Spotify Technology S.A. (NYSE:SPOT):
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Dear Shareholders,
Our business exhibited strength and resiliency in Q1. Nearly all
of our key metrics surpassed guidance, led by MAU outperformance,
healthy revenue growth, and better Gross Margin. Excluding the
impact of our exit from Russia, subscriber growth exceeded
expectations as well. Overall, we are very pleased with the
performance of the business and remain highly encouraged by the
traction we are seeing.
First Quarter 2022 Earnings Highlights
- MAUs grew 19% Y/Y to 422 million or 419 million excluding a
one-time benefit of 3 million MAUs
- Premium Subscribers grew 15% Y/Y to 182 million (inclusive of
approximately 1.5 million disconnects from the wind-down of our
Russian operations)
- Premium ARPU grew 6% Y/Y in Q1 and 3% Y/Y on a constant
currency basis
- Gross Margin finished at 25.2%
- Announced agreement with Google for User Choice Billing and a
long-term partnership agreement with FC Barcelona
MONTHLY ACTIVE USERS (“MAUs”)
Total MAUs grew 19% Y/Y to 422 million in the quarter, up from
406 million last quarter and above our guidance by 4 million.
During March, there was a brief service outage that caused users to
be involuntarily logged out of Spotify. As a result, we believe
certain affected users created new accounts to log back in,
resulting in approximately 3 million additional MAUs in the
quarter. Following the one month anniversary of the outage in
April, we saw a reversal of the approximate 3 million MAU benefit.
Excluding this event, we believe MAUs would have reached 419
million in Q1, with growth exceeding our expectations by
approximately 1 million users. The business benefited from
outperformance in Latin America and Rest of World, led by
Indonesia, Brazil, and Mexico. MAU growth was particularly strong
in our Gen Z audience, fueled by successful product feature
launches such as our Lyrics experience, as well as marketing and
content initiatives.
PREMIUM SUBSCRIBERS
Our Premium Subscribers grew 15% Y/Y to 182 million in the
quarter, up from 180 million last quarter. While this is slightly
below our guidance, after excluding the involuntary churn of
approximately 1.5 million subscribers as a result of our exit from
Russia, growth was above expectations and aided by outperformance
in Latin America and Europe.
During Q1, we entered into a multiyear agreement with Google for
User Choice Billing, bringing our Android users greater flexibility
in payment choice and enabling a frictionless user experience for
all in-app transactions. We anticipate this new offering to launch
later this year. Users who have downloaded Spotify from the Google
Play Store will be presented with a choice to pay either with
Spotify’s payment system or with Google Play Billing for the very
first time. We also announced a promotional partnership with
Walmart (offering 6 month trials to Walmart+ members in the United
States) and a data access program with Airtel (whereby Airtel is
offering all Spotify customers complimentary connectivity to
Spotify in Nigeria).
FINANCIAL METRICS
Revenue Revenue of €2,661 million grew 24% Y/Y in Q1 (or
19% Y/Y on a constant currency basis) and was above our guidance.
Premium Revenue grew 23% Y/Y to €2,379 million (or 18% Y/Y constant
currency) while Ad-Supported Revenue grew 31% Y/Y to €282 million
(or 22% Y/Y constant currency).
Within Premium, average revenue per user (“ARPU”) of €4.38 in Q1
was up 6% Y/Y (or up 3% Y/Y constant currency). Excluding the
impact of FX, we saw a benefit to ARPU from our price increases in
2021 and favorable product mix shift.
We achieved our largest Q1 ever for Ad-Supported Revenue (11% of
Total Revenue) and saw strong Y/Y growth across all regions and
channels. Music Ad-Supported Revenue benefited from a Y/Y increase
in impressions and healthy double-digit growth in CPMs. Podcast
revenue strength was led by the Spotify Audience Network along with
continued growth across existing Spotify studios and our exclusive
licensing deals. Starting in January, we began to roll out a new
on-platform podcast ad experience in the United States called
call-to-action (CTA) cards. CTA cards make podcast ads interactive
for the first time and allow listeners to directly discover
products and services of interest without having to remember promo
codes.
During the quarter, we announced the acquisition of Podsights, a
leading podcast advertising measurement service that helps
advertisers better measure and scale their podcast advertising.
Additionally, we acquired Chartable, a podcast analytics platform
that enables publishers to know and grow their podcast audiences
through promotional attribution and audience insight tools.
Gross Margin Gross Margin finished at 25.2% in Q1,
slightly above guidance and down 29 bps Y/Y. The Y/Y Gross Margin
trend reflected a favorable revenue mix shift towards podcasts and
growing marketplace activity, which was offset by increased
non-music content spend, investments in music product enhancements,
and modestly higher Other Cost of Revenue.
