Spotify Technology SA
NYSE:SPOT
Earnings Call Analysis
Q4-2023 Analysis
Spotify Technology SA
Spotify's 2023 was marked by unprecedented milestones, including the largest-ever increase in monthly active users (MAUs) and premium subscribers, surging past their past engagement records. This remarkable growth was not only beyond their expectations but also signified a transformative year for the company. They have not only maintained their reputation for an exceptional product but have also realigned their operations to develop a sustainable business that is on the path to consistent profits.
Moving into 2024, Spotify plans to maintain their momentum in product development and growth, with increased emphasis on monetization and streamlining operations to bolster profitability. They intend to balance growth with profitability, seeking to create value by connecting creators and consumers, enhancing monetization while keeping investment thresholds in check. The company has diverse strategies to stimulate revenue, such as user growth, new business avenues, and pricing adjustments, and plans to selectively leverage these strategies to optimize their financial performance.
Spotify's venture into the audiobook market has received encouraging feedback; they have rapidly become the second-largest provider after Audible. This strategic move, still in its infancy, has shown the potential to significantly stir market growth, aiming to benefit the publishing industry and attract a new audience to audiobooks. Spotify is poised to enhance their presence in this sector further as they expand into more markets.
The fourth quarter witnessed a 16% rise in revenue year-over-year, reaching €3.7 billion. Adjusted for unfavorable currency fluctuations, the growth accelerates to 20%, reflecting gains from new subscription pricing strategies. Spotify reported an operating loss of €75 million, which was more favorable than expected due to reduced marketing and personnel costs. However, excluding one-time charges related to efficiency measures, they accomplished an adjusted operating profit of €68 million, showcasing early signs of a shift towards sustainable profitability and an impressive free cash flow of €396 million.
For the first quarter of 2024, Spotify anticipates continued user and subscriber growth, with MAUs reaching 618 million, an increase of 16 million from Q4, and subscribers rising to 230 million, up by 3 million. They forecast a currency-neutral revenue growth rate of over 20% year-on-year, with a target of €3.6 billion in revenue, a gross margin of 26.4%, and a substantial operating profit of €180 million. While full-year guidance is no longer provided, Spotify expects user growth comparable to the multi-year average and a robust increase in subscribers. Both gross and operating margins are projected to see meaningful annual improvements, powered by the podcast sector turning profitable. Significantly, the company predicts that free cash flow for the year will substantially surpass that of 2023, evidencing their confidence in the improving financial health of the business.
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Good morning, and welcome to Spotify's Fourth Quarter 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.
All right. Thanks, operator, and welcome to Spotify's Fourth Quarter 2023 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; Paul Vogel, our CFO; and Ben Kung, our VP of Financial Planning and Analysis, who has been assisting with the transition while we search for our new CFO. We'll start with opening comments from Daniel and Paul. And afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, s-l-i-d-o.com and using the code #SpotifyEarningsQ423. 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 e-mail Investor Relations at ir@spotify.com, and 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 materially differ 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.
And with that, I'll turn it over to Daniel.
All right. Thanks, Bryan, and hey, everyone, and thanks for joining us. I hope you've had the opportunity to review our shareholder deck to get a sense of what an incredible year 2023 was for Spotify.
Throughout the year, we notched some really significant milestones and set numerous records. This included 113 million net adds on the MAU side and premium net adds of 31 million, both the biggest full year additions in our history. And our annual Wrapped experience also toppled previous levels of engagement surpassing 2022 numbers in just the first 31 hours of the campaign. We accomplished all of this by significantly exceeding our own expectations when we entered the year and against the backdrop of global turmoil and uncertainty and Q4 was a continuation of the story.
And while I'm pleased with the level of growth we saw in 2023, perhaps what is even more gratifying is that it also marked a very different year for Spotify, a true evolution in how we operate our company. A year where we started to prove that we're not just a company that has an amazing product, but one that also is building a great business. And there's no question that we had to make some difficult decisions to put us on track to achieve our goal of being a consistently profitable company but by taking these steps, I'm super confident in where we're heading.
So looking to 2024, you should expect a continuation of what you saw in 2023, strong product development, which leads to strong growth, but with an increased focus on monetization and efficiency, which in turn drives profitability.
And I know some of you may start to wonder if we're sacrificing growth for profitability. Long term, we believe that the real value of Spotify is in solving problems at the intersection between creators and consumers . With scale, there will be even more opportunities to do so. Therefore, growth is still the most important thing we can deliver. However, equally true is that our hurdle rate for investment has increased.
