First table, last column changes to six months ended June 30,
2017, basic and diluted figures.
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The corrected release reads:
SPOTIFY TECHNOLOGY S.A. ANNOUNCES FINANCIAL
RESULTS FOR SECOND QUARTER 2018
Spotify Technology S.A. (NYSE:SPOT) today reported financial
results for the second fiscal quarter of 2018 ending June 30,
2018.
Dear Shareholders,
Today Spotify is reporting results for Q2 2018. The quarter was
largely in line with our expectations, with some metrics performing
at the high end of our guidance range.
We finished the quarter with 180 million Monthly Active Users
(“MAU”) and 83 million Premium Subscribers, up 30% and 40%
respectively, Y/Y.1
Total Revenue was €1,273 million, up 26% Y/Y and 34% Y/Y after
adjusting for the negative impact from changes in foreign exchange
rates.2
Gross Margin of 25.8% was at the high end of our guidance range
of 24-26%.
Our Operating Loss was €90 million or approximately 7% of Total
Revenue. This includes a €30 million cash expense related to our
direct listing on the NYSE in April (“Direct Listing”) and €32
million of accrued social costs for options and RSUs3 (€24 million
more than anticipated in our Q2 guidance as a result of the strong
stock performance in the quarter). Excluding increased accrued
social costs for options and RSUs, Operating Loss would have been
at the low end of our guidance. Net cash flows from operating
activities were €30 million, and Free Cash Flow was €18
million.2
1 Historical Total and Ad-Supported MAU figures adjusted from
previously reported amounts. See “Updating Our Key User Metrics
Policy” for additional information. 2 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. 3 Payroll taxes associated
with employee salaries and benefits, including stock-based
compensation that we are subject to in various countries in which
we operate. 4 Based on actual figures and not rounded sums.
MONTHLY ACTIVE USERS
MAUs grew 30% Y/Y to 180 million at the end of Q2. Growth in our
emerging regions of Latin America and Rest of World continues to
outpace growth in our more established markets.
Ad-Supported MAUs totaled 101 million at the end of Q2, up 23%
Y/Y. Earlier this year we began rolling out a new user interface
for our Ad-Supported tier of service, the first major revision
since our mobile product was introduced in 2014. We expect this new
user interface to drive improvements in engagement, retention, and
conversion.
PREMIUM SUBSCRIBERS
Premium Subscribers grew to 83 million, up 40% Y/Y. Our mid-year
campaign performed well and was a significant portion of our
subscriber intake in the quarter. Family Plan continues to be a
primary driver of gross adds and lower churn due to strong
retention. We also extended our offer of a Spotify + Hulu bundle to
Standard $9.99 Premium subscribers in the US, following the early
success of the Spotify Student + Hulu bundle launched last
fall.
UPDATING OUR KEY USER METRICS POLICY
We continually seek to improve estimates of our user base, and
we regularly review our policies and processes for calculating user
metrics to improve their accuracy. In Q2, we revised our policy to
better align with current practices of other consumer-facing
internet companies. In our Registration Statement on Form F-1 filed
in March and our Q1 earnings release, we excluded a number of users
that may have employed methods to limit or otherwise avoid being
served advertisements (although our financials captured all the
costs of streaming content to these users). As such, the MAUs we
reported did not reflect the full number of users consuming content
through our service.
Our Q2 Total MAU figure of 180 million is inclusive of these
users that may have employed methods to limit or otherwise avoid
being served advertisements. For comparability we have adjusted our
prior period figures to align with this revised methodology. We
estimate that users exhibiting this behavior constitute less than
5% of our total reported Ad-Supported MAU figure (less than 3% of
Total MAUs).
Separately, we continue to work to identify and remove users
from our reported metrics that we consider to be “fake” users based
on various criteria. This includes, but is not limited to, bots and
other users who aim to manipulate stream counts for purposes of
royalty calculations. Such users are removed from our metrics in a
timely fashion once they are discovered. However, some such users
may remain in our reported metrics because of the limitations of
our ability to identify their accounts.
