Quarter 1
Q2 2026 Earnings Call — August 4, 2026
Analyst (Jessica Reef Ehrlich): Our first question today is going to come from Jessica Reef Ehrlich on the product roadmap. You have a unique global platform for both audio and video products. You provided a robust product roadmap in May at your analyst event. What products are you most excited about in the near term, and where do you think you will get the most traction over the next three to five years?
Executive (Gustav): Thanks for the question, Jessica. This is Gustav. I'll start and then maybe Alex wants to jump in because I know he's also very excited about product. But this is kind of like asking me to choose between my children. So it's a tough question, but I'll try. But first, I kind of want to level up a little bit because what I am most excited about is the system that we've built and what we presented at Invest Today. So the way to think about it is, some time ago, over a year ago, Alex and I spoke and we realized that the world that we were in, where software development was mostly an amortization game, right? You developed once and then you amortize your developer investment over more and more users. That world was going to change because inference adds a variable cost per user. So we looked at this and we said the game is going to change. There's going to be more variable cost per user. This could be a headwind or it could be a tailwind.
So we decided to start working on changing the model where this power law that Alex and I talked about where some users use the product a lot more than others, which didn't really matter so much in the amortization world because it didn't have large variable costs, but it will matter a lot in this new world. We decided to change the model. So we've built this platform where we can decide how much inference we want to put into the free tier, how much we want to put into the premium tier. And then instead of saying that's where the party ends, you have to go somewhere else. We say to people, if you want to live in the future, you can. You just pay more. So we let some people who are prepared to pay for it run ahead of other users. And we demonstrated this model with audiobooks, which works exactly like this. We give about 15 hours of audiobooks in the premium tier. Some people want much, much more than that. They're allowed to run ahead of everyone else and pay for it. So we spent a lot of time building that infrastructure and as we don't like to ship ideas, we didn't really talk about it until investor day. That's kind of what we revealed.
This system to be able to have different types of users with different levels of monetization and different needs on the same platform instead of being sort of kept back by the average or what the least engaged user can afford or what we can afford to give them. So that is what I'm excited about, having built this platform. Now we're launching a long range of products on top of this. And I can tell you sort of what I'm excited about there and which ones in the near term and longer term. But it's important to think about the structure. I'm a systems type of guy. That's what really excites me. In terms of actual products, I would say right now the thing that excites me the most is reserved. It is probably the feature that the most people ever have said, this is the best thing you ever did at Spotify. And we've seen, as Alex said in his introductory remark, really exciting numbers there. So I think this is one of the biggest values that we've put in premium ever. And as we said before, this is actually unique to us because of the structure of these deals. So that's very exciting to me.
The second thing I would say more in terms of AI, which I mentioned in my comments, my prepared remarks, is the LPM. The LPM, we talked a lot about it at Invest Today, pretty big investment for us, both in terms of personnel, but also training costs. So it's very good to see it paying off. The bet we made there was that the old type of machine learning had capped out. More data and larger models did not produce better results. The sequence-based LLMs follow different laws, the laws that are called scaling laws, where more compute, more parameters and more data actually produces better results. And now we're seeing those. We're seeing these scaling laws play out on the inside in terms of taste and recommendations. So that's very exciting to me. The third thing that I'm really excited about, which I think Alex mentioned as well, is SongDNA, which is a feature that we poured a lot of love into. We acquired a company called WhoSample to power this feature. So we invested something there. We took some costs and now it's paying off with over 100 million users using it and loving it. It's also very unique to us. So that's maybe my 30 if I would rank them.
Another one which we don't talk so much about but that I'm personally very excited about is music videos. We invested in music videos and a great music video experience for a very long time. Now we have both a good experience and the catalog. And we are seeing that songs with music videos, specifically new releases, are performing much better, which was the bet, meaning that music videos is... is of outsized importance when you're discovering a new artist because you're wondering who they are. You want to see them. It's not that important the tenth time you listen to the song, but it's very important the first time. So that's quite exciting to me. Obviously, I think it's a tie between maybe gen pods and running. Running, just because fitness is so close to my heart, I think we have a very unique experience there, which no one else can really do. There is no other service that can give you a playlist at the cadence you're running in with your favorite songs and beat stretch them and mix them together. Gen pods excites me because... It's something that is new to people. I think those are the ones that are near term and exciting.
Longer term, I was also obviously a bit remiss if I didn't say that our remix and covers, I think, is an incredibly exciting product. Again, because there is no one else that can really do this. Normal generative music will happen with or without us. This product will not happen without us. and it needs to exist so that existing artists can participate in this. So that's very exciting to me. It's a lot of work, it's going to take more time, but I'm very excited about what we're seeing internally. Lastly, I would say the longer term, back to systems thinking, Thank you for watching! These are better answers than you get from any LLM, certainly within our domains about podcasts and books and music. So, you know, without stretching it too far, I feel like Spotify is coming alive and you can literally start talking to it. That was a long answer, but that's what I'm excited about.
Analyst (Jessica Erlich): Thank you.
Analyst (Jessica Erlich): Another one from Jessica Erlich on advertising. Advertising growth in the past year has been subdued despite programmatic now comprising over 25% of ad supported revenue. Can you provide an outlook for the coming year or years and what can you do to drive momentum in what is a very high margin business that monetizes your engaged and growing base of users?
