Spotify’s Q2 2018: The Good, The Bad, and the Ugly

Yes, Spotify reached 83 million subscribers.  No, it still doesn’t have a plan to stop burning cash reserves.

Spotify has just published its second quarterly report of 2018.  And, just as with its Q1 report, the news isn’t pretty.  Not for investors in the long run, at least.

The Good – Results were mostly in line.

Spotify finished the quarter with 180 million Monthly Active Users (MAUs) and 83 million Premium subscribers, up 30% and 40% year-over-year, respectively.  A FactSet consensus estimate had expected 82 million.

Between January and June 2018, the company added approximately two million subscribers per month.  Spotify had previously confirmed 75 million subscriptions at the end of March.  Premium revenue totaled €1.15 billion ($1.34 billion), up 27% year-over-year.

In good news for the company, a recent analysis puts Spotify’s global subscriber tally ahead of Apple Music by a significant margin.  Sources to DMN estimate that Apple Music now counts 45 million paying subscribers worldwide, not including free trials (which are largely three months long).  But Apple has pulled ahead in the critical U.S. market, with sources pointing to the development in early July.

That was quickly echoed by the Financial Times, which noted that Apple Music would be passing Spotify’s U.S. tally by the end of this month.  By the end of the year, FT sources projected that Apple would be beating Spotify’s US-based premium subscriber tally by 3 million.

Globally, Spotify’s ad-supported MAU grew to 101 million, slightly ahead of Factset’s 99.7 million consensus estimate.

Average revenue per user (ARPU) totaled €4.89 ($5.40), down 12% year-over-year yet up 4% quarter-to-quarter.

The company attributed the growth to Family and Student plans as well as rising use in lower ARPU countries, including Latin America and Southeast Asia.  Lower rates make sense in developing countries, though research is now exposing a heavy percentage of cut-rate plans instead of full-stock $9.99 monthly accounts.

Total revenue grew to €1.27 billion ($1.49 billion), up 34% year-over-year after adjusting for the negative impact in foreign exchange rates.  Thomson Reuters had forecast $1.49 billion.

At 25.8%, gross margin stayed mostly in line with Spotify’s guidance range.

The Bad – Operating losses continue to balloon.

Yet, revenue didn’t grow as fast as company executives would’ve preferred.

Brian McCarthy, Spotify’s Chief Financial Officer, attributed the issue to Europe’s recently-implemented General Data Protection Regulation (GDPR).  It caused a notable “disruption across our European markets,” explained McCarthy.

“GDPR posed mostly a timing challenge for us, mostly with ad holding companies, exclusively in the free business.  It was an opportunity for them to try to negotiate for a broader set of information sharing rights, and we weren’t willing to give them.”

The company also noted a slowdown in ad-supported MAU growth.  Analysts had hoped for an 8-9% growth quarter-to-quarter.  Yet, Spotify reported just 2% and 23% year-over-year.  McCarthy spun the results, stating the slower-than-expected rise in ad-supported MAUs wasn’t a concern, at least for now.

Operating loss grew to €90 million ($105 million), 7% of Spotify’s total second-quarter revenue.  This includes a €30 million ($35 million) cash expense related to its direct listing on the New York Stock Exchange.  Spotify’s operating loss this quarter, however, grew almost 120% over Q1 2018.

The Ugly –  Just don’t look at the deficit…

Spotify’s deficit grew to €394 million ($460 million) in the second quarter, up 133.1% over Q1 2018.

The deficit reveals that this year alone, Spotify has lost over €500 million ($584 million) so far.  The company also reported rising financial costs, which skyrocketed to €302 million ($352 million).  Basically, €100 million ($117 million) a month.

That is scary, especially for investors hedging bets against any economic disruptions ahead.  Compounding the issue is Spotify’s lavish spending, particularly on ultra-expensive offices in swanky locations, extremely high salaries, and other huge perks.

Spotify’s subscriber growth outlook has also slowed.  In the three months following March 2018, the company added 8 million subscribers.  Yet, at the end of the third quarter, Spotify expects to add just 3 to 5 million subscribers.

So, what’s next?

Spotify expects €1.2-€1.4 billion ($1.4-$1.6 billion) for the next financial quarter, up 17-36% year-over-year.  Gross margin will remain relatively steady at 23.7-25.7%.

Yet, the company hasn’t presented a plan to stop bleeding money.

Spotify warned investors that its operating loss will remain the same – €10-€90 million ($12-$105 million).  In fact, for Q4 2018, operating loss will like hit €20-€100 million ($23-$116 million).

At the end of the second quarter, Spotify held €1.7 billion ($2 billion) in cash and cash equivalents, restricted cash, and short-term investments.

Investors remain confident about the company’s long-term profitability, however.

Currently, the stock has risen 3.53% to $194.48.  It opened at $191.86.  After its Q1 2018 report, the stock had fallen 7% in after-hours trading.


Featured image in the Public Domain.

5 Responses

  1. Spot ftw

    You might want to update this article, investors seem pretty positive 😉

    • Daniel Sanchez

      Just because they seem pretty positive doesn’t mean the stock will do well in the long run. Until the company presents an actual plan to stop the bleeding, expect future quarters to see skyrocketing net losses and an ever-growing deficit.

      • Spot ftw

        This blog has been predicting the downfall of Spotify for the last 8 years. Keep it up guys you’re good luck for us Spotify investors.

        • Daniel Sanchez

          I’m glad we could replace your rabbit’s foot as a source of luck.

    • Remi Swierczek

      Millions of NAIVE NERDS buying stock on old rule: “buy stock when you love and use the product” Spotify’s uncalled for ASS KISSING of freeloaders and semi-freeloaders is temporarily paying off. Very specific and unusual DPO – almost self propelled absurd.
      In the meantime there is ZERO MERIT Mr. Ek’s proven business model.