Spotify’s Mixed Q3 2018 — Finally, a Profit?

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With substantially lower losses, have Spotify’s fortunes turned around?  Not quite.

Spotify hasn’t had a good couple of months.  Financially speaking, at least.

Ahead of its Q3 2018, the company’s battered stock continues to reach record lows.  On Tuesday, Spotify reached $131 before closing at a disappointing $141.68.

But, according to major analysts, things will soon get better.

Among twelve financial firms, including longtime investor Goldman Sachs, Spotify has rolled out exclusive podcasts, playlist-powered tours, and customized merchandise.  The company’s leading position across “platforms and geographies” will ultimately drive the share price upward.

So, the firms gave their opinion – buy, buy, buy.

Now, the company has released its highly-anticipated Q3 2018 report.  And, while some key metrics have risen, the numbers suggest slowing growth and heavier competition.

How to stop the bleeding, by Spotify – simply invest in profitable companies.

Spotify executives aren’t known for their economic prudence.

Last year, the company quietly agreed to lease 564,000 square feet at the World Trade Center.  Over the lifetime of the lease, Spotify will pay over $586 million for its luxurious office space.  Earlier this summer, the company agreed to expand its offices, adding $80.9 million to the lease.  In total, Spotify will pay nearly $650 million before the lease expires.

Also, last year, a report revealed Spotify’s top brass earn seven-figure salaries.  Gustav Söderström, the company’s Chief Product Officer, reported $7.9 million in annual income.  Martin Lorentzon, Co-Founder and Chairman of the Board, earns $5.2 million.  Daniel Ek, the company’s CEO, earns $4.5 million.  Average employees also earn 6-figure incomes.

Keep in mind after ten years on the market, Spotify has yet to post a profit.  Reckless spending has contributed to the company’s skyrocketing losses.

Last year, Spotify lost $1.5 billion.  At the end of Q2 2018, the company has already burned through $583 million.

Now, with its Q3 2018 report out, how has the company fared?

Not too bad.  But, not too great, either.

Spotify reported a modest growth in global subscribers, rising to 87 million.  The company had reported 83 million subscribers at the end of June 30^th, 2018.  The new number falls mostly in line with a Thomson Reuters forecast.

Total monthly active users (MAUs) also jumped to 191 million, up 40% over the same period last year.  Global listeners on the company’s ad-supported service rose 8% over the previous quarter, jumping to 109 million.  Ad-supported MAUs now total 57% of the company’s total listeners.

On the financial side, Spotify posted €1.21 billion ($1.38 billion) in Premium subscriber revenue, up 31% year-over-year, but just up 5% from the previous quarter.  Ad-supported revenue jumped to 16% over the previous quarter to €142 million ($162 million), up 30% year-over-year.

Total revenue also jumped 31% year-over-year to €1.35 billion ($1.51 billion).  Average revenue per user (ARPU) reached €4.73 ($5.40), a sharp 6% decline.  Spotify pinned the blame in lower ARPU on Family and Student plans.  The company explained,

“Family and Student plan growth has caused a reduction in ARPU.”

Thanks to subscriber growth in developing markets – Latin America and Southeast Asia – ARPU will likely continue to decline.

The company also posted a surprising decrease in losses.  While gross profit totaled €342 million ($390.1 million), operating losses reached just €6 million ($6.8 million).  Losses dropped a whopping 92% year-over-year, and 93% over the previous quarter.

Spotify also finally posted a profit.  Net income rose to €43 million ($49 million).  But, don’t get too happy just yet.  That’s all thanks to a technicality.

Late last year, Spotify and Tencent Music Entertainment, a Chinese streaming service, agreed to an investment swap, classifying the move in their respective balance sheets.  When TME filed to go public earlier this summer, the Chinese company revealed its own value.  Spotify, in turn, readjusted the value in the investment swap, leading to the one-time quarterly profit.

Looking ahead to Q4 2018, the company expects to have between 199 and 206 million MAUs.  Global subscriptions will reach between 93 and 96 million.  Total revenue will hit between €1.35 billion ($1.54 billion) and €1.55 billion ($1.77 billion).  Operating profit/loss could reach as high as €15 million ($17.1 million) or as low as -€35 million (-$39.9 million).

Investors reacted swiftly to the company’s mixed Q3 2018.  Thanks to a slowdown in subscription growth and poor revenue guidance for the upcoming fiscal quarter, Spotify’s stock dropped 11.7% in early trading.  The company’s valuation has now dipped below $26 billion.

Basically, investors know one thing – don’t get used to Spotify posting a profit.

And yes, financial firms aren’t always right.

Featured image by Recode (YouTube screengrab).