This meeting is the financial report conference call for Spotify in the second quarter of 2025, hosted by the Head of Investor Relations, Brian Goldberg, with senior executives such as the CEO, Chief Operating Officer, Chief Product and Technology Officer, and CFO participating. During the meeting, the team will share the performance of the quarter, operational highlights of the company, and future outlook, and will also accept questions from analysts and participants through the Slido platform. In addition, the meeting also mentioned the use of safe harbor statements and non-GAAP financial metrics.

In the second quarter of 2025, Spotify achieved significant user growth, particularly in the increase of subscription users and Monthly Active Users (MAU), with a net increase of over 30% in subscription users, surpassing 100 million subscription users in the European region. The company emphasized the positive impact of content expansion and product improvement on its business, as well as the value creation for nearly 700 million users. However, the performance of the advertising business did not meet expectations, and the company is actively adjusting to ensure future growth. Overall, the company is confident in its business model and long-term strategy, committed to providing more value for users and creators through innovation, with the goal of establishing a global, vibrant platform that benefits everyone. At the same time, Spotify emphasizes that its decisions are based on long-term value rather than short-term quarterly performance.

In this quarter, Spotify has seen significant growth in both users and subscribers, surpassing over 3% of the global population subscribing to its services. This shows enormous growth potential, with the goal possibly reaching 10%-15% of the global population. In mature markets, Spotify continues to discover new subscription growth opportunities and maintains a healthy conversion rate from free to paid users. In terms of advertising business, although it is full of potential, there is a need to accelerate development to contribute more financial revenue. Spotify is actively collaborating with brand partners, utilizing automated advertising and new tools, with a year-on-year growth of over 40% in active advertisers. In the future, the focus will be on improving operational efficiency, launching more advertiser tools, optimizing inventory performance, and achieving comprehensive monetization of new channels.

Spotify has successfully enhanced user engagement and business impact by providing diverse content formats. Data shows that the more content formats users engage with, the more active and long-lasting their usage on the platform. Particularly, video podcasts have performed exceptionally well, with consumption growing rapidly. Since 2024, video consumption has grown 20 times faster than pure audio consumption, with over 430,000 video podcasts on the platform attracting over 350 million users at a 65% annual growth rate. Additionally, Spotify holds a 45% share of paid users in the global music streaming market (excluding China and Russia), and this proportion continues to increase.

With the advent of the generative AI era, Spotify has significantly enhanced user interaction by improving its technological capabilities. For example, its introduction of the Spotify DJ feature has been widely popular, with user interaction almost doubling. Especially in over 60 markets, the DJ feature utilizes AI and recommendations from global editorial experts to provide music request services, allowing users to delve deeper into music exploration. Additionally, through the expansion of AI playlist tools, Spotify has attracted millions of users to create personalized playlists, further increasing user interaction and usage time, with global DJ streaming increasing by nearly 45%, generating tens of millions of interactions accumulated.

In the past, creating user playlists relied on analyzing users' listening history, such as save and skip behaviors. Now, with the help of generative AI, users can directly express their specific needs for playlists using natural language, such as emotions, scenes, etc., which are aspects that were difficult to capture solely through listening data in the past. This new approach allows for continuous iteration and optimization of products without the need for additional product or feature development, achieving a virtuous cycle of preference optimization. After the initial application of AI to optimize playlists, significant performance improvements have been observed, including users listening for longer periods of time and saving playlists more frequently. According to Luminate's data, 65% of global audio music streaming occurs on Spotify.

In the second quarter, Spotify's monthly active users (MAU) increased to 696 million, exceeding expectations by 7 million. At the same time, net added subscribers reached 8 million, a year-on-year increase of 12%, reaching 276 million, exceeding expectations by 3 million. Total revenue reached 4.2 billion euros, a 15% year-on-year increase. Currency fluctuations affected revenue in the quarter, amounting to 140 million euros. The company's gross profit margin was 31.5%, remaining stable, with operating income at 460 million euros, but lower than expected due to factors such as higher than expected social costs. In addition, the company also announced that it has 8.4 billion euros in cash and short-term investments, demonstrating a strong financial position.

The company expects MAU to reach 710 million in the third quarter, an increase of 14 million; the number of subscription users is expected to be 281 million, an increase of 5 million. Total revenue is forecasted to be 4.2 billion, but due to unfavorable exchange rate fluctuations, it is expected to suffer a loss of about 200 million. However, the company is confident in its business and expects profit margin expansion for the full year of 2025 after strategic investments for future growth. Additionally, the company also anticipates that the quarterly free gross margin rate will remain on par with the previous two quarters after excluding regulatory expenses, and the annual operating profit margin will achieve year-on-year growth.

The company emphasizes its strong liquidity and the expected annual growth rate of healthy free cash flow by 2025, focusing on growth opportunities and balance sheet management to support long-term strategic goals. In the face of upcoming maturing exchange notes, the company has planned and received board approval to increase the share repurchase authorization to $2 billion to enhance flexibility and consider shareholder interests. It is expected that the returns on recent investments will be more evident in the third quarter, maintaining confidence in the company's growth and believing in the potential for healthy growth.

Spotify is actively considering introducing multi-level services, including specific levels for super fans, such as 'Superfan', to meet the needs of different user groups. The company emphasizes that since its establishment, they have always adhered to high standards of product value and release time, and are currently steadily advancing this process, although progress takes time. In addition, Spotify has launched audio book subscription services in 13 markets, aiming to meet super fans' needs for books and provide more access privileges for family plan subscription accounts. The company is full of confidence in the future super fan segmentation market in areas such as music, podcasts, and videos, and will continue to actively develop related products.