Executive (Alex): Hey Jessica, this is Alex. I'll start. I should take the opportunity to organize this a little bit differently because I do think that this similar question is coming further down the line from Richard Greenfield. So I'll try to do both at the same time. I'll speak to maybe most to why should investors have confidence in us when it comes to the ad sales business of Spotify and then maybe Christian can talk about the margin side of things. So I want to pull the lens back a little bit and talk about the past two years here. I've said many times now that we have been in a transitional phase with ad sales. And in the beginning of this year, we completed that transitioning. We now are entirely on the new ad stack that is proprietary built inside the walls of Spotify. I think 99% of all the impressions that we serve are now on our own ad stack. But the big thing is the addition of the biddable exchange that we put in place and the automated sales channels. These are now almost 40% in Q2, up from 30%. And if you ask me, I can tell you that it's even going up further from here. So the two things to think about is obviously supply and demand.
We'll start with supply. The supply picture has actually never been stronger. It's not only about user growth and reach, which is obvious because we grow and then the reach sort of follows, but it's also about MFT Plus and the new placements we have in the free tier. It's also about us launching personalized ad load, and it's also about the depth of the engagement that we have. So this in turn drives a lot of supply for us to sort of match the demand against. Now on the demand side, for the longest time, since the inception of Spotify really up until two years ago, the way to buy ads on Spotify is a brand would call us, literally call us, or contact us via email, and they would buy fixed and guaranteed campaigns from Spotify. Now that's all good, but it's also capping us in several ways. One is it's really capping us in terms of pricing and sell-through. So when the inventory is bought, it's bought. And it's also capping us obviously in the ways that people want to buy. Not everyone wants to write emails, sign IOs, and make calls. They further want it to automate the buying as well.
So what we have put in place now actually uncaps this, unlocks both of these things. and many more. and many more. and people are now actually prompting to create campaigns and audio assets. I think out of the 33,000 active advertisers we now have 7,000 of them using our AI audio asset creation tool which just makes it easier for brands to buy on Spotify. There's a lot of change going on, but I'll just rinse repeat. There's something that hasn't changed, and that's the three reasons that people come to Spotify to buy ads. It's the beloved brand, it's the high-quality content, and it's our high user engagement.
Executive (Christian): So, Christian here, just on the margin side to fill in on that, I mean, one of the things you brought up, Alex, is very important to understand. I mean, when we move to an automated sales channel and we also have self-served, it becomes a scale business different from before. So as we scale and the ads monetization, both on music and podcast, we will also be able to improve our profitability. And as we said on Investor Day,
Analyst: Thank you for joining us. Are you surprised more artists have not signed on to the AI music tier to enable you to launch? What is stopping artists from participating?
Executive (Gustav): I'll start and maybe Gustav you can jump in. Following our agreement that we had with UMG and Universal Music Publishing Group in May, we announced today the deal with Merlin, which adds 30,000 labels in Merlin's network, the opportunity to partake into this new product that we're building around covers and remixes. I think it's worth repeating what we said during investor day. What we're trying to do is very considerate and planned out. So we're trying to, we call it the three C's at Spotify. First of all, we are looking for consent. We want artists to be consenting their work into this catalog so people can play around with covers and remixes based on their art. We also obviously want to give them credit. And last but not least, this is about compensation to the labels and publishers and artists and songwriters. Not only do we have the consent and give credit, but we also drive the compensation for this. So really we're talking about the first legal way to partake in this AI tailwind that we see coming for interactive music, basically. And I would just say we have really strong momentum there.
One thing that I think is important to remember is that while you can see that there is skepticism around net new artificial music by many people out there, what we're doing is something different, and artists see that. Our products are about real artists, not fake artists. And in the case of remixes, real artists with real voices, right? So you're listening to real people. And that's a very different proposition, which is why we're focusing on this. This is the thing that doesn't exist. And artists remain excited about that, and consumers remain excited about that. But it is an ever-changing landscape.
Analyst: Thank you very much.
Analyst: So this is not a test of the product. It is the thing that guarantees that the product will be very good. So for those of you who know about machine learning, you know that one of the most important phases is the post-training using reinforcement learning. So what we will do is we will allow people who are fans of a certain artist to start making remixes with songs from that artist. And what they do is they say, I think this remix was better than this remix. And then we get the preference data that actually makes the model better. and this is our unique advantage in this business you know we have now 777 million people and music fans to do reinforcement learning with which is why we think we're very well positioned in this business so that's kind of what you should expect as the next step we're going to launch the product when it's ready and we think it's good enough and it has the right appeal to consumers.
Analyst (Justin Patterson):
Our next question is going to come from Justin Patterson on AI tooling. Over the course of 2026, we've seen meaningful momentum in open source. How are you thinking about the costs and benefits of deploying open source more broadly versus how you're using Anthropix, Cloud, and other models today?