So what gifts? Well, as I've shared before, we have various levers to pull at different times to drive revenue growth. These include growing our users, creating new businesses with new revenue streams and increasing revenue per user through price increases.
In 2023, we leveraged all three throughout the year at various times, but this won't always be the case, you should expect to see a shift back and forth among prioritizing these three key elements based on a variety of considerations. And looking ahead, I believe 2024 is going to be another year of solid progress led by an acceleration of revenue growth.
That said, I think it is important to remind investors that we constantly modulate between what we spend most of our time focusing on. In some years, it's focusing on growing the top of the funnel. And in some years, it's about driving monetization of those users. The last few years has been extraordinary from the top of the funnel perspective. Our aim is to continue this trend, but our focus in 2024 is more on how we monetize that growth.
I also wanted to provide a quick update on our audio books business, which is performing well, and we are very excited about its potential. It's still early days, but the feedback from listeners and from the industry is extremely encouraging. Data shows that our entry into this market has dramatically accelerated its overall growth. In Q4, we became the #2 provider of audio books behind Audible, which is notable given how entrenched the legacy players are.
And this is exactly what we set out to do: grow the pie for the publishing industry and expand the interest in audio books to an entirely new set of listeners. More to come as this takes hold and we roll it out through additional markets.
Before I turn it over to Paul to provide more details on the numbers, I also wanted to take this opportunity with all of you on the line to thank him and wish him well. Although Paul is sticking around for a couple more months, this will be his last earnings call. He's been a great partner and helped to solidify the position of the strength that we sit in today. So thank you, Paul, for these years.
I also wanted to give you a quick update on our CFO search. We are well underway, and I'm happy with the caliber of the candidates that I'm seeing. As we enter this next phase of focusing on having both a great product and building a great business, I'm confident we will find the right person, someone who is passionate about driving the levels of efficiency and resourcefulness that are critical to our long-term success.
Paul, thanks again, and over to you.
Great. Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook.
Q4 is a very strong quarter. MAU grew like 28 million to 602 million, and we added 10 million net subscribers finishing at 236 million. Both MAU and subscriber growth continued to be above our historical trend and outperformed forecast. Revenue grew 16% year-over-year to EUR 3.7 billion during the quarter. Excluding the effects of unfavorable currency movements, revenue grew 20% year-on-year, representing an acceleration of 300 basis points versus the prior quarter as a result due to the ongoing effects of the new subscription pricing.
Turning to gross margin. Gross margin of 26.7% was above guidance by about 10 basis points due primarily to favorability in our podcast business. We reported an operating loss of EUR 75 million, which was better than guidance due mainly to lower-than-expected marketing spend and personnel and related costs.
As we previously disclosed, our operating loss was impacted by about EUR 143 million of charges related to the efficiency actions we announced in December. Excluding the onetime charges, we generated EUR 68 million of adjusted operating profit, which is more than double the third quarter as the business continued its early stage of inflection towards sustainable growth and profitability.
Finally, Free cash flow was positive EUR 396 million in Q4. While some of the strength was timing related, we remain confident that we've entered a new chapter in terms of expanding the business, the business's cash generation potential.
Looking ahead to the first quarter guidance, we are forecasting 618 million MAU, an increase of 16 million from Q4 and 230 million subscribers, an increase of 3 million over Q4. We're also forecasting a currency-neutral revenue growth rate of 20% plus year-on-year putting to EUR 3.6 billion in total revenue. We also anticipate a gross margin of 26.4% and an operating profit of EUR 180 million. While we no longer give full year guidance, we do expect healthy full year 2024 user growth that should be close to the average of the last few years, and we expect strong subscriber growth as well.
Gross margin and operating margin are both expected to improve throughout the year to deliver meaningful full year expansion with podcasting expected to deliver positive gross profit for the year. We also expect our free cash flow generation to meaningfully exceed what we generated in 2023.
And finally, as Bryan mentioned, Ben Kung, who has been a trusted partner of [indiscernible] Finance, is also on the call and we're joining us for Q&A. And additionally, I'd like to thank Daniel and all of my colleagues over the past 8 years for making my time at Spotify truly special.
And with that, I'll hand things back to Bryan for Q&A.
All right. Thanks, Paul. Again, if you've got any questions, please go to slido.com, #SpotifyEarningsQ423. We're going to be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions.
And our first question is going to come today from Doug Anmuth on podcasting. Have podcasts flipped into positive gross profit yet? And how do you think about inflection here through '24 as you're rationalizing content spending?