FINANCIAL METRICS
Revenue
Total revenue was €1,273 million this quarter, up 26% Y/Y.
Foreign exchange rate movement continued to be a significant
headwind this quarter. Excluding the negative impact from foreign
exchange rates, growth in revenue would have been 34% Y/Y.
Premium revenue was €1,150 million in Q2, up 27% Y/Y. Foreign
exchange rates had a meaningful impact, as Premium revenue would
have been up 35% Y/Y if the negative impact were excluded.
Average revenue per user (“ARPU”) was €4.89 in Q2, down 12% Y/Y
and up 4% Q/Q. The increase from Q1 is largely due to the timing of
our bi-annual campaigns which create a seasonal impact to both
revenue and gross margin. We expect this seasonality to continue.
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, Southeast Asia, and other
newly launched markets. Changes in foreign exchange rates also
contributed to the Y/Y decline in ARPU. Excluding the impact of
foreign exchange rates, ARPU would have been down 6% Y/Y.
Ad-Supported revenue was €123 million in Q2, up 20% 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 28% Y/Y.
During Q2 we implemented a new data policy which slowed our
revenue growth. We course corrected early in Q3 and are seeing a
recovery in the business. We did see some GDPR disruption across
our European markets during Q2 but seem to be largely past that
now. We are, and will remain, GDPR compliant thanks to a terrific
cross-functional effort.
The majority of our Ad-Supported revenue continues to be driven
through our Direct channel, but our Programmatic & Ad Studio
products are growing faster and now account for more than 20% of
the total. In Q2 we launched our new automated self-serve platform,
Ad Studio, in several more countries. We’re now live in the US, UK,
Canada, and Australia. Over time, we expect our Programmatic and
self-serve products to become a significant portion of Ad-Supported
revenue.
Ad spending continues to grow fast on our mobile platform, which
comprises the 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.
At the end of the quarter we unveiled Active Media in Australia,
which gives users the choice to hear, watch, or skip audio and
video ads they are served. We believe this system will better
enable us to understand what drives intent and engagement, and
ultimately allow us to personalize the ad experience in the same
way as our most popular playlists. With good execution we’re
betting that pay for performance will better monetize our free user
base than our current CPM-based pricing model.
Gross Margin
Gross Margin was 25.8% in Q2, the high end of our guidance
range, up from 24.9% in Q1 and 23.0% in Q2 2017. As a reminder,
Gross Margins tend to be lower 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 faster
subscriber growth. Q1 2018 margins included a 124 basis point gain
from adjustments to prior period estimates related to changes in
rightsholder liabilities. While there was a similar adjustment in
Q2, margins this quarter were much more in line with the usual
seasonality. We expect Gross Margin to continue to demonstrate
these seasonal patterns throughout the remainder of the year.
Premium Gross Margin was 26.9% in Q2, up from 26.0% in Q1 and
24.1% in Q2 2017. Ad-Supported Gross Margin was 16.3% in Q2, up
from 12.7% in Q1 and 13.6% in Q2 2017. Ad-Supported Gross Margins
are relatively strong in our developed markets and relatively weak
in our emerging markets. As the emerging markets grow, margins
should too.
Over the long run our goal is to manage the consolidated
business to 30%+ Gross Margins. We outlined our long-term margin
goals for the business at our Investor Day on March 15, 2018. Those
goals are informed by a vision for building a two-sided marketplace
where millions of artists can reach millions of fans. To succeed,
we said we need to help more artists connect with more fans. The
path to success involves building services and tools for labels and
artists focused on promotion, marketing, and career management.
This will be a multi-year journey, but we’re making exciting
progress. In the last quarter we have grown the number of unique
artists listened to on our platform by 5%. Additionally, Spotify
for Artists, our platform where artists can manage their profiles,
is now used by 200k artists monthly. In its first 9 months Monthly
Active Artists grew by 100k and doubled in the next 6 months.
Expect regular updates on our progress over time.