Premium Gross Margin was 28.4% in Q1, up 51 bps Y/Y, and
Ad-Supported Gross Margin was (1.5)% in Q1, or down 584 bps Y/Y. As
a reminder, all content costs related to podcast investment are
included in the Ad-Supported business for the current and
historical periods.
Operating Expenses Operating Expenses totaled €677
million in Q1, an increase of 27% Y/Y. Social Charges were lower
than forecast given the decrease in our share price during the
quarter. Excluding the impact of Social Charge movements, Operating
Expenses were slightly higher than forecast due to higher personnel
costs, which was partially offset by lower advertising
expenses.
As a reminder, Social Charges are payroll taxes associated with
employee salaries and benefits, including share-based compensation.
We are subject to social taxes in several countries in which we
operate, although Sweden accounts for the bulk of the social costs.
We don’t forecast stock price changes in our guidance so upward or
downward movements will impact our reported operating expenses.
At the end of Q1, our workforce consisted of 8,230 FTEs
globally.
Free Cash Flow Free Cash Flow was €22 million in Q1, a
€19 million decrease Y/Y primarily due to unfavorable changes in
net working capital arising from higher licensor payments. Capital
expenditures decreased €14 million due to finalization of various
office build-outs.
At the end of Q1, we maintained a strong liquidity position with
€3.6 billion in cash and cash equivalents, restricted cash, and
short term investments.
PRODUCT AND PLATFORM UPDATES
Two-Sided Marketplace In Q1, we increased the number of
artists and labels who can create Sponsored Recommendations by
rolling out our self-serve campaign management tool to all eligible
artists in the United States. As a result, we doubled the number of
new customers while maintaining an 85% retention rate from existing
customers. Additionally, we rolled out Spotify for Artists in 9
additional languages (bringing total supported languages to 26) and
published the latest 2021 data reflecting our contribution to music
industry economics on our Loud & Clear website.
Podcasting At the end of Q1, we had 4.0 million podcasts
on the platform (up from 3.6 million at the end of Q4). Growth in
the number of MAUs that engaged with podcast content continued to
outstrip total MAU growth, podcast consumption rates grew in the
double digits Y/Y, and podcast share of overall consumption hours
on our platform reached another all-time high. We saw a
double-digit Y/Y increase in new podcasts across key growth markets
in Latin America and Rest of World, with more than 85% of new
podcast creation occuring on our Anchor platform.
Product Enhancements In Q1, we collaborated with IKEA on
the integration of Spotify on their newest Bluetooth Speaker lamp,
Vappeby, which is now the first Bluetooth speaker on the market
that comes with Spotify Tap. Additionally, new or existing Porsche
vehicles with the Porsche Communication Management 6.0 Infotainment
system will now be able stream Spotify as an audio source. We also
expanded our Blend feature to allow up to 10 people together in a
group to merge their music into one shared playlist and for users
to integrate this feature with some of their favorite artists.
Global Marketing Partnerships On March 15th, we announced
a long-term partnership with FC Barcelona whereby Spotify will
become a Main Partner of the Club and its Official Audio Streaming
Partner. The Spotify brand will appear on the front of both men’s
and women’s team jerseys and training kits beginning in the
2022-2023 season. Spotify will also become Title Partner of the
Stadium, with the historic Camp Nou stadium rebranded to Spotify
Camp Nou. This partnership will allow Spotify to amplify artist
voices, connect artists to new and existing fans, and help grow our
global user base across key growth markets and audience
segments.
Q2 2022 OUTLOOK
The following forward-looking statements reflect Spotify’s
expectations for Q2 2022 as of April 27, 2022 and are subject to
substantial uncertainty. These expectations reflect the full
closure of Spotify’s services in Russia, which was completed on
April 11, 2022.