Yes, I'll take this one, Doug. Yes. So I think just to level set with everyone, I think when we had our Investor Day last year, everyone was probably expecting our podcast business to be a net adder to the business and probably thought that the music margins was worse than what they ended up being and obviously, as we outlined then, podcasting was a drag to the business, but something we were committed to turn around. And I'm pleased to say in Q4, we were very close to breakeven on that business, which gives me a lot of confidence that as we get into 2024, we will achieve the full year profitability target on podcasting.
And so when you think about then, what are the drivers for that to happen? Well, it's really two drivers. On the top line side, we're still seeing healthy growth on engagements. That engagement in turns means there will be more opportunities for us to monetize those engagement hours, and that's the top line. And then on the bottom line, we have doubled down on the deals that worked, and we have got -- really throughout 2023, gotten out of a lot of the deals that didn't work. And that's the result you're now seeing with the close to breakeven and that then will lead to a positive podcasting business in 2024.
All right. Our next question is going to come from Michael Morris on margins. What are the most impactful steps that will help you progress towards your long-term music gross margin goal of 30% to 35%? And can you share more detail on the gross margin levers in 2024 and the relative impact you anticipate from each?
Great question, Michael. In terms of the progress on the music margin goals, we see a lot of potential in the growth of our marketplace products as we continue to focus on driving adoption of those and adding value to our label partners and therefore, sort of building upon the progress that we've already made to date in that area.
In terms of 2024, I think you've called out some of the key levers with respect to your comment on Q1. Really, the story of 2024, I think, can be broken into sort of these 3 parts. It's a continuation of the journey on profitability and podcasting. It's the continuation of marketplace growth, as I mentioned, and also just gaining greater efficiency and leverage in our other cost of revenue areas such as cloud cost and streaming delivery. We think all three are equal parts important to the story in 2024. And so we're looking forward to building on that progress there.
Okay. We've got a question now from Rich Greenfield on advertising. With advertising revenues still under 14% of your revenues. I'm surprised to see it's not growing faster than subscription revenue. How do you accelerate advertising growth to reach your goals of it becoming 20% plus of your overall revenues?
Yes, I'd say a couple of things here. So first, I think we're very pleased with how advertising is growing. Obviously, the market -- a lot of ways continues to be choppy, but our FX-neutral high-teens growth on the advertising side, we think is really strong and really strong relative to the industry overall. So we feel good about kind of the advertising growth. That's number one.
Number 2 is, we've obviously seen on the subscriber side, it is faster growth on subscribers in general, plus we've had a price increase. And so just the overall growth on the premium side has probably been even faster than maybe we would have thought and others would have thought when you factor in both the outside subscriber growth and the price increase.
And the last thing I'd also just remind you of the advertising business does get impacted more significantly by FX than the premium business. And so when you're thinking about just reported numbers, that also has an impact on sort of the progression. But I think we feel really good about both sides of the businesses right now. So everything is progressing as planned.
All right. We've got a follow-up from Rich Greenfield on podcasting. How should we think about the revenue opportunity and gross margin impact of shifting from an exclusive podcast like Call Her Daddy or Joe Rogan to nonexclusive?
Yes, Rich. So I think to kind of up level and talk about it generally and remind people. So when we walked into podcasting, we actually went in with multiple strategies at once. We did exclusives that you're referencing to, but we also did our own and original programming, and we also did licensed nonexclusive deals, too. And what we said at the time, I think many people mostly sort of made a reference to thinking that this was an all-out exclusive effort similar to that of Netflix. But we said we take much more of an opportunity approach to the strategy and we're going to try many different things. And for some shows, exclusive matters for some others, it don't.
So I think the general story, just to be candid here with all of you on the line is that, what we've seen is that while exclusivities were net positive on the side, it's not driving as much as the opportunity that we see on the ad side. And so by broadening distribution, we think we can accomplish a number of different goals. Most notable among them, we are going to be more aligned with the creator. The creator obviously wants to be on many different platforms and wants to have as big of an audience as possible. So that's important.
And then the second part is, when you think about the revenue growth story on advertising, we're very excited with what we've been seeing in early 2023 with these new types of deals that we've been structuring because we really become aligned with the creator. And long term, that is the reason why I started Spotify. We care equally about consumers, and we care equally about creators. So I feel like with this new strategy, we're actually even better aligned with the creator because we're not asking the creator to trade one for the other. And because advertising is in such a strong growth position for us, I feel I'm really excited about the opportunity we can bring both the creators and to Spotify itself with that strategy.
