Spotify (SPOT) Q1 FY26 earnings call: guidance and Q&A

Discuss the pace of investment for the balance of the year and how success is defined for this spend, particularly regarding AI.

Spotify is spending more on compute per employee, not increasing headcount, due to tremendous productivity returns from AI. This accelerates product development, leading to more features being shipped faster. Marketing spend is also increasing to promote these new features. Success is measured by user engagement (e.g., DJ closing on 100M users, Song DNA reaching 52M users in 4 weeks), which is a proxy for retention and long-term revenue.

“We think this opportunity is as big or possibly bigger. So we're taking that opportunity. But we are very diligent and very disciplined about those investments.”

asked by Jessica Reif Ehrlich · answered by Gustav Söderström

Why isn't increased engagement translating to accelerating ad revenue growth, given investments in ad tech?

The ad business is seeing steady progress after a strategic decision 1.5-2 years ago to rebuild the entire stack for programmatic and biddable exchanges, which caused short-term pressure but unlocks a much larger market. Biddable now represents over one-third of ad revenue and is growing quickly. Management believes increased time spent and quality engagement will eventually close the monetization gap, as the new stack enables new capabilities and improved measurement.

“Now that transition is done. So now it's about execution. It's about patience. And really, what you have to believe for this is to work out for us are a couple of different things. But mainly, it's whenever we have seen increased time spent on Spotify, and quality time to boot, right, then -- and then there's a gap to monetization, typically, that gap will close.”

asked by Rich Greenfield · answered by Alex Norström

Highlight key drivers of Q1 Premium gross margin outperformance and discuss the Q2 gross margin guide, including investments weighing on upside.

Q1 gross margin strength was driven by a healthy core business spanning music, podcasts, and audiobooks. For Q2, the gross margin outlook incorporates continued strengthening of the core business alongside reinvestments in new products and initiatives. These investments are disciplined, balancing margin progression with future growth potential, and include smaller, minor investments in various areas, some of which will be revealed at the upcoming Investor Day.

“I mean it's cool that you called it out because both Gustav and Christian are very pleased with the gross margin progression, not just for this quarter but also consistently in the last 2 years.”

asked by Benjamin Black · answered by Alex Norström

Update on progress towards new AI products for user content creation and derivatives of existing music, including hurdles and cost/margin impact.

Spotify sees a unique opportunity in generative music for existing creators, as the copyright and attribution problems for derivatives of existing IP are complex but solvable. The company believes it has the capabilities and technology to address this, aiming to expand the music catalog and allow existing artists to participate in AI. While the catalog has grown from 2M to 250M tracks, AI makes recommendation even more crucial.

“But what we think there is a unique opportunity is that, right now, existing creators are largely left out of the AI opportunity altogether. Many creators are using AI to make new music, but existing creators cannot join.”

asked by Doug Anmuth · answered by Gustav Söderström

How Spotify is approaching the balance between headcount investment and rising AI costs, and how employee productivity is gauged.

Spotify is maintaining roughly flat headcount while increasing compute spend, leading to significant productivity growth. Metrics like 'pull requests' and 'definitions of done' are doubling. This allows the company to ship more features, which translate into usage, retention, and ultimately revenue. Spotify uses three monetization modes (free, subscription, top-ups) to capture value across the user spectrum, from casual to highly engaged.

“Right now, we're going for the middle approach. We're keeping our headcount roughly flat and just doing much more, shipping more value to consumers.”

asked by Justin Patterson · answered by Gustav Söderström

Discuss traffic and consumer usage of Spotify in AI applications like ChatGPT and Claude, and their impact on KPIs.

Spotify's ubiquity strategy aims to be present wherever users are, including AI applications. The company is capturing a 'treasure trove of data' from users expressing their preferences in natural language (e.g., 'going for a run and they want this BPM'). This data is used to train Spotify's proprietary 'large personalization model' (taste model), which is crucial because taste is subjective and constantly evolving. This advanced usage drives personalization, engagement, and retention.

“Now people are telling us in English that they're going for a run and they want this BPM and that cadence and so forth. So we're getting this treasure trove of data that we are capturing, training on it. And this builds a unique advantage for us.”

asked by Deepak Mathivanan · answered by Gustav Söderström

Any unusual subscriber reaction to recent price increases and tools for further ARPU expansion.

There were no surprises regarding churn following the recent price increases (global in Q4 FY25, US in Q1 FY26). For ARPU expansion, Spotify leverages increased engagement and new verticals. The success of audiobooks with 'top-ups' demonstrates a model for monetizing highly engaged users beyond the standard subscription, allowing the company to capture the entire 'power law' of user engagement.

“But until we launched audio books add-on, we didn't really have a tool to capture the head, the people who want to read for hundreds of hours a month. We had a clear theory that we could capture the entire [ power law ], but we haven't proven it to ourselves until recently. Now we have those 3 tools.”

asked by Jessica Reif Ehrlich · answered by Gustav Söderström

Outline key moats limiting risk from low-cost AI music alternatives, large platform peers, and AI-first alternatives.

Spotify's 'fair advantages' include almost 20 years of listening history and a proprietary 'large personalization model' (taste model) trained on unique, constantly evolving user data. Taste is subjective and dynamic, making it difficult to commoditize. This scale and data provide a sustainable advantage. Unlike some Chinese services, Spotify has never gated content, mitigating risks from AI-driven content challenges. The company believes it can benefit from AI by expanding the catalog and serving existing creators.

“And it turns out luckily for us, taste is not easily commoditized because it's not a fact, it's an opinion. It differs between people, it differs between regions, it differs between people in those regions and use cases. And on top of that, it changes weekly, what is called right now and what is culture.”

asked by William Packer · answered by Gustav Söderström