- Total MAUs: 428 million
- Reflects a loss from the closure of Russian operations as well
as the full reversal of the March service outage benefit (combined
these two items reflect approximately 8 million of the 422 million
MAUs reported in Q1 2022); excluding the impact of these items, our
Q2 guidance implies the addition of approximately 14 million net
new MAUs in the quarter
- Total Premium Subscribers: 187 million
- Assumes an additional 600k disconnects from full closure of
Russian operations in April; excluding Russia, our Q2 guidance
implies the addition of approximately 6 million net new subscribers
in the quarter
- Total Revenue: €2.80 billion
- Assumes approximately 600 bps tailwind to growth Y/Y due to
movements in foreign exchange rates
- Gross Margin: 25.2%
- As a reminder Q2 2021 Gross Margin benefitted 190 bps due to
the release of accruals for prior period publishing royalty
estimates
- Operating Profit/Loss: €(197) million
- Inclusive of the Operating Loss is approximately a €50 million
impact to Operating Expenses due to unfavorable movements in
foreign exchange rates
EARNINGS QUESTION & ANSWER SESSION
We will host a live question and answer session starting at 8:00
a.m. ET today on investors.spotify.com. Daniel Ek, our Founder and
CEO, and Paul Vogel, our Chief Financial Officer, will be on hand
to answer questions submitted through slido.com using the event
code #SpotifyEarningsQ122. Participants also may join using
the listen-only conference line by registering through the
following site:
Direct Event Registration Portal:
https://conferencingportals.com/event/txExvogt
We use investors.spotify.com and newsroom.spotify.com websites
as well as other social media listed in the “Resources – Social
Media” tab of our Investors website to disclose material company
information.
Use of Non-IFRS Measures
To supplement our financial information presented in accordance
with IFRS, we use the following non-IFRS financial measures:
Revenue excluding foreign exchange effect, Premium revenue
excluding foreign exchange effect, Ad-Supported revenue excluding
foreign exchange effect, and Free Cash Flow. Management believes
that Revenue excluding foreign exchange effect, Premium revenue
excluding foreign exchange effect, and Ad-Supported revenue
excluding foreign exchange effect are useful to investors because
they present measures that facilitate comparison to our historical
performance. However, Revenue excluding foreign exchange effect,
Premium revenue excluding foreign exchange effect, and Ad-Supported
revenue 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. Management believes that Free
Cash Flow is useful to investors because it presents a measure that
approximates the amount of cash generated that is available to
repay debt obligations, to make investments, and for certain other
activities that exclude certain infrequently occurring and/or
non-cash items. However, Free Cash Flow should be considered in
addition to, not as a substitute for or superior to, net cash flows
(used in)/from operating activities or other financial measures
prepared in accordance with IFRS. For more information on these
non-IFRS financial measures, please see “Reconciliation of IFRS to
Non-IFRS Results” table below.
Forward-Looking Statements
This shareholder letter contains estimates and forward-looking
statements. All statements other than statements of historical fact
are forward-looking statements. The words “may,” “might,” “will,”
“could,” “would,” “should,” “expect,” “plan,” “anticipate,”
“intend,” “seek,” “believe,” “estimate,” “predict,” “potential,”
“continue,” “contemplate,” “possible,” and similar words are
intended to identify estimates and forward-looking statements.
Our estimates and forward-looking statements are mainly based on
our current expectations and estimates of future events and trends,
which affect or may affect our businesses and operations. Although
we believe that these estimates and forward-looking statements are
based upon reasonable assumptions, they are subject to numerous
risks and uncertainties and are made in light of information
currently available to us. Many important factors may adversely
affect our results as indicated in forward-looking statements.
These factors include, but are not limited to: our ability to
attract prospective users, retain existing users, and monetize our
products and services; competition for users, user listening time,
and advertisers; risks associated with our international operations
and our ability to manage our growth; our emphasis on innovation
and long-term user engagement over short-term results; our ability
to predict, recommend, and play content that our users enjoy; our
ability to be profitable or generate positive cash flow on a
sustained basis; our ability to convince advertisers of the
benefits of our advertising offerings; our ability to forecast or
optimize advertising inventory amid emerging industry trends in
digital advertising; our ability to generate revenues from podcasts
and other non-music content; potential disputes or liabilities
associated with content made available on our Service; risks
relating to acquisitions, investments, and strategic alliances; the
impact of the COVID-19 pandemic and other public health crises; our
dependence upon third-party licenses for most of the content we
stream; our lack of control over third-party content providers who
are concentrated and can unilaterally affect our access to content;
our ability to comply with complex license agreements; our ability
to accurately estimate royalty payments under our license
agreements and relevant statutes; the limitations on our operating
flexibility due to financial commitments required under certain of
our license agreements; our ability to identify the compositions
and ownership thereof embodied in sound recordings in order to
obtain licenses or comply with existing license agreements;
assertions by third parties of infringement or other violations by
us of their intellectual property rights; our ability to protect
our intellectual property; the dependence of streaming on operating
systems, online platforms, hardware, networks, regulations, and
standards that we do not control; our ability to maintain user data
security; undetected errors, bugs or vulnerabilities in our
products; interruptions, delays, or discontinuations in service
arising from our systems or systems of third parties; changes in
laws or regulations affecting us; risks relating to privacy and
data security; our ability to maintain, protect, and enhance our
brand; our ability to achieve our net zero emissions target or make
progress in other environmental, social, and governance
initiatives; payment-related risks; our dependence on key personnel
and ability to attract, retain, and motivate highly skilled
employees; our ability to access to capital to support growth;
risks relating to currency exchange rate fluctuations and foreign
exchange controls; the impact of economic, social, or political
conditions, such as the current conflict between Russia and
Ukraine; our ability to accurately estimate user metrics and other
estimates; our ability to manage and remediate attempts to
manipulate streams and attempts to gain or provide unauthorized
access to certain features of our Service; risks related to our
Exchangeable Notes; tax-related risks; the concentration of voting
power among our founders, which limits shareholders’ ability to
influence our governance and business; and risks related to our
status as a foreign private issuer and a Luxembourg company. A
detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from our
estimates and forward-looking statements is included in our filings
with the U.S. Securities and Exchange Commission (“SEC”), including
our Annual Report on Form 20-F filed with the SEC on February 3,
2022, as updated by subsequently filed reports for our interim
results on Form 6-K. We undertake no obligation to update
forward-looking statements to reflect events or circumstances
occurring after the date of this shareholder letter.