Okay. Our next question comes from Zach Morrissey on Marketplace. Can you provide an update on marketplace and how that performed in 2023? And how should we think about momentum into '24?
Yes. Marketplace performed really well in '23. The growth rate, basically the contribution to gross profit grew at similar rates to 2022. So really strong growth in '23. And then just to reiterate what Ben said prior about overall gross margin, when you think about the improvements and gross margin moving to 2024, marketplace will be a key contributor, again, along with the podcasting flip and some of the other costs of revenue.
Okay. We've got a follow-up from Zach. You saw strong subscriber growth and marketing leverage in 2023, how are you thinking about marketing spend in 2024? And do you see more room for further efficiencies?
Yes. And just as a reminder to everyone, this is something I talked about, I believe, during the Q1 earnings call in 2023, where I was positively surprised and some of the efficiencies we were seeing is still sort of healthy top line growth. And that trend has been continuing for much of 2023. And the reality is we don't know how far that will go. I feel good about the efficiencies we're seeing so far.
The big concern always when you're making these things is you may see some healthy positive responses intra-quarter, but then long term, are you impacting the brand. So we're always going to modulate towards that. But -- but I think what we've been seeing so far has just been pure efficiencies and quite great ones. And I expect there's still some, but the question is still internally, we're still debating how much?
The most important thing for us, as I said, is long-term growth still for the company. So that's what we will optimize for. And I think you're going to see us modulate between the quarters. Some quarters we may spend a little bit more on some less.
The most important metric for all of you, though, is to think about the LTV to SAC. We referenced this before. It had been in 2022 and 2023 going down, the efficiency in some of our spend. Now you're going to see a higher hurdle rates. So we're going to be a lot more diligent as we're thinking about these marketing investments overall. But the spending per quarter may be more opportunistic, and you should think about it as such. But if you see a strong LTV to SAC, why wouldn't you? And that's the approach we take.
Okay. Our next question is going to come from Eric Sheridan on operating priorities. Following your fourth quarter restructuring, what's your updated view about balancing long-term growth investments, accelerating the pathway to long-term margin targets in the next few years? And/or optimizing internal efficiency on an annualized basis?
Yes, I'll start and then Paul or Ben, if you want to chime in on that.
Yes. I mean, I really talked about it in my introductory remarks, but it is a new way for us to operate as a company, one where we're consistently thinking about efficiency all the time top line. We started doing it in early 2023, and I think we are gradually becoming better quarter-by-quarter. And I think investors should expect the same much for 2024. We are going to continuously look at being more resourceful with the resources we have. That's just the new modus operandi that we have.
But that said, that obviously leads to a concern then, okay, well, are we doing that to sacrifice at the expense of growth? And the answer should be, of course, not. That's not at all what we want to do. We still care about long-term growth because we believe that's where we're going to be able to solve real and meaningful problems for consumers and creators alike with scale. So that's our real focus.
But it's a constant balancing act. And I think what you're seeing us rather than sort of growth at all cost or growth, growth, growth, you're going to see us quarter-by-quarter optimizing at various parts of that funnel. Sometimes it's top line growth, sometimes it's bottom line. As a general trend, we had healthy top line growth in 2023. 2024 is about monetizing more of that top line growth. That's the general trend. But you'll see in various geographies, we may have just MAU growth as the goal and in some others, it may be more of a just ARPU approach as an example.
Yes. I would just add, I think to everything Daniel said, if you think about the free cash flow and the acceleration of free cash flow and the better profitability, it just gives the business so much more optionality in terms of what it can do moving forward. And so I think you've seen that sort of inflection on the free cash flow side, you've now seen us on an adjusted basis, profitable for two quarters in a row with the forecast again for Q1 of next year. And so all that just puts the business in a much better place for the team to have the optionality to invest in areas that really makes sense for the long term.
Okay. Our next question is going to come from Rich Greenfield on audio books. What surprises you most about the current state of the audio book market?
Yes, Rich, I think it's two parts of focus. So I think on our side, the intriguing part is we are able to bring a whole new audience to audio books. So internally and externally, I think the biggest surprise has been the type of titles that resonate with consumers. These are not the normal titles that traditionally does well, that do well on Spotify, and that's pleasing to see because that means we're bringing a whole new audience to audio books, the format, which is great to see.
