In a conference call, Spotify CEO, Daniel Ek commented on the competition stating, “We don’t see this as a winner takes all market.” He also mentioned some competitor products stating, "As for voice-activated smart speakers, we view it longterm as an opportunity not a threat.” Spotify is available on Google Home and Amazon Alexa devices.
From Spotify's press release:
We finished the quarter with 170 million Monthly Active Users (“MAU”) and 75 million Premium Subscribers, up 30% and 45%, respectively, Y/Y.
Total Revenue was €1,139 million growing 26% Y/Y, and 37% Y/Y after adjusting for the negative impact from changes in foreign exchange rates1.
Gross Margin was 24.9% in Q1, above the high end of our guidance range of 23-24%. Excluding adjustments to prior period estimates primarily related to changes in rights holder liabilities booked in the quarter, we would have finished at the high end of our stated range. These adjustments accounted for approximately 124 basis points of Gross Margin in Q1.
Our Operating Loss was €41 million or approximately 4% of Total Revenue. This was also better than our guidance for the quarter, but was largely due to the flow through from the Gross Profit outperformance mentioned above. Operating expenses were in line with our expectations. Net cash flows from operating activities were €84 million, and Free Cash Flow was €74 million1.
FIRST QUARTER HIGHLIGHTS & RECENT DEVELOPMENTS
Direct Listing
On April 3, the ordinary shares of Spotify were listed for trading on the New York Stock Exchange. This is our first interim report as a public company. Investor information can be found on our IR website (investors.spotify.com).
Personalized Discovery: All-New Free Tier
On April 24, we officially unveiled a new Ad-Supported experience on Spotify. The updated user experience provides greater consumer control and an increased focus on curation and personalization. Ad-Supported users can now listen to any track in their top 15 Spotify curated playlists completely on-demand. Each user’s on-demand experience will be completely based on their individual music consumption and preferences they list upon sign up. Additionally, we introduced Data Saver, a simple optimization switch users can activate so that less mobile data is used while streaming music.
Expanding Hulu Bundle
Following the success of the Hulu/Spotify Premium for Student bundle which launched in September 2017, we expanded that program in early April 2018 to offer a similar deal to our Standard Plan subscribers. Existing subscribers are eligible to upgrade to the $12.99 per month plan today, and the plan will be made available to new subscribers later this summer.
New Market Launches
On March 13, we launched service in four new markets: Israel, Romania, South Africa, and Vietnam. This brought our total footprint to 65 countries and territories, and marked our first entry into the African continent.
Cadillac Partnership
At the end of March, we announced an integration with Cadillac to provide drivers with a seamless listening experience akin to using the radio from the moment they enter their car. The vehicle connects to Spotify itself using a 4G LTE connection without the need to use your phone, cables, or a Bluetooth connection. All of the artists, albums, and personalized playlists you love are integrated into the car’s infotainment system—you can even make Spotify playlists into presets the same way you would an FM radio station. Plus, the app is designed to deliver personalized recommendations specifically geared toward the drive.
Podcasts
During Q1 we entered into partnerships with several major podcast networks and aggregators which more than doubled the size of our catalog compared to Q4 2017. Consumption hours are rapidly increasing, and we plan to continue our investment into podcasts and other forms of spoken word content.
Growth of Global Recorded Music Market Accelerates
The International Federation of the Phonographic Industry (“IFPI”) released its annual Global Music Report on April 24. IFPI reported that the global recorded music market was worth $17.3 billion in 2017, up 8.1% on 2016 marking the third consecutive year of growth for the industry. Much of that growth was again led by streaming where revenues grew 41.1% to $6.6 billion and now account for 38.4% of all recorded music revenue - the single biggest revenue source. Other key takeaways: paid subscription audio streams grew 45.5%, and there are now more than 176 million people paying for music subscriptions globally.
GRAMMY Best New Artist Party
This January, Spotify aligned with GRAMMY week to celebrate the second annual Best New Artist Party in New York City. All 5 featured nominees (Alessia Cara, Khalid, Julia Michaels, Lil Uzi Vert, and SZA) have been true partners to Spotify and have enjoyed growth and success in part attributable to the support we’ve provided both on and off the platform. In addition to the party, we also executed a large out-of-home campaign honoring the five nominees.
USER METRICS
We closed the quarter with 170 million monthly active users (up 30% Y/Y). Both Ad-Supported and Premium MAU were in line with our expectations and guidance range.
Ad-Supported MAUs totaled 99 million at the end of Q1, up 21% Y/Y and 9% Q/Q. We continue to see strong growth in emerging markets, particularly Asia given our recent launches in Vietnam and Thailand, as well as increasing momentum in Japan.
Premium Subscribers grew to 75 million, up 45% Y/Y. Family Plan additions continued to be a source of strength. We also extended the length of our trial programs from 30 days to 60 days in certain key markets including the US, Australia, and Brazil, which we believe will have a positive effect on conversion and smooth some of the seasonal intake trends over time.
