Spotify’s Q1 2018: The Good, the Bad, and the Ugly

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Looks like Spotify isn’t going to become the next Netflix after all.  Nor will it turn a profit in 2018.

Spotify has just published its first quarterly earnings since going public.  And the news isn’t pretty.  At least, not for investors: shares have fallen over 7% in after-hours trading.

So let’s break down the results, starting with the good news.

The Good — Revenue matched expectations.

Spotify finished the quarter with 170 million Monthly Active Users (MAU) and 75 million Premium Subscribers.  The numbers grew 30% and 45% respectively year-over-year, and fell mostly in line with analyst estimates.  In the first quarter of 2017, Spotify had 131 million MAUs.

Spotify reported 52 million Premium users last year.  Over the fourth quarter of 2017, total MAUs grew 8%.  Total Premium subscribers jumped 7%, and ad-supported MAUs grew 9%.

The company reported total revenue of nearly €1.14 billion ($1.36 billion) for the quarter.  Once again, the numbers fell in line with analyst estimates.  Last year, the company reported revenues of €902 million (nearly $1.08 billion).

Exceeding the company’s guidance range of 23-24%, Spotify’s gross margin – the portion of revenue left after paying the direct costs of providing its services – was 24.9%.  The company also beat analysts’ expected ad-supported MAUs, 99 million over 98 million.

The Bad — Operating loss continues to grow.

Spotify reported a total operating loss of €41 million ($49 million), approximately 4% of its total revenue.  Operating expenses totaled €324 million ($387 million).  Net loss totaled €169 million ($202 million), down 2.3% year-over-year when the company lost €173 million ($206 million).

Spotify executives explained that its financial results have slowed due to a decline in advertising revenue.  The company reported only €102 million ($122 million) in revenue from its ad-supported service.  This represents a 38% growth year-over-year.  Yet, ad-supported revenue dropped 22% over the fourth quarter of 2017.

Executives attributed the drop to “the mix of US dollar-denominated revenue.”  Adjusting for the impact of foreign exchange rates, they claimed that ad-supported revenue “would’ve grown 55% year-over-year.”

Revenue growth from subscriptions also didn’t rise as quickly as hoped.  From Premium subscriptions, the company only brought in close to €1.04 billion ($124 billion).  Year-over-year, this represents a 25% growth.  Yet, over the fourth quarter of 2017, Premium subscription revenue only grew 2%.

And the Ugly — Expect lower revenue and greater operating losses next quarter.

In revenue guidance for the second quarter, Spotify expects to generate between €1.1 billion ($1.3 billion) and €1.3 billion ($1.55 billion).  This includes a negative impact of approximately €95 million (around $114 million) from foreign exchange rates.  The company explained that these numbers represent between a 10% and 29% increase year-over-year.

In the second quarter last year, Spotify posted €1 billion ($1.2 billion).  For the company’s second quarter of 2018, analysts expect €1.28 billion ($1.53 billion) in sales.

The company also expects its operating loss to grow next quarter, €60 million ($71.7 million) to €140 million ($167 million).  In the second quarter last year, Spotify posted operating losses of €79 million ($94.4 million).  In addition, Spotify expects to lose between €230 million ($275 million) to €330 million ($394 million).

The company also expects to have between 79 and 83 million Premium subscribers.  Analysts expect 82.1 million total subscriptions.

So, what’s next?

In a letter to shareholders, Spotify explained that it expects ad spending to grow on mobile platforms.  It generated €84 million ($100.4 million) in net cash flows from operating activities.  The company also generated €74 million in Free Cash Flow in the first quarter.

At the end of the first quarter, Spotify held €1.6 billion ($1.91 billion) in cash and cash equivalents, restricted cash, and short-term investments.  The company’s short-term goal is to sustain and grow Free Cash Flow into the near future.  This, however, excludes the impact of capital expenditures associated with the build-out of new and existing offices in New York, London, Los Angeles, Stockholm, and Boston, among others.

While Spotify may remain positive about its short-term future, investors may not feel the same.  Until it presents a viable strategy to turn a profit, the company’s stock may be vulnerable.

You can check out the full report here.

Featured image by Paul Hohmann (CC by 2.0)