And then I think overall, I'm just happy to see that the partners we have on the publisher side and the author sides are just very excited about the innovation we're bringing and very open-minded to trying new things. And this is an industry that's so important, I think, to the world. And it's great to see that there is a hunger and willingness to innovate among all of our partners there. So that's definitely been a positive surprise. And it's amazing to see also how much value audio books is adding to our subscriber base. So I feel really good about that.
Okay. Next question is from Benjamin Black on margins. Last quarter, you mentioned 2024 gross margin should exceed those of 2023. Is that still the case? And if so, how should we be thinking about the trajectory of gross margins throughout 2024?
Thanks, Benjamin. Building on my earlier commentary, we feel very excited about the potential for 2024 gross margins. I mentioned some of the building blocks that we have ahead of us kind of going into this year. And I think you should expect that we're going to continue focusing on what we did in 2023, which is building sequential growth in that gross margin, and it's about executing against those building blocks of opportunity that we have that I mentioned previously.
Okay. Our next question is going to come from Jessica Reif Ehrlich on the music business. Universal Music Group just pulled their music from TikTok. What are the implications to Spotify from a competitive standpoint? And how does this impact, if at all, your negotiations with your recorded music partners?
Yes. Obviously, I'm not going to comment on any sort of competitive dynamic. But what I can say is we feel really good about our relationship with our music partners. It's probably at the best it's been. I don't know, whatever, it's been better, to be honest. So I feel really good about where we are with our music partners. I feel great about the value we're bringing to the music industry. And I think that's being widely recognized. And yes, I don't think it has much of an implication, any other competitive dynamic but we feel good about the partnership. We feel great about opportunities to enhance the partnership to any extent that, that creates opportunities. So yes, we're overall very excited.
All right. Our next question is from Maria Ripps audio books. Could you talk about what type of engagement you've seen with the free 15 hours of audio books listening? To what extent do you think the expanded value proposition is driving any of the subscriber momentum? And are you seeing any uplift to audio books purchases in the relevant markets?
Yes, Maria. So I mentioned that in my prior response, but the engagement has been very strong, very positively surprised about the content mix. It's driving as well what type of titles that our consumers are engaging with not very surprising. It is a lot of entertainment. It's a lot about culture. Maybe some of the titles that traditionally doesn't do as well in the book market, but also pleasing is very many younger authors, newer authors as well given the model where you can take a chance on a totally new book without sort of eating up the credit, which I think kind of drove you towards more safer bets. So we're seeing a very, very interesting sort of trend around the content consumption, which is really great and I believe, additive to the entire book industry, which is amazing.
Now as it relates to how that translates into our business, I think it's too early to say but what we've seen generally speaking is the more engagement we have on our platform, the better the value is of course and then everyone knows that audio books is an expensive proposition where buying an audio books today costs a lot of money. So it's another reason why we're offering a great value to our consumers. And that, of course, gives us an ability to increase the value that then allows us long term to follow through by reflecting that in the price that we have as well to our consumers.
Okay. Next question from Justin Patterson on revenue potential. Investors now have confidence in your operating margin potential and the redesigned app is resonating with users. As you look ahead, what should give investors confidence in your revenue growth, achieving the 20% targets outlined at your Investor Day?
I'll start with this one, Ben, and then maybe you can chime in.
So I think, again, this is very much a continuation of the trend of 2023. And just to level set again, 2023, we walked into the year thinking that we'll have healthy top line growth and focus on the bottom line on efficiencies and that was pretty much the year, but we exceeded all of our expectations on the MAU side, which then translated into exceeding all of our expectations on the sub side and then when you top off that with price increases, that leads to a very healthy dynamic. And that top line growth has really been a continuation of that trend in all of 2023.
So I've said this before, but I'll say it again, MAU growth sooner or later then translate into conversion to subscriber that sooner or later then translate into revenue growth that sooner or later then translates into bottom line. And so given 2023, I feel really good about our ability to have healthy revenue growth throughout the year and with this smaller cost structures that we're having because of the focus on efficiency that we had really throughout 2023, we talked about it on the podcasting side. We talked about it on the employee side but also, as Ben mentioned, with cloud costs, all the other things that we've been focusing on, that should give you confidence that 2024 will be a great year.
I don't know if you have any addition, Ben?
Yes. No, I think all that commentary is very much sort of the perspective going forward. The top -- the funnel kind of our user side and subside looks very strong. And I think the focus is about sort of monetizing that, both from a premium subscription perspective as well as focusing on making sure that our ad business continues to grow at a healthy clip going forward. So we feel really strong about sort of progressing towards the 20% targets.
