Spotify’s Q1 2019 — 100 Million Subscribers, $159 Million in Net Losses

Spotify's Q1 2019 — 100 Million Subscribers & $159 Million in Net Loss

Spotify has reached 100 million subscribers.  But, its losses continue to  spiral out of control.

Earlier this morning, Swedish streaming music giant Spotify published its financial report for the first fiscal quarter of 2019 (Q1 2019).

First, the good news.

The service has become the first streaming music platform to reach 100 million subscribers.  This figure grew 32% year-over-year.  In the last quarter, the streaming music giant reported 96 million subscribers.

In addition, the service now has 217 million total monthly active users (MAUs), up 5% over the previous quarter.  Last year, the company had 173 million MAUs.  The company reported 123 million users on its ad-supported service.

The total MAU figure (which should total 223 million) likely reflects the active reduction of fake accounts on Spotify.

Breaking down the company’s financials, Premium revenue reached €1.4 billion ($1.5 billion), up 34% year-over-year and 5% over Q4 2018.

Now, the bad news.

Ad-supported revenue took a major hit, growing 24% year-over-year to €126 million ($140.6 million) but plummeting 28% over the last quarter.

The company’s total revenue also rose just 1% over the previous quarter to €1.5 billion ($1.7 billion).  In addition, Spotify’s gross profit totaled €373 million ($416 million), up 32% year-over-year, but down 7% over Q4 2018.  The company’s gross margin also fell to 24.7%, down 0.2% year-over-year and down 2% over Q4 2018.

Average revenue per user (ARPU) remained stagnant over Q1 2018, totaling €4.71 ($5.26) per user.  The company expects ARPU declines to remain in the low single digits this year.

Despite reporting €94 million ($107 million at the historic exchange rate) in operating income last quarter, Spotify posted a sharp drop of €47 million ($52.5 million) in operating loss.  This figure represents a 16% decline year-over-year and a substantial 150% drop over Q4 2018.

Spotify also posted a negative earnings per share (EPS) of €0.79 (-$0.88).  The company’s net loss for Q1 2019 totaled €142 million ($158.6 million).  Spotify’s net income last quarter totaled €442 million ($507.5 million at the historic exchange rate).

Despite the negative news, the company’s net cash flows from operating activities increased 149% year-over-year to €209 million ($233 million).  Spotify’s free cash flow also grew 134% to €173 million ($193 million).

The company attributed its subscriber growth to better-than-planned promotions in the U.S. and Canada.  In addition, family plans continue to grow at a steady rate.  Spotify also saw strong growth from the expansion of its Google Home Mini deal as well as its Hulu bundle in the U.S.

Breaking down its total subscribers by region, Europe makes up 40% of all Spotify subscriptions.  North America has a 30% share, followed by 20% in Latin America and 10% in “the rest of the world.”

Spotify also reported it had a “small incremental benefit” from podcasts following its acquisitions of Gimlet Media and Anchor.  The company expects podcast revenue to accelerate this year.  It had spent €308 million ($343.9 million) to acquire both podcasting companies.  Spotify also spent approximately €50 million ($55.8 million) to acquire a third podcaster – Parcast.

Speaking about its long-term podcast revenue plan, the company explained,

Over time, our ambition is to develop a more robust advertising solution for podcasts that will allow us to layer in the kind of targeting, measurement, and reporting capabilities we have for the core Ad-Supported business.

Admitting the company’s ad-supported revenue growth underperformed its own expectations, Spotify wrote it has since “course corrected” and expects strong ad revenue in Q2 2019.

In addition, the value of the company’s investment in Tencent Music Entertainment has increased €652 million ($728 million) to €2.3 billion ($2.6 billion).

In its expectations for Q2 2019 and FY 2019, Spotify admitted to “substantial uncertainty.”