Rounding
Certain monetary amounts, percentages, and other figures
included in this letter have been subject to rounding adjustments.
The sum of individual metrics may not always equal total amounts
indicated due to rounding.
Consolidated statement of
operations
(Unaudited)
(in € millions, except share and per share
data)
Three months ended
March 31, 2022
December 31, 2021
March 31, 2021
Revenue
2,661
2,689
2,147
Cost of revenue
1,990
1,977
1,599
Gross profit
671
712
548
Research and development
250
253
196
Sales and marketing
296
340
236
General and administrative
131
126
102
677
719
534
Operating (loss)/income
(6
)
(7
)
14
Finance income
175
20
104
Finance costs
(14
)
(21
)
(31
)
Finance income/(costs) - net
161
(1
)
73
Income/(loss) before tax
155
(8
)
87
Income tax expense
24
31
64
Net income/(loss) attributable to
owners of the parent
131
(39
)
23
Earnings/(loss) per share attributable
to owners of the parent
Basic
0.68
(0.20
)
0.12
Diluted
0.21
(0.21
)
(0.25
)
Weighted-average ordinary shares
outstanding
Basic
192,476,022
191,952,473
190,565,397
Diluted
197,077,256
192,144,654
191,815,695
Consolidated statement of financial
position
(Unaudited)
(in € millions)
March 31, 2022
December 31, 2021
Assets
Non-current assets
Lease right-of-use assets
443
437
Property and equipment
369
372
Goodwill
978
894
Intangible assets
109
89
Long term investments
682
916
Restricted cash and other non-current
assets
82
77
Deferred tax assets
8
13
2,671
2,798
Current assets
Trade and other receivables
556
621
Income tax receivable
5
5
Short term investments
816
756
Cash and cash equivalents
2,721
2,744
Other current assets
270
246
4,368
4,372
Total assets
7,039
7,170
Equity and liabilities
Equity
Share capital
—
—
Other paid in capital
4,789
4,746
Treasury shares
(262
)
(260
)
Other reserves
709
853
Accumulated deficit
(3,089
)
(3,220
)
Equity attributable to owners of the
parent
2,147
2,119
Non-current liabilities
Exchangeable Notes
1,146
1,202
Lease liabilities
587
579
Accrued expenses and other liabilities
30
37
Provisions
6
7
1,769
1,825
Current liabilities
Trade and other payables
695
793
Income tax payable
13
23
Deferred revenue
469
458
Accrued expenses and other liabilities
1,882
1,841
Provisions
22
22
Derivative liabilities
42
89
3,123
3,226
Total liabilities
4,892
5,051
Total equity and liabilities
7,039
7,170
Consolidated statement of cash
flows
(Unaudited)
(in € millions)
Three months ended
March 31, 2022
December 31, 2021
March 31, 2021
Operating activities
Net income/(loss)
131
(39
)
23
Adjustments to reconcile net income/(loss)
to net cash flows
Depreciation of property and equipment and
lease right-of-use assets
27
25
22
Amortization of intangible assets
10
8
8
Share-based compensation expense
68
50
48
Finance income
(175
)
(20
)
(104
)
Finance costs
14
21
31
Income tax expense
24
31
64
Other
4
3
2
Changes in working capital:
Decrease/(increase) in trade receivables
and other assets
59
(63
)
15
(Decrease)/increase in trade and other
liabilities
(103
)
92
(67
)
Increase in deferred revenue
6
17
37
(Decrease)/increase in provisions
(3
)
8
(1
)
Interest paid on lease liabilities
(13
)
(13
)
(11
)
Interest received
1
—
—
Income tax paid
(13
)
(1
)
(2
)
Net cash flows from operating
activities
37
119
65
Investing activities
Business combinations, net of cash
acquired
(85
)
(14
)
(59
)
Purchases of property and equipment
(10
)
(16
)
(24
)
Purchases of short term investments
(133
)
(112
)
(115
)
Sales and maturities of short term
investments
78
88
90
Proceeds from sale of long term