Okay. Our next question is going to come from Kannan Venkateshwar on product. Given the pricing is a bigger part of the growth algorithm. Have you considered models beyond the All-You-Can-Eat framework used today?
In fact, we actually already do have some other pricing mechanics throughout the world. It's easy to think that Spotify is a single proposition for everyone in the world. It's far from today. So for instance, we have a day passes, it's just one product that we're offering in certain markets, week passes. We even have physical gift cards that people scratch cards from on a weekly basis in order to top up their Spotify listening. So we are very much adapting our pricing models in favor of what consumers want. And that's something that you should expect us to continue to do.
Now with that said, to touch a little bit, one of the things, of course, why we are talking about the Apple case is many things like, for instance, a la carte purchases, things like superfan things like purchasing of audio books, top-up things that could be quite meaningful for Spotify's revenues is a significant hindrance today because Apple insists on taking a 30% cut, which in many cases, exceeds even our own cuts that we're able to take inside of the app. So some of these more innovative things that we would like to do, we are currently restricted in doing on the iOS ecosystem, which limits some of that more innovative things that we would like to do.
So yes, all in all, we are already doing it in other territories. We would like to do even more of it. But to do that, certainly in the Western world, which many of these markets being very heavily iOS influenced, we are precluded from doing it at a way where -- which could be profitable and good for consumers and creators because of Apple stance.
All right. That's a good segue into Michael Morris' question on the Digital Markets Act. You posted twice about the DMA with the potential positives to your business and then also about your dissatisfaction with Apple's proposed changes. Do you expect the DMA to be implemented in a way that supports your vision? And if so, what do you expect the new functions to be available? And how may they impact the company financially?
Michael, I think the truth is we don't know yet. The -- we outline our response to how we would be compliant with the DMA. But obviously, that then very much depends on Apple stance in allowing us to do so. And Apple then obviously subsequently responded with their stance, which is very much incongruent with our stance on the matter and frankly, I think it's a bit of a forest because it looks on the surface that they're complying with it but behind the surface, they're doing pretty much everything to make this such an attractive experience that's no same developer want to pick any of the new terms.
Now the good news, I guess, from the investor standpoint, and I know that there initially with some questions about whether or not this would be a downside for Spotify. I don't think that's the case. So we still have the ability to be on the old terms and keep going as we're currently going. But there are future upsides that could be quite significant.
We talked a little bit about it with fan clubs, all these other things that we could do for creators that we would probably be barred from doing because it simply means that all of Spotify would be unprofitable if we took these new terms. So no downside, but there will be quite a lot of upside if, in fact, we were going to be able to do what we wanted to do, not just for Spotify, but for creators and consumers alike.
And just as a last reminder, this law will come into play in March 7. So obviously, my hope is still very much that the European Commission will take action and allow this to happen because it will be far greater for the ecosystem, both for consumers and creators alike.
Okay. Our next question comes from Batya Levi on audio books. How should we think about the impact of audio books consumption cost on margins?
Yes. Thanks, Batya. So as you know, we don't really break out the individual components like that. What I will say is while we're investing in audio books, we still see a nice improvement in gross margin through 2024, which Ben has talked about at length already on the call. And so -- we feel like we have a model for audio books and the progression of audio books over the next couple of years. It's going to be very additive. We've talked about at the Investor Day where we believe the long-term gross margin of the audio books business can get to. And so we're still really encouraged about that. And in general, we're very optimistic that you're going to continue to see gross margin progression throughout 2024.
Okay. We've got another question from Kannan, this time on the music business. Has growth in international markets helped flip any major ones from fixed minimum payouts to variable payouts? And could we see some impact in 2024?
Great question, Kannan. The short version -- the short answer to this question is yes. I would say that it's been a story of steady progress in sort of how we grow the user base and then begin to monetize them in these international markets and there's really kind of two engines to this. It's about sort of driving subscriber growth and building upon sort of the subscription revenues in these markets, but also making sure that we start to light up the advertising side in these markets as well, both of which basically ultimately help us clear these hurdles in fixed minimum payouts. So I think the story is one of ever constant progress in this department.
Okay. We've got another question from Doug Anmuth on podcasting. With most major podcast content renewals resolved, what are your key priorities for the podcast business in 2024?
Yes. Much more of a continuation of 2023 with the exception, obviously, as you said, we've kind of transitioned the podcasting business from one structure to a different structure throughout 2023, that's mostly done. Now it's back to innovation and growth again.