Executive: Yeah, so I'll go here as well. Thank you very much. Thank you very much. Also, I think you can all see that this is putting pressure on the pricing. And there are lots of announcements of prices coming down per token, which is obviously very helpful for us. Like on a constant per feature quality level, it's pretty clear that the costs are coming down for a certain level of quality. That doesn't mean that we won't use more advanced models, but for a certain feature of level of quality, the costs are coming down quite fast.
Analyst (Bacha Levy):
Our next question is going to come from Bacha Levy on MAU. What's informing your guidance for slower MAU growth in the third quarter? Do you see a change in the competitive environment or the general intake for your campaigns? And then if I may, I see Benjamin Black had a question about some initiatives to drive MAU growth in the future as well. So you might want to address that also.
Executive: Yeah, I will. Thanks, Batja and Benjamin. Just to hijack this for a second, you don't see us here, but Gustav and I are in Stockholm. The sun is shining, and we're happy about the fundamentals of Spotify. It's really in a good place. We just hit 300 million subscribers, and we're super elated to be in this sort of rarefied air, and it just keeps growing. On the question of MAU, so we've had a few years of outperformance in MAU. And maybe more recently, in the maybe past four or five quarters, we've had outperformance relating specifically to emerging markets. I think we've pointed that out in past earnings calls. And of course, emerging markets includes countries like India and Indonesia and so on. And
as a reminder, these are very populous nations.
So they're a very lucrative opportunity for us. and what you're seeing us do now is that we're making changes to the product and the value proposition and strategy in these markets. We've made changes like tweaking the sign up to get a higher quality MEU throughput. We've deprecated a lower end Android device support and many more. This is going to take some time, but the shape of the growth curve follows other markets. And the way to think about it is really, when you start out in a market, you work on getting prop market fit and get some MEUs. Slowly and surely, that MEU growth will increase, and then all of a sudden you have a base to convert from. Then you have some subscribers come in, there's some conversion coming, and then as you calibrate the product and value proposition, that growth then continues to become something like a LATAM, which also started out with very low conversion but massive MAU growth. So our planning here is very considerate and I think also a consequential point here is that this will not affect SAB's growth in the near term.
Analyst (Rich Greenfield): All right,
our next question is from Rich Greenfield on Reserved. You started a meaningful ad campaign for reserve ticketing after Role Model. How many concert tours have you worked with since, and are you starting to see an uptick in conversion to paid tiers to excess reserve? And how do you see Spotify's positioning in the broader live event ecosystem evolving?
Executive: That's a good question. Thank you, Richard. Whenever I get to talk to users about Reserved, we get so much praise. We get praise. Live Nation gets praise for the partnership with us and the way we're sort of shaping this feature. And just
as a reminder, the big idea with Reserved is that the biggest fans get access to tickets.
Secondly, artists get to have the biggest fans in the room. And third, Spotify gets to have unique value for our premium subscribers, which obviously gives us differentiation the way the deals are structured to Gustav's earlier point. But it also increases value to price perception for Spotify. It really is like a triple win. It's still early to your point on how many tours we've done. It's been a few. It's US only for premium right now. So the rough number is that we've had about 100,000 tickets reserved. And in some instances, we've blown through the allocation and Live Nation has even upsized them mid-run. Obviously, I'm looking forward to many more tours and more markets. And as far as monetization goes, this is currently about increasing the value to price ratio on premium.
Analyst (Jason Bazinet):
Our next question is going to come from Jason Bazinet on music add-ons. You now have AI music deals with UMG and Merlin. Do you need deals with all the majors before you launch an AI service? Why or why not?
Executive: So I can start there. So the answer is we do not need a deal with all the majors. We would like to have as many artists as possible, obviously, but we don't expect to have all artists. And if you go back to the beginning of Spotify, Spotify started without significant parts of the catalog. It took many, many years before the big acts like maybe the Beatles, Metallica were on. So we don't need full catalog. Of course, we want as many as possible because that's better for consumers and for creators. But as I said, what you should expect is that we start improving this product in the public as a research preview so that we can start getting the preference data that automatically improves our model. So that will be the next step. And then we'll decide when we launch based on where we are. There's more to come, but very strong momentum.
Analyst (Eric Sheridan): All right,
our next question comes from Eric Sheridan on monetization. On the heels of Q226 premium subscriber growth reaching 300 million, how should investors think about the scope for monetization efforts as a result of more interactive tools and live event integrations across the subscriber base?
Executive: I'll take that. So you're basically baking in a opportunity and time question and also sort of like a pricing question in here and, you know, we've said it before, but we're early in our days. I think we've reached this sort of 300 million mark, which is rarefied air. There aren't many and other companies that have built one product and have 300 million recurring customers come back again and again every month. So we're now close to 4% of the world's population. We've said before that maybe we'll not reach 90% of the world, but it's not implausible that we'll get to 15% penetration of the world. So our most important line of work here for Gustav and I is actually to drive the value to price ratio upwards, meaning we need to keep building and so on and so on. I've spoken to MEU as well, so there's a bit of a differentiated approach depending on if we're talking about developing markets or established markets. And so we do think that the opportunity ahead of us is still immense.
Analyst (Justin Patterson):
Our next question comes from Justin Patterson on time spent. In 2025, you streamed 211 billion hours of content versus Netflix's 191 billion. As you expanded new formats like fitness and deepened personalization capabilities across the platform, how do you believe time spent can evolve on Spotify?