The benchmarks for success will include (1) the number of
creators on our platform, (2) the number of creators using our
promotion, marketing, and career management tools, and (3) the
number of artists and labels paying us to use our tools and
services.
Operating Expenses / Income (Loss)
Operating expenses totaled €419 million this quarter, and total
Operating Loss was €90 million. Operating Margin of (7.1%) improved
70 bps Y/Y.
We expensed €30 million in Q2 related to our Direct Listing. The
Operating Loss included a €32 million accrued expense related to
increased social tax on stock option grants and RSUs, primarily in
Sweden, a result of the strong stock performance in the quarter.
This was €24 million higher than our guidance forecast. Excluding
the non-recurring Direct Listing fee would have yielded an
Operating Loss of €60 million or (4.7%) as a percent of revenue, a
310 bps improvement Y/Y.
As of June 30, we had 3,969 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 €30 million in Net cash flows from operating
activities and €18 million in Free Cash Flow in Q2, which includes
the €30 million one-time expense related to our Direct Listing. We
maintain positive working capital dynamics, and our goal is to
sustain and grow Free Cash Flow 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. We anticipate these projects to cost more than €300
million over the next 12 to 18 months.
At the end of the quarter we held €1.7 billion in cash and cash
equivalents, restricted cash, and short term investments.
OUTLOOK
These forward-looking statements reflect Spotify’s expectations
as of July 26, 2018 and are subject to substantial uncertainty. For
the third quarter we are expecting:
- Total Monthly Active Users
(“MAU”): 188-193 million, up 25-29% Y/Y
- Total Premium Subscribers: 85-88
million, up 36-43% Y/Y
- Total Revenue: €1.2-€1.4
billion, up 17-36% Y/Y. This includes a negative impact of
approximately €30 million from foreign exchange rates; excluding
this impact, up 20-38% Y/Y
- Gross Margin: 23.7-25.7%
- Operating Loss: €10-€90
million
Additionally, for the fourth quarter we are expecting:
- Total Monthly Active Users
(“MAU”): 199-207 million, up 24-30% Y/Y
- Total Premium Subscribers: 93-97
million, up 30-37% Y/Y
- Total Revenue: €1.35-€1.55
billion, up 18-35% Y/Y. This includes a negative impact of
approximately €20 million from foreign exchange rates; excluding
this impact, up 20-37% Y/Y
- Gross Margin: 24.5-26.5%
- Operating Loss: €20-€100
million
TME INVESTMENT
Tencent Music Entertainment Group (“TME”), through its parent,
Tencent Holdings Limited, has announced its intention to list TME's
shares on a recognized stock exchange in the United States through
a registered public offering. We own TME shares. These are held in
long term investments on our balance sheet. A TME IPO would trigger
a fair market value adjustment to the carrying value of our
investment recognized in other comprehensive income. The gain could
be significant. The accounting treatment for such a gain could
trigger a tax benefit large enough to generate positive Net Income
for us in the quarter of the IPO. If such an outcome were to occur,
it would be a one-time, non-recurring event. The following quarters
we would expect the business to once again generate a Net Loss.