What I'm most excited about is there are lots of things that creators are asking us to do that enables them to easier post content, have more ways of engaging with their audience. You've seen some of this already in [ '22 and '23 ]. As a reminder, you saw video podcasting growing in a healthy way on the platform. You've seen us add Q&A responses, which is quite phenomenal to see the comments that are showing up on Spotify. Now you've seen much more interactivity and more and more creators are starting to use those tools, but that's just the beginning. We have plenty of plans on podcasting, which I think will mean more content on the platform, which I also think means more engagement.
So it has been a profitability story in 2023. And I think that's going to play out. But where we're focused on is really all about now growing podcasting and increasing it. And we think it's a lot larger of a medium than most people really today give it credit for. That's not where we need to prove. But we are doing so from a profitable standpoint instead of one that's losing a lot of money for us.
Okay. We've got a question from Rich Greenfield on user engagement. Daniel, you've talked about user interest in your [ Hack day ] creation day list, which feels like another [ AIML ] use case to drive engagement. How is it impacting overall usage and time spent? And by the way, my day list for today is [ Sad Tailspin Tuesday ].
All right. Well, hopefully, nothing we're seeing on this call today gives you any reason to tail spin on a sad basis. But jokes aside, yes, I mean this, again, is a story of innovation at Spotify. What's so cool is we have these crazy engineers and scientists inside of the company that dreams up these kind of weird and wonderful things, which seems like very narrow use cases, but this is culture. And what they do is they test culture and they bring it out and they personalize culture to people. And it turns out that people are just reacting in this weird and wonderful way, and they want to express their own identity through music, which in itself is not surprising. It's a very core thing for humanity and something that we've been doing. And the team keeps finding weird and wonderful ways for consumers to be able to do that.
And I think I referenced this, but we saw searches increased by over 2,000% on a day list. So it's a widely sought after feature people are excited to come into the app every day now to find out whatever Spotify thinks your current mood is of today. And yes, we keep churning these types of things out. It's kind of our way of creating content. And I'm really proud of the team and the things that they're doing in this department and it wouldn't surprise me if we see many more innovative things come out of it, both on -- of course, on the music side, but later on also reflecting that on the audio book side and the podcasting side as well.
Okay. Our next question is going to come from Benjamin Black on efficiency. What are some of the key learnings you've seen with the more streamlined cost structure? And as we look ahead, what's your philosophy on headcount growth?
Yes. I mean the key things are probably not the surprising things. It's always what happens, right? Initially, when you go through an exercise, everyone kind of says, well, we can't cut this because then all of a sudden, everything will stop working. And it turns out that -- as this is true in so many cases, most things can tend to work anyway even when you go through that exercise, and it actually even killing things that sometimes sort of works is a healthy thing to refocus and reenergize people on the things that really drive lots of value. So those are some of the obvious lessons, which I think you guys have heard plenty of times before on these calls before.
I think the more exciting things are the things we're in the midst of learning this as a company. So by no way it means things we're fully adapted to this mindset. But I think, this is something I wrote in my internal memo that we then published as well is, is this notion of being relentlessly resourceful. For me, that means to think constantly about the resources we're having and not just think about getting more of them, but thinking about how we reallocate constantly everything we're doing to the most and highest impact use case. And there, I don't think we are yet. So I think the good news is that there is still some ways for us to go on it.
And I think the way you should think about headcount growth is, we're not allergic to it. We're not saying, hey, we can never ever grow anything. We should grow things that obviously are working, but the hurdle rate for any new type of investments will be much higher than what it has been and more importantly, I think you're going to see us more diligent in shutting down things that perhaps have sort of worked but may not work as well going forward into the future. And you're going to see that all across the company in a pretty big way.
And I think the biggest takeaway I can give to you, that doesn't mean that the company is any danger of any kind because sometimes that get interpreted by media and investor, if they're no longer showing up in a big way to event X, maybe they're in dire straits and so on. That's not the case. We're just simply thinking about, are there better ways for us to do this? Are there better ways for us to achieve this efficiency and try to think outside of the box. Maybe it is not to throw the lavish party. Maybe it is to have a virtual party where we could have 10x the audience come and show up. Maybe it is about partnering with other brands and doing something in conjunction that where 1 plus 1 doesn't equal 2, but equals 3 or more.
So you're going to see us, I think, still have a lot to learn, but re-question things that in the past have worked, but we need to think about how we do them going forward.
All right. We've got time for a few more questions. Our next one is going to come from Steven Cahall on margins. First quarter is typically the lower margin quarter of the year. Are there any onetime benefits in the strong implied Q1 margin guidance? Or can we assume the same seasonality of sequentially improving margins for 2024?