Executive: It's a good question, Justin. So you're pointing to Netflix, and sometimes we also get a similar comparison with YouTube. And I think the important comparison and observation to make here is that we're very different from these other streamers. When it comes to engagement, our engagement typically spans many more devices than our friends here in the industry. Whereas most of them are big screen and maybe small screen. We are speakers, we are gaming consoles, we are cars, we are contexts like sleep, we are contexts like studying, where you actually find Spotify much more compatible. So you have sort of the context I think it's worth pointing out also that the one metric that we put special value on when it comes to engagement is the active days and you know we've talked about before that you know we have over 100 million of our subscribers spending more than 20 days in a month with us and so the reason why we're tracking this this number the active days is that we find it to correlate very well with lifetime value which is great for us right so so we've seen that increase again and again and even this quarter active days in a month has increased overall for premium subscribers on Spotify.
Analyst (Deepak Madhavanan):
Our next question is from Deepak Madhavanan on AI products. You've launched several AI-powered products in the last six months, including prompted playlists. Can you discuss what types of benefits you're seeing in the KPIs such as listening hours, conversion rates, or churn?
Executive: Thanks, Deepak. So I think in general, some metrics is that AI-powered experiences now reach about a quarter of our active users. And this year's launch, as I talked to Spotify, Studio, Personal Podcast, from the playlist, they're scaling really fast. So it's already reached more than 25% adoption among active users. So we have scale. and a healthy compounding business and opportunities that were then uniquely positioned to pursue. So we feel very good about the overall adoption from the playlist specifically. I think it's reached already 14 million of the 100 million active. So that's pretty, pretty quick adoption for a feature like this. And in terms of what we're seeing, I shared a bunch of metrics and prepared remarks here around the large taste model where we are moving some of the metrics that are absolutely the hardest to move, which are active days. And sort of related to the previous question of viewing hours and engagement, as Alex has said before and I, we focus on active days as the most important metric to try to drive rather than only engagement in the moment. and so we are seeing those effects from this. And I think overall since 2010 when we started investing in personalization, the correlation between personalization and retention has been super clear for us.
Analyst (Doug Anmuth):
Our next question comes from Doug Anmuth on third quarter operating expenses. Can you talk about the drivers of the implied acceleration in operating expenses in Q3?
Executive: Thank you, Doug. Yeah, I just wanted to, I understand it could be a little bit of confusion here on our expense for this year. We have said we're going to elevate it with 200 million for this year, something that is very much in control and structural. And just to give a little bit better guidance on it, excluding the currency and social charges we see on our expenses, our expense growth in quarter three, we expect it to be roughly consistent with quarter two. So it's going to be pretty much the same growth. So I think it's important to be careful with the rounding nature of our guidance. We talk about five billion. We also add, I mean, growth, 14% growth and ARPU consistency between the quarters. So we're well positioned to actually moderate this into quarter four and to keep it consistent into quarter three. And this is a structural, non-structural cost change. Personnel is in the same level. We do this investment to increase engagement in LTV and marketing. We have a lot of new features coming out, and we are also boosting a bit on our AI, and we talked about that at Investor Day. So nothing strange, nothing new, and we are keeping this consistent, what we have been thinking all along from the beginning of the year, and we are in full control. So excluding currency and social charges, we see our expense growth to be roughly consistent in Q3 with Q2 growth.
Executive: I would just chime in here. I said this in my prepared remarks, but we started this year by investing to make sure that we were leading in this wave of using AI. And we are leading, according to other companies, actually. Now we're starting to focus on cost and efficiency, which is always the second step. This is what I talked about when we talked about Chirp. and many more.
Analyst: All right, we are coming up on the hour, so we've got time for a few more questions, and we've got a follow-up from Doug Anmuth on product tiers in ARPU. Can you help us understand the timing of add-on tier rollouts across verticals, and how should we think about their impact on premium ARPU in the second half of this year and into 2027?
Executive (Alex): Hey Doug, Alex here. We don't comment on timing for launches and we don't give guidance on ARPU either, but I can comment on this in a different way. You heard Gustav talk and wax passionately about the different products that we've been rolling out and how the usage-driven paradigm is one important paradigm for us and how we convert from free to premium, from premium to add-ons. The one example I want to share is that Audiobooks Plus, which was launched a while ago, since we last shared a number on that, that has now doubled. Which is great. And it just keeps growing and this is just in a select few markets. So obviously that introduces another type of change to ARPU. ARPU obviously can change by way of price increases but when we have success with an add-on like this it'll structurally increase ARPU in a different way. So in the sort of like price to quantity equation we're really providing a different type of price increase here than just sort of moving the price of premium up.
Analyst (Jason Helfstein): Okay, and
our next question is going to come from Jason Helfstein on the pricing environment. Is there any read-through from the Apple Music price increase that was announced in July, and how does this impact your thinking about price increases going forward?
Executive: We don't comment on other companies' price increases, but what it does show is that this is an example of just continued value in music streaming services, and we're happy about that for the ecosystem. Our category leadership in and many more.