The company's management explained the reasons why the gross profit margin did not exceed expectations, emphasizing that they have not changed their guidance and expect to increase the gross profit margin in the long term. At the same time, they discussed how AI technology can play a role in improving production efficiency, product development, and enhancing consumer experience, especially in fast prototyping design and speeding up the entire workflow.

The introduction of generative AI marks a significant shift in product development, especially for product personnel, where the traditional evaluation process has been replaced by product requirement documents (PRD). At the core of this transformation, AI has moved from past user signals (such as playback, save, etc.) to more refined user direct feedback. Users can interact with products like Spotify through natural language, providing more specific and personalized data. This new data set not only enriches the understanding of user preferences for products but also promotes interactivity and personalization of user experience, shifting from predictive experiences to reasoning experiences based on user history and explicit needs, heralding a great change in future user interaction methods.

Spotify discussed its capital allocation strategy, planning to use stock buybacks as a flexible tool while prioritizing company growth opportunities. In terms of Average Revenue Per User (ARPU) trends, the company noted that it will remain neutral in the third quarter, with a long-term strategy focused on optimizing subscriber numbers rather than quarterly revenue. In terms of business investments, Spotify emphasized its role as a research and development engine in the music industry, continuously investing to support future pricing especially as it expands into areas such as audio books, video, podcasts, and education.

The discussion focuses on Spotify's significant progress and prospects in the vertical fields of music, video, and books, emphasizing that 3% of the global population are already paid subscribers of Spotify, while also looking forward to potentially reaching a subscription rate of 10% or 15%. Additionally, the discussion also mentions Spotify's market share and streaming share in the music industry, as well as views on packaging and pricing strategies for new products, highlighting the importance of user engagement.

After the Apple lawsuit, the conversion rate of iOS payment subscriptions has improved, not only promoting Spotify's growth in the United States and emerging markets but also enhancing consumer experience. Now, Spotify can communicate directly with users and add calls to action without the need for email or third-party platforms for user redirection. Additionally, this change has opened up new business opportunities for Spotify, such as increasing revenue through the sale of books and other digital products, thereby integrating the three revenue models of advertising, subscriptions, and one-time transactions. Spotify looks forward to similar regulatory changes in Europe to further expand these benefits.

In the discussion, it was mentioned that Spotify's adjustment of its podcast business model had an impact on its advertising business in the second quarter, highlighting that the removal of some exclusive podcast inventory directly affected revenue. At the same time, the company remains optimistic about the growth of podcasts and video content, with video consumption far outpacing audio, and users who watch videos spending more than those who only listen to audio. The adjusted advertising revenue growth rate is in the low double digits, excluding the impact of short-term strategic adjustments.

Spotify expects its gross profit margin to continue expanding after 2025, driven mainly by the growth of its advertising business, especially in the music and podcast sectors, as well as the monetization of the music and podcast market and audiobooks. In addition, the upcoming on-demand services will also contribute to future gross profit margin growth. Regarding the advertising business, Spotify is making adjustments to accelerate its development, including changes in leadership, to address the current situation of progress not meeting expectations, with the goal of speeding up business transformation and improving efficiency.

Discussed the growth of user engagement in areas such as music subscription, video, and audiobooks over the past year, as well as how to monetize this high level of user engagement through means such as converting to premium advertising, raising prices, and single-point purchases. It was also mentioned that audiobook services have been launched in Germany, Austria, Switzerland, and Liechtenstein, and the first additional subscription service has been released in the UK, New Zealand, Australia, and Switzerland.

Daniel explained that in the current business environment, Spotify faces a balance between operating costs, especially in terms of manpower and computing resources. He emphasized that the company will not blindly pursue short-term goals, but instead focus on increasing the lifetime value of users, even if it means increasing marketing or technology investments in the short term. He used the example of the ratio of acquisition cost to lifetime value of subscribers in marketing to illustrate that in some cases, even if expenses are increased in the short term, the company will choose to invest if it can bring long-term high returns. At the same time, as the advertising market becomes increasingly programmatic, Spotify may seize the opportunity to increase investment in marketing efficiency in order to achieve long-term business growth.

The conversation discussed Spotify's current business situation, including strong growth in subscription users, increased user engagement, and increased market share globally. In addition, it also explored how the company is developing in accordance with user demands, expanding from music to podcasts and now to video content, particularly emphasizing the importance of video content for the company's advertising growth and adapting to the growth of the digital advertising industry.

In the discussion, Spotify was asked why it couldn't raise prices faster in high user engagement markets like Peacock. Spotify emphasized its focus on user value and price ratio, adopting a subscriber-centric strategy and different pricing strategies in different markets. At the same time, the company emphasized the importance of retaining users for the long term, pointing out that retaining existing users is more cost-effective than acquiring new ones.

Despite facing unit growth and competitive pressure, Spotify emphasizes the importance of its advertising business to its core strategy. The company is undergoing a business transformation for 2025, attracting advertisers through new ad formats and tools, while also accelerating market expansion to address current challenges.

Spotify is revolutionizing its core product experience by utilizing the latest advancements in large language models (LLMs), not only in recommendation and content curation, but also in the way it interacts with users, such as through voice or text conversations with Spotify. The company is completely overhauling its technology stack to adapt to the era of generative AI, by implementing Model Context Protocols (MCPs) to build infrastructure that can automatically respond to user needs. This change allows the product to self-optimize and improve, especially in cases of high user engagement, where AI models' performance will continue to improve with increasing data and usage, bringing Spotify a strategic competitive advantage.