Thanks, Steven. I think you have sort of the right themes in your question there. I think to reiterate, as Daniel said, in 2023, we had a lot of focus areas between sort of growing our users and subs, driving sort of monetization to price increases and efficiency actions, all these has sort of taken our core business, I think, to a new stair step. And I think Q1 is sort of where that new core business is shining through. And so I think that implies sort of like a new starting point, I think, for where you can expect the margin to go. And as I said before, our focus is to continue building on that sequentially quarter-on-quarter into 2024. So we look forward to making progress in that department.
Okay. We've got question from Richard Kramer on execution. What's the message to the organization about new growth initiatives following your recent headcount reduction? How do you mitigate the execution risk in 2024?
Yes. I think implied in your question, Richard, is obviously this, how do you do both? How do you, on the one hand, save? And how do you tell people that you want to grow? And I think this is why in my last response, I focus so much about the mindset of being relentlessly resourceful and what it actually means. So I don't think it is either or I think it's both. And so I think we need to become more efficient by deprioritizing some of the existing things, but we also need to invest in some of the new. But when we're investing in some of the new, what is the optimal way of doing that? You talk about execution risk. I think it is exactly the right thing and right framing of it. It is about execution. It isn't about strategy. It's about how do we -- [ buy ] constraining the resources we have, how do we think about different ways to executing some of these newer growth initiatives? If the hurdle rate is X, how can we more quickly prove out that something is working?
Those are some of the questions that I, Ben, Paul and the rest of the team is having when we're looking at these types of things and when we're talking to the teams. And I think the good news is that the teams are excited. They're excited to show that there's a different path to do this. They're excited because they also see the momentum in how it currently translates to the business and that sort of momentum fuels that mindset as well. I think it would have been honestly harder to do so from a backdrop if we had to do some of these discussions if we had 1 year, 1.5 years of slog just ever sort of going through this. But we've actually gone through all the hard stuff this past year. And we have plenty of things to learn, of course, but I feel really good about now. The optimism that the team has never fun to do a riff of course.
And so we're happy to have this behind us, and we feel obviously a huge sense of gratitude to everyone who has been part of the company and then had to leave. But I know the team is excited about where we are and where we're heading and how it's translated into a healthier Spotify.
All right. We're going to take one last question, and we're going to take Maria's question, Maria Ripps on podcasting. Is it reasonable to assume that Spotify is looking to structure most of its podcast deals in a similar fashion to what was reported in the Wall Street Journal regarding Joe Rogan? And how is the company thinking about the trade-off between engagement and advertising revenue or profitability by deemphasizing exclusivity?
Yes. I think, Maria, I sort of already mentioned some of these things. But -- generally speaking, we had multiple strategies in podcasting. It wasn't just all about exclusivities even if that got most of the -- sort of press headlines. And what we've been able to see here is as we've been learning over these past few years, is that while some of these exclusivity deals worked, generally, it wasn't aligned with what the creator wanted. The creator wants to have broader audience. And I feel like with these new deals that we've been making for most of 2023, we are in a position where we're actually better aligned with the creator. We can both deliver the growth rate, and we are equally incentivized to drive audience growth and, of course, then also drive revenue growth because we both share in that upside.
So I think the team was able to innovate and create a much smaller structure and that is the path we see going forward on more and more of our deals and I think even on the MAU side, it will be on a healthy basis because we're in a very different position than we were just a few years ago in podcasting because today, Spotify is, in many cases, the #1 podcasting player already.
So exclusivity makes sense when you're the smaller playing trying to gain scale. When you're the bigger player, the additional value of the exclusivity is far smaller than it is about being aligned. And it feels also that from a value's point of view, this is better aligned with who we are at Spotify, too.
Great. Thanks, Maria, and thanks, everyone, for your questions. That's going to conclude our question-and-answer session today, and I'd like to turn it back over to Daniel for some closing remarks.
Yes. Thanks, Bryan.
The long-term opportunity for Spotify is strong. Hopefully, you heard that now during the call and during the Q&A session. And we will continue to innovate in big and small ways to deliver for our listeners and the artists, creators and authors on our platform and make no mistake that we will continue to make bold bets, invest and seize on the opportunities when they make sense. But hopefully, it's clear now with much more disciplined approach going forward.
Thanks, everyone, for joining us today.
Okay. Great. And 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.
This concludes Spotify's Fourth Quarter 2023 Earnings Call and Webcast. Thank you for your participation. You may now disconnect.