Analyst (Jason Bazinet): Okay, and
our last question is going to come from Jason Bazinet on the subscriber opportunity. You had solid premium net ads this quarter, but the record labels suggested the industry's premium growth slowed in the second quarter. How confident are you in the long-term growth of premium subscribers for the industry and Spotify?
Executive: Very confident. We don't give guidance for long term, but what we're optimizing for is a healthy funnel. This not only builds our business, Jason, it's of course aimed at helping our subscriber growth and not slowing it down. So very confident about the long term growth.
Analyst: All right, great. So that concludes our Q&A session. Thank you, everyone, for the questions. And it also concludes today's call. A replay of the call will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. And thanks again, everyone, for joining. This concludes today's conference call. Thank you for joining. You may now disconnect.
Quarter 2
Q1 2026 Earnings Call — April 28, 2026
Analyst: Ben Black
Management: Our first question today is going to come from Rich Greenfield. I apologize. Slight technical issue here. We're going to start with Jessica Reef-Ehrlich's question on operating expenses. Q1 had higher marketing, cloud, and AI spend. Can you discuss the pace of investment for the balance of the year and how you would define a successful outcome for this investment spend?
Management: Thanks for sneaking in a question right at the top there. They usually take longer to get to. So we did spend a little bit more on OPEX. And the way to think about it is we have not increased our headcount. Actually, we've slightly decreased our headcount. But we are spending more compute per employee. And that is because we're seeing tremendous return in terms of productivity. We talked about accelerating our ability to ship products already during the late fall. That has only accelerated since then. So we're simply doing much more, and we're getting very good return on that investment. But as we ship more features, in order to get the true return on that investment, we also need to tell our users about those features, which is why we're seeing some more sales and marketing spend as we market these features to users. But the way to think about it is we see tremendous opportunity here. I usually make the analogy to 2009 when the iPhone came out and the App Store came out. And believe it or not, I was actually here back in 2009. So I lived through that. It was a time of tremendous opportunity. Some people sat around and waited. Spotify did not.
We took the opportunity and we drastically accelerated first our conversion to premium and then our free user growth. 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. So we are seeing these returns. I talked in my prepared remarks about the DJ closing in on 100 million users. Also something we released only four weeks ago, SongDNA, is now up to 52 million users in just four weeks. So we are seeing the kind of growth and return on these feature investments that we want to see. Obviously, we think that usage is a good proxy for retention, and retention is a good proxy for revenue long term.
Analyst: Rich Greenfield
Management: Growth is still slowing after the meaningful investments in ad tech in 2025 and absorbing the impact from changes to podcast advertising for premium subs. Why is increased engagement not translating to accelerating ad revenue growth?
Management: Rich, my friend, this is Alex. I hope you're doing well. I just want to, before I expand on the question, I do want to just mention to Jessica, you should check out Prompted Playlist, a global campaign just came online yesterday. It's just a terrific campaign that explains how basically we give you back more control over your Spotify with us using AI. And this is a good point to sort of back up what Gustav just said. It's out there in the wild right now, and it's performing. So let's get back to the ad business. You know, the ad business, Rich, has been seeing very sturdy progress more recently. But if you take it back, you know, a year and a half or two years almost, you know, we observed that there was a gap. What was the gap? Well, essentially, we saw us missing out on a time where people were putting a lot of money. And this time was programmatic. It was automated sales and it was biddable exchanges. And the decision we made back then was a pretty tough one because we had to essentially rebuild the entire stack.
And we did that knowing that we would face a bunch of short-term pressure, but that it would unlock meaningfully a much bigger market for us in the long term. Now... That transition is done. So now it's about execution is about patience. And, you know, 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, you know, 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 it's a question of time whether it's like you're thinking about it as as like advertising as a category whether it's inside a company the gap will close it's just a matter of time the other things you need to believe in is that really this rebuilt new stack that we have it actually gives us more opportunity to do new things that we couldn't do before and obviously that our measurement and and um And performance shows that Spotify delivers as a brand. You know, what hasn't changed, I'll end with that, is that advertisers, they come to Spotify, marketers, they come to Spotify for three different reasons.
Our beloved brand that they want to associate themselves with, our high user engagement, and also, of course, our high quality content.
Analyst: Benjamin Black
Management: First quarter premium gross margin was very strong despite only one month of U.S. pricing. Can you highlight some of the key drivers of the outperformance and also dig a bit deeper into the 2Q gross margin guide? Could you talk about the investments you're making that may be weighing on gross margin upside?
Management: Hey, Benjamin and Alex here. I was looking forward to answering this question, but I don't know what Brian did there when he sort of hit it. But it's now back up again. I was happy to see that. I mean, it's cool that you call 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 three years. And really, the underlying reason for this is a very healthy core that actually spans both music and podcasts and audiobooks. Now, Christian will give you the technicalities of that. As far as going forward, I think the important thing is to understand how we think about gross margin. And like Gustav said, this is a time of... tremendous opportunity for us. And you know the muscle that we've built during the past three or actually even four years is that we think about reinvestments using cost of revenue using gross margin in a very disciplined way. We do that. We try to strike a balance between that and margin progression. And again you know I think we have pretty good track record striking a good balance between these two things.
