Spotify CEO says company isn't seeing impact of economic downturn yet

Shares in Spotify spiked nearly 7% Wednesday morning after the streaming audio giant said it beat Wall Street's expectations on revenue, earnings and user growth.

Why it matters: Several media and tech firms attributed slowed growth last quarter to macroeconomic headwinds. CEO Daniel Ek told Axios he remains "paranoid" about a potential recession but said, "so far, we're not seeing much of it at all."

• He noted the Russian war with Ukraine is "looming as sort of a cloud on the horizon, but has very little impact on us."
• Spotify's chief financial officer Paul Vogel said on a call with investors that macroeconomic pressure has had no impact on subscription cancellations for its premium subscribers last quarter. In fact, the company saw less churn last quarter compared to Q2 2021.

Details: Spotify added 19 million monthly active users (MAUs) last quarter, a 19% increase compared to the second quarter of the year prior.

• The firm blew past its own expectations for user growth by 5 million MAUs, thanks in large part to product improvements over the past year as well as more localized marketing and content, Ek told Axios. The company cited a spike in user growth in particular amongst Gen Z users in Latin America.
• Spotify reported revenues of €2.9 billion last quarter, a 23% increase compared to the same quarter a year prior. Ad-supported revenue grew 31% year-over-year to €360 million, reaching an all-time high as a percent of total revenue at 13% during the second quarter.

Yes, but: The company did see a decrease in its gross margins last quarter compared to the year prior, due to its decision to write down the investment it made in a hardware product called "Car thing," an in-vehicle music control device that the company debuted this year.

• Ek told Axios that while the experiment delivered important learnings, like how sales cycles and recalls work for a hardware product, "frankly, what we're seeing now is that that hardware is unnecessary," in part because car manufacturers have gotten better at producing in-car entertainment products.
• Car products will continue to be important for Spotify, Ek said, given that over one-third of the company's monthly active users are now using Spotify in cars.

The big picture: While the company expects developing countries to continue to lead user growth in the near and mid-term, Ek said revenue in that period will continue to be driven from developed markets, where Spotify can upsell more users into features like podcasting, and soon, audiobooks.

• The company says it will continue to invest in new verticals, like podcasts and audiobooks, as it believes those investments long-term will be beneficial to its gross margins, even if they feel like a drag in the short-term — something investors have expressed concerns about.

What to watch: Expanding the amount of ad inventory available is by far"the single-biggest contributor to growth" of the company's ad business, Ek told investors. The company will continue to push for innovation within its free products to drive more engagement, and thus, impressions.

• In a letter to investors, the company cited high levels of growth in impressions sold and ad rates within its Spotify Audience Network, an ad network that combines all of Spotify's music and podcast ad inventory in one place.

What's next: Vogel said the first iteration of audiobooks on the platform should occur as soon as next quarter, but investors should expect to see a fuller extent of its audiobook efforts in the first half of 2023.