into a growing positive operating margin. Last year, Spotify generated EUR 2.9 billion of free cash flow. We expect that growth to continue. That strength is why we set the 2030 targets we did in May. A mid-teens revenue CAGR, gross margin of 35%-40%, operating margin above 20%, and strong growth in free cash flow. Gustav and I believe there are opportunities only Spotify is positioned to invest in because of our scale, the health of our business, and our focus. We rigorously explore new premium offerings and new verticals with our customers.

We covered these at length at Investor Day, but there are a few that's worth repeating. The first is AI. Many investors ask about our large taste model, which learns from the 3.4 trillion events our users generate on the platform every day. The reality is we've been investing in AI-driven personalization for more than seven years. Today, AI-powered experiences like DJ are used by roughly a quarter of our active users. Prompted Playlist, our newest addition, gives users direct control over the algorithm. Around 14 million of the first 100 million users we've rolled it out to are already using it, and the early retention improvements look promising. The second big idea is the power law. As we've grown, we've observed that the usage of our products, features, and content follows a power law.

At the head of that curve are many millions of people who simply want more, and they're willing to pay for it. Audiobooks proved it first in just a handful of initial markets. We see that overall audiobooks penetration among premium listeners has more than doubled this year, and Audiobooks+, the add-on, has passed EUR 100 million in annual recurring revenue. It's subscriptions on top of subscriptions with more on the way. Combined, these two just make for something powerful. Inference-driven products carry a marginal cost per use, so they need a compatible way to monetize. That is exactly the muscle we've built over 20 years of freemium. Feature-gated, usage-driven products optimized for the best value-to-price ratio. Now we will price and optimize these features and content just as we've successfully done with our premium product.

In conclusion, we have a scale that few companies in history have reached, a business that is healthy and compounding, and opportunities only we are positioned to pursue. Spotify lives across your whole day, the commute, the workout, studying, gaming, the dinner table, and sleep. At our scale, that is rare. Most products own one or two contexts. Our position gives us an opportunity space as wide as our users want it to be. At Investor Day, we told you where Spotify is going, and this quarter, we're building momentum behind that. With that, let me hand it over to Gustav.

Thanks, Alex. I want to use my time on two things, how we're building and what we're building. Both matter for the durability of our business over the next several years. A couple of quarters ago, I mentioned our internal tool, Honk, which enables our engineers to go on Slack from their phone and ask an AI agent to fix a bug or add a feature, and then they get a testable buildback before they even reach the office. That way of working is now ubiquitous, and it's unlocking a compounding advantage. Honk is our coding agent, but there's something new that we call Chirp, which is the engine that we've built underneath it. You can think of Chirp as something that you use instead of using Claude Code or Codex directly. That sit in front of it.