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 want to 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. But it actually looks like that. We are growing year on year, both quarter one, quarter two. We have reinforced the statement that we will do it for the full year. And 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.
But it's a good, good flow we have right now. and we're very disciplined and working very hard in our weekly bets board to actually update ourselves and see what we want to do.
Analyst: Doug Anmuth
Management: Can you update us on your progress towards new AI products that would empower users to create new content and enable derivatives of existing music? What are the hurdles to launching these products, and do you expect that they would impact your cost structure or margin trajectory in any meaningful way?
Management: Hey, Doug, this is Gustav. I'll take this. I've talked about this a little bit before, so for now, I'll mostly reiterate how we actually think about this opportunity. The way to think about it is that the generative market, for example, for music is really two things. It's net new music, which is happening at scale and quickly increasing the catalog. And that, we think, is good for a company that aggregates contents because it makes the recommendation problem even more important. I think it's worth thinking about. I just mentioned, revealed my age here, saying that I joined Spotify back in 2008. When I joined, I think the music catalog was about 2 million tracks, and now it's something like 250 million tracks. So the growth of the catalog is not new. We think it's going to keep increasing. And that means that the recommendation problem gets more important for consumers. But where 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.
That's because the copyright problem is much more complicated to solve well, and the attribution problem of who should get paid what is much harder. But we love hard problems. So that's the problem we want to go after. We want to take this opportunity to existing creators as well. with derivatives of existing IP. So as I've said before, we have the capabilities and technologies we need. We are the right company to solve this problem. And we think that existing creators should participate in AI just as well as new creators.
Analyst: Justin Patterson
Management: We're seeing many companies wrestle with headcount investment versus rising AI costs. How is Spotify approaching this problem and gauging employee productivity?
Management: So this is Gustav again. Thank you, Justin. So I kind of mentioned this. I snuck this point in before, but I'll reiterate that we are seeing tremendous productivity growth. You can translate that into different things. You could translate it straight into cost savings and cut headcount, which some companies out there are doing. The other thing you could do is to say we're going to be roughly the same amount of people. We're just going to do more. The third thing you could do, which I also see many companies doing, is saying we should invest like crazy because there's so much opportunity. 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. And then on the question on how we measure this, you have many proxies on the way. So one proxy for this would be something very technical like pull requests, what amount of code is getting written. And maybe better proxy is how much we actually ship. We have something called DODs, definitions of done, for any feature that we build.
So how many DODs are getting done? How many bets do we have on this bet board that I think Kristen mentioned I've talked about before? And all of these keep increasing. And they're increasing, you know, several times. They're not increasing 10%. They're increasing, you know, they're doubling. That's that kind of increase. So we're seeing all of these metrics. Now we are starting to see these things ship. And as I mentioned, with things like song DNA, DJ, we're starting to see them translate into usage. And usage, as Alex mentioned, is a really good predictor of retention. And retention is a predictor of revenue. And as Alex mentioned as well, we have three different modes of monetizing features. There is the free tier where you can maximize the reach. There is one of the world's largest subscription where you can bundle things. And then as of recently, we've also shown that we can do top-ups like within audiobooks, which we are very excited about the progress on and the numbers that we are seeing. So we feel very good. What I'm trying to convey is that we are diligent and disciplined, but we are not sitting around waiting for this opportunity to go past us.
We are taking the opportunity. So that's where we are right now. a little bit of historical flavor on that. I just want to add and remind us that some years ago, we did a resizing of the organization. And since then, as you've seen, we haven't increased our employees. And we have been very diligent in keeping the overall platform stable. And as last as the last quarter, we decreased with 65 people. So it's not like we are growing people and doing that. And we haven't done that for three years. It's been a very disciplined approach to this. I think, yeah. Alex here is probably too humble to say it himself, so I'll say it for him. Alex is actually the one who set this plan about three years ago to get Spotify to be profitable, and we've been executing on this plan, so we are very diligent with our costs. Thank you. That wasn't planned. Give me that much praise. It's the both of us, of course. It was actually spur of the moment. It's the both of us.
Analyst: Deepak Madhavanan
Management: You have integrated Spotify and leading AI applications already. Chat GPT last year and Claude more recently. Can you talk about what type of traffic you're seeing and how consumers are using Spotify in AI applications
at this time? And how are AI applications helping KPIs such as MAUs and time spent?
Management: It's really all about AI today.
It's great. So we are the... There are a few ways to think about this. As you know, Spotify has had a few core pillars, one being freemium, another being personalization, and the third being ubiquity. So one way to think about this is just ubiquity. Spotify was always going to be everywhere, right? This has been a counter strategy to some of our competitors who favor their own ecosystems. So this goes for ChatGPT, Cloud, et cetera, as well. We just want to be wherever users are. And so that's a simple way to think about it. And I also mentioned that we track usage and engagement and costs very diligently. And we are seeing what we want to see. In terms of type of traffic, it depends on the feature. What Alex mentioned up front is we have, for the first time in Spotify history, this ability for users to actually tell us in plain English or actually whatever language they want, what they want. We were always guessing. Old school machine learning was a statistical activity based on clicks and streams. 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. And this builds a unique advantage for us. I talked last time about the large personalization model, which is a model that we're training from based on open source models. But it's trained on our proprietary data. This is not something that we rent from someone. This is something we're building in-house. And, you know, the casual name for the large personalization model is a taste model. Why is that important? It is because it turns out that taste is actually not a fact. It is an opinion, and it differs between people, between markets, between use cases and activities. So that is the kind of usage that we were hoping to see in Prompted Playlist in AI DJ. And that's exactly what we are seeing. Very advanced usage that is giving us a type of data we never had before. And now we're just heads down serving those use cases better than anyone else.
