Spotify Technology S.A. (NYSE:SPOT) today
reported financial results for the first fiscal quarter of 2018
ending March 31, 2018.
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the full release here:
https://www.businesswire.com/news/home/20180502006667/en/
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Dear Shareholders,
Today Spotify is reporting results for the first fiscal quarter
of 2018 ending March 31, 2018.
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.
____________________
1 Free Cash Flow and Revenue excluding
foreign exchange effect are non-IFRS measures. See “Use of Non-IFRS
Measures” and “Reconciliation of IFRS to Non-IFRS Results” for
additional information.
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
Our expectations for the Full Year 2018 are unchanged. They
are:
- 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
EARNINGS QUESTION & ANSWER SESSION
The Company will be hosting a live question and answer session
starting at 5 p.m. ET today on investors.spotify.com. Daniel Ek,
our Co-Founder and CEO, and Barry McCarthy, our Chief Financial
Officer, will be on hand to answer questions submitted to
ir@spotify.com and through the live chat window available through
the webcast. Participants may also join using the following
listen-only conference line:
Participant Toll Free Dial-In Number: (866) 393-4306Participant
International Dial-In Number: (734) 385-2616Conference ID
6066125
Use of Non IFRS Measures
This shareholder letter includes references to the non-IFRS
financial measures of EBITDA and Free Cash Flow. Management
believes that EBITDA and Free Cash Flow are important metrics
because they present measures that approximate the amount of cash
generated that is available to repay debt obligations, make
investments, and for certain other activities that exclude certain
infrequently occurring and/or non-cash items. However, these
measures should be considered in addition to, not as a substitute
for or superior to, net income, operating income, or other
financial measures prepared in accordance with IFRS. This
shareholder letter also includes references to the non-IFRS
financial measures of Revenue excluding foreign exchange effect,
Premium revenue excluding foreign exchange effect and Ad-Supported
revenue excluding foreign exchange effect. Management believes that
Revenue excluding foreign exchange effect, Premium revenue
excluding foreign exchange effect and Ad-Supported revenue
excluding foreign exchange effect are important metrics because
they present measures that facilitate comparison to our historical
performance. Revenue excluding foreign exchange effect, Premium
revenue excluding foreign exchange effect and Ad-Supported revenue
excluding foreign exchange effect excluding foreign exchange effect
should be considered in addition to, not as a substitute for or
superior to, Revenue, Premium revenue, Ad-Supported revenue or
other financial measures prepared in accordance with IFRS.
Forward Looking Statements
We would like to caution you that this letter to shareholders
contains “forward-looking statements” as defined in Section 27A of
the United States Securities Act of 1933, as amended, and Section
21E of the United States Securities Exchange Act of 1934, as
amended. We intend such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and include
this statement for purposes of complying with the safe harbor
provisions. Such forward-looking statements involve significant
risks, uncertainties and assumptions that could cause actual
results to differ materially from our historical experience and our
present expectations or projections, including but not limited to
the following known material factors: our ability to attract
prospective customers and to retain existing customers; our
dependence upon third-party licenses for sound recordings and
musical compositions; our ability to comply with the many complex
license agreements to which we are a party; our ability to generate
sufficient revenue to be profitable or to generate positive cash
flow on a sustained basis; our lack of control over the providers
of our content and their effect on our access to music and other
content; our ability to accurately estimate the amounts payable
under our license agreements; the limitations on our operating
flexibility due to the minimum guarantees required under certain of
our license agreements; our ability to obtain accurate and
comprehensive information about music compositions in order to
obtain necessary licenses or perform obligations under our existing
license agreements; potential breaches of our security systems;
risk associated with unauthorized access of our software and
services and manipulation of stream counts and customer accounts;
assertions by third parties of infringement or other violations by
us of their intellectual property rights; risk associated with our
substantial indebtedness; risks related to our status as a foreign
private issuer; dilution resulting from additional share issuances;
and the concentration of voting power among our founders who have
and will continue to have substantial control over our business;
tax-related risks; unanticipated changes relating to competitive
factors in our industry; ability to hire and retain key personnel;
changes in legislation or governmental regulations affecting us;
international, national or local economic, social or political
conditions; conditions in the credit markets; risks associated with
accounting estimates, currency fluctuations and foreign exchange
controls; and such other risks as set forth in our filings with the
United States Securities and Exchange Commission.
We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to publicly update or revise any of our
forward-looking statements after the date they are made, whether as
a result of new information, future events or otherwise, except to
the extent required by law.