For its Q2 2019 guidance, the company expects between 222 million and 228 million total MAUs.  Premium subscribers will total between 107 million and 110 million.  The streaming music giant expects to bring in between €1.51 billion ($1.7 billion) and €1.71 billion ($1.9 billion) in total revenue.  Gross margin will total 23.5%—25.5%.  Operating losses will likely total between €15 million ($16.8 million) and €95 million ($106.1 million).

For its FY 2019 guidance, total MAUs will grow to reach between 245 million and 265 million.  Premium subscribers will also increase to between 117 million and 127 million.  Total revenue will reach between €6.35 billion ($7.1 billion) and €6.85 billion ($7.6 billion).  Gross margin will total 22%—25%.

Not expecting a profit this year, operating losses will total between €180 million ($200.1 million) and €340 million ($379.7 million).

 


Featured image by Spotify.

4 Responses

  1. Versus

    This model is broken. Even at the obscenely low pay-out rates (especially to indie label or completely independent artists; who knows about the special deals and Minimum Revenue Guarantees (MRGs) to major labels), and massive user base, Spotify is not profitable.

    So why is Netflix, for example, profitable?
    There are analyses of this online. (Search article “WHY NETFLIX CAN TURN A PROFIT BUT SPOTIFY CANNOT (YET)” for example).
    – Costs seem to be similar:
    “Content is the biggest cost for Spotify and co, but interestingly they are in line with Netflix’s content costs. Looking at Netflix (FY 16), Spotify (FY 15) and Deezer (H1 15) content costs as a % of revenue is broadly similar.”
    – Problem areas seem to be those Minimum Revenue Guarantees (MRGs), and the free tier.

    So:
    – phase out the free tier (Netflix, Amazon Prime, etc. have no free tier)
    – create limits on plays at different paid subscription tiers (based on number of hours or number of tracks played per month)
    – get rid of the MRGs which favor major labels

    Additional reform:
    – Each subscribers pay should only go to the tracks that subscriber actually listened to (instead of the current “pool” approach which surely again favors major labels). There should be a “user-centric” pay-out model, where a paying user knows that the money they pay is going to the artists they listen to. This might even motivate more people to pay for a subscription. (Instead I go to BandCamp or the artist’s web site and buy music directly from the artist, if available).
    [See recent article called “Is Spotify’s Model Wiping Out Music’s Middle Class?” on this issue:
    https://www.theringer.com/tech/2019/1/16/18184314/spotify-music-streaming-service-royalty-payout-model%5D

    Reforms should both allow profitability, while also enabling treating musicians better, setting the stage for fixed or minimum HIGHER payouts to artists.

    There has to be a better way. Everyone loves music; people listen to music more than ever. Most people would feel their lives were impoverished if they did not include music. So musicians (at least those who do have an audience of reasonable size) deserve to be able to make a living wage, to put food on the table and pay their rents and medical bills. The music-oriented tech companies, labels, publishers, distributors, etc. who operate fairly and have a market of substantial size also deserve to be profitable.

    This should not be a zero-sum game. Everyone should win here: musicians, companies, and listeners.

  2. DavidB

    The problem is not just the low-value ad-supported users, but the low average revenue from subscribers. If we take ‘Premium’ users as meaning paying users (and I don’t know what else it would mean), then 100 million Premium users are only generating $1.5 billion in the Quarter, which averages about $5 per paying user per month. With a ‘standard’ payment of $10 per month, this is equivalent to half the users paying the full standard rate and the other half paying nothing at all, or various intermediate positions.

  3. Anonymous

    “its losses continue to spiral out of control.”?!?!?!?!?!

    Um, losses DECREASED, as revenue increased.

    That’s what rational people would recognize as a likely scaling towards profitablity.

  4. Someone Who Understands

    Versus:

    You obviously understand very little about the media business in general, or the specifics attendant to the music and movie/TV businesses, specifically.

    [i]“This model is broken. Even at the obscenely low pay-out rates (especially to indie label or completely independent artists; who knows about the special deals and Minimum Revenue Guarantees (MRGs) to major labels), and massive user base, Spotify is not profitable.”[/i]

    Um, the “model” is in its infancy. It is entirely unproven. It is a heretofore unimagined – let alone tested – business model for allowing on-demand access to recorded music.