Management: Let me jump in on the action here a little bit, Gustav. I think it's important that you are hearing Gustav say this, and I say it sometimes, about how we think. I think as a general approach, it's good for us to explain to you how we think about things so that you can understand how it applies to other things as well. You know, when Gustav said earlier in the response to another question that when the music catalog grows and when our content platform grows in volume, it's always been good. You know, it's good for users. It's good for the industries that we're in and so on. But then the second thing that happens is something we've also said for a long time, and Daniel broached this many times in these calls, that we optimize for the long term, and we talk about optimizing for lifetime value. So how do you bridge these two things with an ever-increasing catalog of content and lifetime value? Well, you know, it turns out that the number one reason for why people actually engage more with Spotify is personalization. And how we track that is if AI increases engagement for us, it generally means that it increases personalization for us.
And increased personalization engagement, to Gustav's point, are going to lead to, well, they are going to be the best proxies for the increase in retention that we're going to see over time with these investments. And if that happens, then we know that that will eventually translate to a longer lifetime value, which in turn translates to more enterprise value. So that's how we think about the investments.
Analyst: Eric Sheridan
Management: Can you frame the key platform and product initiatives that are driving incremental operating expense trends? How should investors think about the trajectory of operating margins going forward?
Management: I'll start with them and then Chris can talk about the trajectory. So I've kind of mentioned it already in terms of the OPEX band that it's a mix of increased compute, not increased headcount, and sales and marketing to make sure that we capture the value of the features that we're now launching. To give you a bit more detail in what do we mean with compute, it's a few different things actually. One is just using things like cloud code, codex, et cetera, to accelerate our development pace and building some proprietary systems around that. I talked a little bit about Honk last time. I have many more exciting things to talk about if you guys want to go there that we are doing. But that's just one type, accelerating our productivity of writing code. But then, as I also mentioned briefly, we are training rather large models in-house. Because we have lots and lots of unique data that no one else has. For example, the large personalization model, which is not something that you can rent or buy off the internet. You literally need 700 million plus people every day using the platform to be able to say what is trending in a certain region in India right now. So a lot of it is training or some of it's training cost, and that's upfront. And we'll capture that value when those products roll out. And some of it is just direct productivity in terms of development costs. So think of part of it's strategic investment, part of it as a productivity investment.
Management: Yeah, and when we see product market fit with the features that we launch, it just leads to an opportunity for us to talk more about it, meaning we can start telling compelling marketing stories around it to scale it even further on top of this healthy core that we have. It's all about awareness and use once you find product market fit. And what we highlighted and I did in my script was that the next two quarters will be a little bit elevated from this, and we do have a different pattern on our launches this year of products, and that's what Alex talked about. And the R&D, of course, is extremely important for building the tech stack that we are delivering to our customers. So I just want to say with that also that what we did say and we reiterate is that the operating margin will improve year over year.
Analyst: Justin Patterson
Management: How are you judging the higher cost of the free tier versus subscriber conversion and your LTV framework? How does this compare to your expectations when rolling this out last September?
Management: All right, Justin, good question. I'll start and then Christian will fill in. So you heard me in the remarks saying that we in particular pay a lot of attention to the number of days in a month that users spend on Spotify. So I'd much rather someone spend many days in a month rather than many hours per day. Of course, you would want both. But if you have to prioritize, it's the many days in a month. And really, internally, we talk about it as the lifeblood of our system. And if you look back on the development of the free tier, the new more enhanced free tier that we launched, I can't remember, is it a little bit more than a year ago now? We have seen consistently that the free tier users have increased in the active days in a month. Now, what does that mean? Well, we've had this consistent increase for many years, basically from like 21, 22, 23 and so on. But when we launched new improved free tier globally, we saw this just step change, which essentially means that people... are liking the free tier much more. It's satisfaction and more usage and more days in a month. So that is always going to downstream lead to more subscriber conversion and eventually lifetime value. I mean, it's just blown up my expectations fully since we launched this last September.
Management: Just chiming in, I guess you also have then read the numbers and maybe a little bit surprised that 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. So that is really a short-term issue.
Analyst: Rich Greenfield
Management: Fitness will undoubtedly drive increased video engagement on Spotify, particularly on TV screens. How does this impact your video ad business, and how should we think about the cost impact you will bear within the premium business from adding this content?