Premium Churn was on trend in the quarter thanks to the continued popularity of the high retention Family and Student plans. While we don’t plan to disclose Premium Churn on an ongoing basis, our average monthly Premium Churn rate for the quarter fell below 5%, a significant milestone. Greater penetration of our high retention products and a general maturation of our overall subscriber base should have a long-term downward impact on Premium Churn, mitigated somewhat by launches in new markets.
FINANCIAL METRICS
Revenue
Total revenue was €1,139 million this quarter, increasing 26% Y/Y. Foreign exchange rate movement was a significant headwind this quarter. Excluding the negative impact from foreign exchange rates, growth in revenue would have been 37% Y/Y.
Premium revenue was €1,037 million in Q1, up 25% Y/Y. Foreign exchange rates had a meaningful impact as Premium revenue would have been up 36% Y/Y if the negative impact were excluded. Average revenue per user (“ARPU”) was €4.72 in Q1, down 14% Y/Y. Growth in Family and Student plans continues to weigh on ARPU, as does the shift in market mix as we grow faster in relatively lower ARPU geographies, like Latin America, and launch new markets. Changes in foreign exchange rates also contributed to the decline in ARPU. Excluding the impact of foreign exchange rates, ARPU would have been down 6% Y/Y.
Ad-Supported revenue was €102 million in Q1, up 38% Y/Y. Foreign exchange rates also had a substantial impact on advertising revenues due to the mix of US dollar denominated revenue. Adjusting for the impact of foreign exchange rates, Ad-Supported revenue would have grown 55% Y/Y.
The majority of our Ad-Supported revenue continues to be driven through our Direct channel, but growth in Programmatic continues to outperform our expectations nearly doubling Y/Y.
Ad spending continues to grow faster on our mobile platform, which comprises a majority of ad revenue. From a product perspective, video is our fastest growing source of revenue, while audio remains our largest source of revenue and continues to experience solid growth.
We launched a beta version of our self-serve advertising platform (Ad Studio) late last year. Hundreds of advertisers have successfully launched campaigns through the platform, and thousands more have signed up requesting access. While still small, early results have been encouraging, and we expect self-serve to become a significant portion of Ad-Supported revenue.
Gross Margin
Gross margin was 24.9% in Q1, up from 24.5% in Q4 and 11.7% in Q1 2017. We outperformed the high end of our guidance range primarily due to changes in prior period estimates for rights holder liabilities. These adjustments accounted for a gain of 124 bps in the quarter. We typically see a seasonal decline in gross margins of our business in Q1 and Q3 resulting from the costs of promotional campaigns we launch in Q2 and Q4 of each calendar year during which we typically experience fast subscriber growth. We expect Gross Margin to normalize to historical seasonal patterns for the remainder of the year.
Operating Expenses / Income (Loss)
Operating expenses totaled €324 million this quarter. As a percentage of revenue, operating expenses fell 140 bps year over year.
Total Operating Loss was €41 million. Operating Margin of 3.6% was an improvement of 1,180 bps Y/Y and 400 bps Q/Q.
As of March 31, we had 3,813 full-time employees and contractors globally. Research & Development made up the greatest share of hiring this quarter, accounting for almost half of the added headcount.
Free Cash Flow
We generated €84 million in Net cash flows from operating activities, and €74 million in Free Cash Flow in the first quarter. As we spoke about at our Investor Day on March 15, we have positive working capital dynamics, and our goal is to sustain and grow Free Cash Flow into the near future excluding 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.
At the end of the quarter, we held €1.6 billion in cash and cash equivalents, restricted cash, and short-term investments.
OUTLOOK
These forward-looking statements reflect Spotify’s expectations as of May 2, 2018 and are subject to substantial uncertainty. For the second quarter, we are expecting:
- Total Monthly Active Users (“MAU”): 175-180 million, up 28-32% Y/Y
- Total Premium Subscribers: 79-83 million, up 34-41% Y/Y
- Total Revenue: €1.1-€1.3 billion, up 10-29% Y/Y. This includes a negative impact of approximately €95 million from foreign exchange rates; excluding this impact, up 20-38% Y/Y
- Gross Margin: 24-26%
- Operating loss: €60-€140 million. This includes expenses related to the direct listing of €30-€35 million
- Total Monthly Active Users (“MAU”): 198-208 million, up 26-32% Y/Y
- Total Premium Subscribers: 92-96 million, up 30-36% Y/Y
- Total Revenue: €4.9-€5.3 billion, up 20-30% Y/Y. This includes a negative impact of approximately €280 million from foreign exchange rates; excluding this impact, up 26-37% Y/Y
- Gross Margin: 23-25%
- Operating loss: €230-€330 million