investment
—
144
—
Change in restricted cash
(5
)
—
—
Other
(1
)
(3
)
(6
)
Net cash flows (used in)/from investing
activities
(156
)
87
(114
)
Financing activities
Payments of lease liabilities
(10
)
(10
)
(8
)
Lease incentives received
2
—
—
Proceeds from exercise of stock
options
43
64
51
Proceeds from issuance of Exchangeable
Notes, net of costs
—
—
1,223
Repurchases of ordinary shares
(2
)
(65
)
—
Payments for employee taxes withheld from
restricted stock unit releases
(11
)
(14
)
(16
)
Net cash flows from/(used in) financing
activities
22
(25
)
1,250
Net (decrease)/increase in cash and
cash equivalents
(97
)
181
1,201
Cash and cash equivalents at beginning of
the period
2,744
2,512
1,151
Net foreign exchange gains on cash and
cash equivalents
74
51
90
Cash and cash equivalents at period
end
2,721
2,744
2,442
Calculation of basic and diluted
earnings/(loss) per share
(Unaudited)
(in € millions, except share and per share
data)
Three months ended
March 31, 2022
December 31, 2021
March 31, 2021
Basic earnings/(loss) per share
Net income/(loss) attributable to owners
of the parent
131
(39
)
23
Share used in computation:
Weighted-average ordinary shares
outstanding
192,476,022
191,952,473
190,565,397
Basic earnings/(loss) per share
attributable to owners of the parent
0.68
(0.20
)
0.12
Diluted earnings/(loss) per
share
Net income/(loss) attributable to owners
of the parent
131
(39
)
23
Fair value gains on dilutive warrants
—
(2
)
(22
)
Fair value gains on dilutive Exchangeable
Notes
(90
)
—
(49
)
Net income/(loss) used in the
computation of diluted earnings/(loss) per share
41
(41
)
(48
)
Shares used in computation:
Weighted-average ordinary shares
outstanding
192,476,022
191,952,473
190,565,397
Warrants
—
192,181
312,148
Exchangeable Notes
2,911,500
—
938,150
Stock options
1,055,820
—
—
Restricted stock units
562,670
—
—
Other contingently issuable shares
71,244
—
—
Diluted weighted-average ordinary
shares
197,077,256
192,144,654
191,815,695
Diluted earnings/(loss) per share
attributable to owners of the parent
0.21
(0.21
)
(0.25
)
Reconciliation of IFRS to Non-IFRS
Results
(Unaudited)
(in € millions, except percentages)
Three months ended
March 31, 2022
March 31, 2021
IFRS revenue
2,661
2,147
Foreign exchange effect on 2022 revenue
using 2021 rates
109
Revenue excluding foreign exchange
effect
2,552
IFRS revenue year-over-year change %
24
%
Revenue excluding foreign exchange effect
year-over-year change %
19
%
IFRS Premium revenue
2,379
1,931
Foreign exchange effect on 2022 Premium
revenue using 2021 rates
91
Premium revenue excluding foreign exchange
effect
2,288
IFRS Premium revenue year-over-year change
%
23
%
Premium revenue excluding foreign exchange
effect year-over-year change %
18
%
IFRS Ad-Supported revenue
282
216
Foreign exchange effect on 2022
Ad-Supported revenue using 2021 rates
18
Ad-Supported revenue excluding foreign
exchange effect
264
IFRS Ad-Supported revenue year-over-year
change %
31
%
Ad-Supported revenue excluding foreign
exchange effect year-over-year change %
22
%
Free Cash Flow
(Unaudited)
(in € millions)
Three months ended
March 31, 2022
December 31, 2021
March 31, 2021
Net cash flows from operating
activities
37
119
65
Capital expenditures
(10
)
(16
)
(24
)
Change in restricted cash
(5
)
—
—
Free Cash Flow
22
103
41
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220427005371/en/
Investor Relations: Bryan Goldberg Lauren Katzen
ir@spotify.com
Public Relations: Dustee Jenkins press@spotify.com
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