Spotify's Q2 2019 — The Good, The Bad, and The Ugly

Spotify has released its financial report for the second quarter of 2019 (Q2 2019).

First, the good news.

For the three months ended June 30^th, 2019, the music streaming giant reported 232 million monthly active users (MAU), up 29% over the same period last year. This figure outperformed Spotify’s estimates. The company had expected between 222 and 228 million MAUs.

Total revenue also reached €1.66 billion ($1.85 billion), growing 31% year-over-year. In addition, revenue from Premium subscribers also grew by 31% to €1.56 billion ($1.67 billion). Still relatively low, ad-supported revenue rose 34% to €165 million ($183 million). This shows that companies that offer ad-supported music streaming (YouTube, Deezer) don’t earn a lot of money from freemium.

In addition, it’s worth noting that companies like Spotify also pay the music industry much, much lower royalties from ad-supported streams.

The music streaming giant’s monthly churn rate – how quickly customers cut ties with the service – fell 4.6% year-over-year, a historic low.

After finalizing three major acquisitions earlier this year, Spotify’s podcast gamble has paid off. The podcast audience on the service has grown more than 50% over the previous quarter. In addition, podcast engagement has doubled since the start of 2019.

Over 400 artists and their teams are now using Spotify for Artists each month. The company has also paid over €13 billion ($14 billion) to rightsholders since its launch in 2008.

Spotify’s gross margin was 26%, far above its guidance range between 23.5-25.5%. Premium gross margin was 27.2%, up from 25.9% in Q1 2019. Ad-supported gross margin also reached 15.8%.

Now, the bad news.

Spotify has 108 million subscribers. While still far ahead of rival Apple Music (which has 60 million), investors had expected more. In fact, as the company explained in a press release, the new figure fell “below the midpoint of our guidance range of 107-110 million.”

Spotify also earned “below plan” from Student subscriptions. In addition, the company’s bi-annual ad campaign remained in line with expectations. As with previous quarters, average revenue per user (ARPU) continued to fall, dipping nearly 1% to €4.86 ($5.40). This is due to further rollouts in developing markets, where Premium subscriptions cost far less than in developed countries.

The company’s operating expenses grew 4% year-over-year to €437 million ($485 million). Operating losses totaled €3 million ($3.3 billion). The company attributed the ‘better-than-expected loss’ to higher gross profit and lower-than-expected spending across artist, marketing, R&D, and G&A.

And finally, the ugly.

Reacting to the financial report, investors swiftly punished Spotify’s stock.

Due to the lower-than-expected subscriber count, the company’s shares fell 2.3% in early morning trading.

Spinning the bad news, Spotify CEO Daniel Ek reminded investors the company now has nearly double the subscribers of Apple Music. In addition, with podcast engagement and usage growing on the service, Spotify now expects its podcast ad revenue to grow in the long term.

Stating the company’s “lifetime value” versus the acquisition cost of subscribers is “on the rise,” Barry McCarthy, the company’s Chief Financial Officer, explained,