    To paraphrase Mark Twain: “The report of Spotify’s death are an exaggeration.

    [i]“So why is Netflix, for example, profitable?

    There are analyses of this online. (Search article “WHY NETFLIX CAN TURN A PROFIT BUT SPOTIFY CANNOT (YET)” for example).”[/i]

    Did you even READ the Midia article that you suggested we search for? It DEFENDS Spotify, by pointing out the many reasons that the Spotify business model is very different than the Netflix model/business.

    [i]“– Costs seem to be similar:”[/i]

    No. They are not.
    Again, the Midia article you suggested we look into even headlines a subsection:

    [i]“NETFLIX’S LOWER CONTENT COSTS PER SUBSCRIBER AND HIGHER REENUE PER SUBSCRIBER HELPS DRIVE MARGIN”[/i]

    Even the blurb you posted (without a citation, natch) acknowledges the same thing, while tryinhg to minimize the distinction:

    [i]“Content is THE BIGGEST COST FOR SPOTIFY AND CO, but interestingly they are in line with Netflix’s content costs. Looking at Netflix (FY 16), Spotify (FY 15) and Deezer (H1 15) content costs as a % of revenue is BROADLY SIMILAR.”

    “– Problem areas seem to be those Minimum Revenue Guarantees (MRGs), and the free tier.”[/i]

    Um, no.

    The problem is that Spotify has to pay out about 70% of ALL INCOME for licensing fees. That’s why scaling the Spotify model is so hard. It doesn’t scale in a linear fashion, like many other businesses, where many costs go down as scale increases. Spotify will have to get HUGE before it can be truly profitable.

    I don’t even have to touch your already-tried-and-proven-unworkable suggestions re: “phase out the free tier (Netflix, Amazon Prime, etc. have no free tier),” and “create limits on plays at different paid subscription tiers (based on number of hours or number of tracks played per month)” since you obviously don’t know about that. Let’s just address this little gem:

    [i]“get rid of the MRGs which favor major labels”[/i]
    Riiiiiight….
    And HOW do you propose they do that?
    Your ONLY source of content demands a certain revenue. So, you just refuse that – and say goodbye to the content – and your entire business.

    Great business plan!

    Blah, blah blah… [i]“…already suggested dumb ideas that people who actually understand how this works know Spotify’s critical content suppliers won’t agree to…”[/i]

    [i]“Everyone loves music;…. people listen to music more than ever. Most people would feel their lives were impoverished if they did not include music. So musicians (at least those who do have an audience of reasonable size) deserve to be able to make a living wage, to put food on the table and pay their rents and medical bills.”[/i]

    And they can. Over 90% of the top 100 artist on Spotify are millionaires. Over 50 of them are multi-multi-millionaires. The others are well on their way…
    How many more artists do we need at that level? A level that is FAAAAAR beyond “making a living wage, to put food on the table and pay their rents and medical bills.”

    As for the more “middle-class” musicians, while it sounds nice to make proclamations like they deserve to “make a living wage, to put food on the table and pay their rents and medical bills.”

    That just begs a bunch of serious and important questions:

    1) What is an artist who “has an audience of reasonable size”?

    2) What amount is necessary to “make a living wage, to put food on the table and pay their rents and medical bills.” (i.e. it’s a lot harder to achieve that goal in New York City or L.A. than it is in Buffalo or Dayton); AND FINALLY:

    3) Shouldn’t THE MARKET determine those things?

    Just like the phonograph 130 years ago, on-demand streaming is just this century’s new medium by which consumers are voting with their feet and their dollars to choose as the way they want to access music.

    Let it scale… and when we’re done with that – and that’s NOT gonna be ‘this year” or even “next year” but, sometime in the future – then, this won’t be a zero-sum game. Everyone will ultimately win: musicians, companies, and listeners.