Management: I know you love your TV and Apple TV, Rich, so hopefully we'll see you using Spotify, pumping iron in front of the TV or maybe doing some stretching. You should think about this launch as a launch in fitness that basically is something that's happening organically already on Spotify. This is something we're doubling down on. And much like we did when we launched podcasts at first and also audiobooks, we saw the behavior organically happening on the platform. And if you think about the time here, the demand here, in our research, we have the staggering number that says that 70% of our premium users actually train or work out or go to the gym or do yoga every month. And, you know, you can also see it in the numbers. Hundreds of millions of playlists are being created to do yoga, to go to the gym, and so on and so forth, right? So this is us doubling down on that trend. And, you know, little did we know when, you know, about a year and a half ago when we launched SPP, the ad-free video experience for Spotify Premium users, we saw a lot of fitness instructors and fitness creators just unprompted upload a lot of videos to Spotify.
And if you think about it, this is really what we do, right? We use our platform to bridge the demand between creatives, like a fitness instructor, and users. We connect them using our three tri-modal economic engines like ads, subscriptions and top-ups and we do that you know between creators and this is what we're seeing with with with fitness right now for us so we we do look forward to this to this expanding even more and you know I'll just give you the highlight of how I'm using it you know we're seeing some tennis content come online I play tennis not that I'm very good at all but I still play a lot so When I'm sort of gearing up for a bit of a tournament, then it's an amateur tournament, then I'll see recommendations in the future coming up with podcast videos telling me how to stretch and relax before I go into that week. Maybe there's some instructional videos that tell me how to improve my sake backhand. Maybe I'll get an audiobook recommendation on how to think about tennis playing. So this is really something that we're happy to invest in. This is a demand trend that's happening. right now on Spotify.
Analyst: Jessica Reef Ehrlich
Management: Have you seen anything unusual in subscriber reaction to your recent price increase? And could you talk about tools for further ARPU expansion from here?
Management: You saw us increase price around the world in the last quarter of last year. And then you saw us increase in the U.S. in this most recent quarter. No surprises at all for us. And ARPA expansion tools? I mean, how do we feel about increasing ARPA over time? I mean, I think one of the things we have talked about is when you bring engagement and more verticals, you can actually monetize on that. But on top of that, I think we've proven with the model with audiobooks and top-ups that that is a way to bring more monetization on our platform from our subscribers. And we continue to look at those kind of elements.
Management: I'll just jump in here. Alex talked a little bit about us explaining how we think. And I think one useful model to think about, not just Spotify, actually all consumer products, is that people talk about averages, your average usage and so forth. But almost nothing is an average. It's almost always a power law. You have a long tail of users who use something a little, and then you have a head of people who use it a lot. And so Spotify always had the business model to capture the long tail, which requires a free tier, and to capture a bunch of the averagely engaged users in premium. But until we launched audiobooks add-on, we didn't really have a tool to capture the head, the people who wanted to read for hundreds of hours a month. We had a clear theory that we could capture the entire power law, but we hadn't proven it to ourselves until recently. Now we have those three tools. So we feel very good about just getting more usage on the platform and use these three tools to monetize it.
Analyst: Stephen Cahal
Management: Does Spotify believe in an AI music creation tier? And if so, what are the sticking points with content partners and how might it be priced to premium users?
Management: Yes, this is Gustav. I've touched on this a little bit. What we do believe in is that there is a lot of opportunity out there for creators who want to use AI tools, but there is an opportunity that no one is addressing right now for existing artists. And we really want to address that part. We don't think existing artists should be left out of AI. We think that may actually be the most interesting part of music. If you look at other industries, existing IP is actually the most valuable IP, not the least valuable. But because of how AI music works right now, that is not addressable. That's the problem we want to solve. We think there's a big opportunity for creators and for Spotify and for investors there. And so we think that there is a big opportunity to expand the music catalog. And that is obviously good for us. But we think there is also a big opportunity for existing artists that isn't addressed yet.
Analyst: Benjamin Black
Management: Yesterday, you announced a partnership with Peloton. Could you highlight the strategic rationale? And also, could you talk about the cost structure or this deal? And how does this compare to audiobooks or the Spotify partner program spending? And is it reasonable to think that monetization will follow a similar strategy to audiobooks back in 2024 slash 2025?
Management: Hey, Benjamin. Good question. I like our partnership with Peloton. Although we don't talk about the specific of deals, you know that. I can let you know that this is content that's ad-free. It's high-quality content that normally resides within subscriptions that retail at a much higher price. So we're putting that on premium inside the fitness category. And, you know, so your question is, like, how does this compare to audiobooks? Well, in that sense, it actually is similar to audiobooks and SPP.
Analyst: Maria Rips
Management: Higher engagement among ad-supported users is clearly a positive. What needs to happen for that engagement to start translating into gross margin tailwinds?
Management: I think just continue the work on the sturdy progress that we've had so far with the new ad stack, getting not just more programmatic ad sales on top, which is growing very, very fast right now, but also sort of looking holistically at the whole system, including direct sales. I just want to reiterate that the quarter one gross margin dip we had was a very small one, and that was a short-term issue. And 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 just want to 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's the second half where you see the progress coming through.
Analyst: Doug Anmuth
Management: On tiering, you've recently shifted tiers to feature and product sets in a handful of markets, essentially enabling good, better, and best versions of Spotify. What have been the early learnings with this move, and how could they apply to more mature or established markets?
Management: I love that you paid attention to this, Doug. This is one of my personal favorites. It's like you said, it's v