Interim condensed consolidated statement of
operations
(Unaudited)
(in € millions, except share and per share
data)
Three months ended March 31,
December 31, March 31, 2018 2017
2017 Revenue 1,139 1,149 902 Cost of
revenue 856 867 797
Gross profit 283 282 105
Research and development 115 123 80 Sales and marketing 138 173 110
General and administrative 71 73
54
324 369
244 Operating loss (41 )
(87 ) (139 ) Finance income 15
36 27 Finance costs (154 ) (545 ) (62 ) Share in earnings of
associate — — 2
Finance income/(costs) - net (139 )
(509 ) (33 )
Loss before tax (180 ) (596 )
(172 ) Income tax (benefit) expense (11
) — 1
Net loss attributable to
owners of the parent (169 )
(596 ) (173 ) Net loss
per share attributable to owners of the parent Basic and
diluted (1.01 ) (3.87 ) (1.15 )
Weighted-average ordinary shares outstanding Basic and
diluted 167,778,952 154,126,524
150,149,327
Interim condensed consolidated
statement of financial position
(in € millions)
March 31, December 31,
2018 2017 (Unaudited) Assets
Non-current assets Property and equipment 68 73
Intangible assets including goodwill 161 162 Investment in
associate 1 1 Long term investments 968 910 Restricted cash 56 54
Deferred tax assets 10 9
1,264 1,209 Current
assets Trade and other receivables 322 360 Income tax
receivable 1 — Short term investments 843 1,032 Cash and cash
equivalents 733 477 Other current assets 39 29
1,938 1,898
Total assets 3,202 3,107
Equity and liabilities Equity Share
capital — — Other paid in capital 2,531 2,488 Other reserves 226
177 Accumulated deficit (2,596 ) (2,427 )
Equity
attributable to owners of parent 161
238 Non-current liabilities
Convertible notes 1,022 944 Accrued expenses and other liabilities
61 56 Provisions 7 6 Deferred tax liabilities 3
3
1,093 1,009
Current liabilities Trade and other payables 360 341
Income tax payable 4 9 Deferred revenue 223 216 Accrued expenses
and other liabilities 889 881 Provisions 53 59 Derivative
liabilities 419 354
1,948
1,860 Total liabilities
3,041 2,869 Total equity and
liabilities 3,202 3,107
Interim condensed consolidated statement of
cash flows
(Unaudited)
(in € millions)
Three months ended March 31,
December 31, March 31, 2018
2017 2017 Operating activities
Net loss (169 ) (596 ) (173 ) Adjustments to reconcile net
loss to net cash flows Depreciation of property and equipment 9 11
12 Amortization of intangible assets 2 2 2 Share-based payments
expense 18 14 14 Impairment loss on trade receivables 3 (1 ) —
(Gain)/loss on disposal of equipment (1 ) 1 — Finance income (15 )
(36 ) (27 ) Finance costs 154 545 62 Income tax (benefit) expense
(11 ) — 1 Share in earnings of associate — — (2 ) Net foreign
exchange gains (1 ) (4 ) — Changes in working capital:
Decrease/(increase) in trade receivables and other assets 15 (46 )
(40 ) Increase in trade and other liabilities 70 195 186 Increase
in deferred revenue 9 43 9 (Decrease)/increase in provisions (3 )
(39 ) 44 Interest received 10 6 5 Net income tax paid (6 )
— —
Net cash flows from operating
activities 84 95
93 Investing activities Business
combinations, net of cash acquired — (11 ) (23 ) Purchases of
property and equipment (6 ) (21 ) (1 ) Proceeds from sales of
equipment 1 — — Purchases of intangibles (2 ) (3 ) (2 ) Purchases
of short term investments (271 ) (482 ) (357 ) Sales and maturities
of short term investments 430 237 286 Transaction fees for long
term investment (9 ) — — Change in restricted cash (4 )
1 (28 )
Net cash flows used in investing
activities 139 (279 )
(125 ) Financing activities
Finance lease payments — — (1 ) Proceeds from issuance of ordinary
shares 4 — — Proceeds from exercise of share options 39
7 17
Net cash flow from
financing activities 43 7
16 Net increase/(decrease) in
cash and cash equivalents 266 (177 )
(16 ) Cash and cash equivalents at beginning of the
period 477 668 755 Net exchange losses on cash and cash equivalents
(10 ) (14 ) (4 )
Cash and cash equivalents
at December 31 733 477
735 Reconciliation of
IFRS to Non-IFRS Results
(Unaudited)
(in € millions, except percentages)
Three months ended March 31,
March 31, 2018 2017 IFRS revenue 1,139
902 Foreign exchange effect on 2018 revenue using 2017 rates
100 Revenue excluding foreign exchange effect -
Ad-Supported 1,239 IFRS revenue year-over-year change % 26 %
Revenue excluding foreign exchange effect year-over-year change %
37 % IFRS Premium revenue 1,037 828 Foreign exchange effect
on 2018 Premium revenue using 2017 rates 87 Premium
revenue excluding foreign exchange effect 1,124 IFRS Premium
revenue year-over-year change % 25 % Premium revenue excluding
foreign exchange effect year-over-year change % 36 % IFRS
Ad-Supported revenue 102 74 Foreign exchange effect on 2018
Ad-Supported revenue using 2017 rates 13 Ad-Supported
revenue excluding foreign exchange effect 115 IFRS Ad-Supported
revenue year-over-year change % 38 % Ad-Supported revenue excluding
foreign exchange effect year-over-year change % 55 %
EBITDA
(Unaudited)
(in € millions)
Three months ended March 31,
December 31, March 31, 2018 2017
2017 Net loss attributable to owners of the parent
(169 ) (596 ) (173 ) Finance (income)/costs - net 139
509 33 Income tax (benefit) expense (11 ) — 1 Depreciation and
amortization 11 13 14
EBITDA (30 ) (74 )
(125 ) Free Cash Flow
(Unaudited)
(in € millions)
Three months ended March 31,
December 31, March 31, 2018 2017
2017 Net cash flows from operating activities 84
95 93 Capital expenditures (6 ) (21 ) (1 ) Change in
restricted cash (4 ) 1 (28 )
Free
Cash Flow 74 75
64
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Spotify Technology S.A.Investor Relations:Paul
Vogelir@spotify.comorPublic Relations:Graham
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