EARNINGS QUESTION & ANSWER SESSION
The Company will host a live question and answer session
starting at 8 a.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 also may join using the listen-only
conference line:
Participant Toll Free Dial-In Number: (866) 393-4306
Participant International Dial-In Number: (734) 385-2616
Conference ID 4567529
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 excludes 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; 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
Six months ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Revenue 1,273 1,139 1,007 2,412 1,909 Cost of revenue 944
856 775 1,800 1,572
Gross profit
329 283 232 612 337 Research and
development 143 115 95 258 175 Sales and marketing 173 138 146 311
256 General and administrative 103 71 70 174
124
419 324 311
743 555 Operating loss
(90 ) (41 ) (79 )
(131 ) (218 ) Finance income 41 15 41
56 68 Finance costs (343 ) (154 ) (148 ) (497 ) (210 ) Share in
earnings of associate — — (1 ) — 1
Finance income/(costs) - net (302 )
(139 ) (108 ) (441 )
(141 ) Loss before tax (392 )
(180 ) (187 ) (572 )
(359 ) Income tax expense/(benefit) 2 (11 ) 1
(9 ) 2
Net loss attributable to owners of the
parent (394 ) (169 ) (188
) (563 ) (361 ) Net loss per
share attributable to owners of the parent Basic and diluted
(2.20 ) (1.01 ) (1.24 ) (3.25 )
(2.40
)
Weighted-average ordinary shares outstanding Basic and
diluted 179,077,124 167,778,952 151,069,953
173,459,249
150,612,183
Interim condensed consolidated
statement of financial position(in € millions)
June 30,2018
December 31,2017
(Unaudited) Assets Non-current assets Property
and equipment 83 73 Intangible assets including goodwill 175 162
Investment in associate 1 1 Long term investments 968 910
Restricted cash and other non-current assets 65 54 Deferred tax
assets 10 9
1,302 1,209
Current assets Trade and other receivables 324 360 Income
tax receivable 1 — Short term investments 885 1,032 Cash and cash
equivalents 810 477 Other current assets 38 29
2,058 1,898 Total assets
3,360 3,107 Equity and
liabilities Equity Share capital — — Other paid in
capital 3,733 2,488 Other reserves 256 177 Accumulated deficit
(2,990 ) (2,427 )
Equity attributable to owners of parent
999 238 Non-current liabilities
Convertible notes — 944 Accrued expenses and other liabilities 71
56 Provisions 8 6 Deferred tax liabilities 2 3
81 1,009 Current liabilities
Trade and other payables 369 341 Income tax payable 4 9 Deferred
revenue 234 216 Accrued expenses and other liabilities 991 881
Provisions 51 59 Derivative liabilities 631 354
2,280 1,860 Total liabilities
2,361 2,869 Total equity and
liabilities 3,360 3,107
Interim condensed consolidated
statement of cash flows(Unaudited)(in € millions)
Three months ended Six months
ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Operating activities Net loss (394 ) (169 ) (188 ) (563 )
(361 ) Adjustments to reconcile net loss to net cash flows
Depreciation of property and equipment 4 9 11 13 23 Amortization of
intangible assets 2 2 1 4 3 Share-based payments expense 23 18 19
41 33 Finance income (41 ) (15 ) (41 ) (56 ) (68 ) Finance costs
343 154 148 497 210 Income tax expense/(benefit) 2 (11 ) 1 (9 ) 2
Share in earnings of associate — — 1 — (1 ) Other (3 ) 1 3 (2 ) 3
Changes in working capital: Decrease/(increase) in trade
receivables and other assets 12 15 13 27 (27 ) Increase in trade
and other liabilities 78 70 81 148 267 Increase in deferred revenue
7 9 15 16 24 (Decrease)/increase in provisions (4 ) (3 ) 2 (7 ) 46
Interest received 2 10 4 12 9 Net income tax (paid)/received (1 )
(6 ) 2 (7 ) 2
Net cash flows from operating
activities 30 84 72
114 165 Investing activities
Purchases of property and equipment (5 ) (6 ) (5 ) (11 ) (6 )
Purchases of short term investments (444 ) (271 ) (310 ) (715 )
(667 ) Sales and maturities of short term investments 451 430 300
881 586 Transaction fees for long term investment — (9 ) — (9 ) —
Change in restricted cash (7 ) (4 ) (8 ) (11 ) (36 ) Other (12 ) (1
) (19 ) (13 ) (44 )
Net cash flows (used in)/from investing
activities (17 ) 139 (42
) 122 (167 ) Financing
activities Proceeds from issuance of ordinary shares — 4 — 4 —
Proceeds from exercise of share options 57 39 3 96 20 Other (2 ) —
(1 ) (2 ) (2 )
Net cash flow from financing
activities 55 43 2
98 18 Net increase in cash and cash
equivalents 68 266 32 334 16
Cash and cash equivalents at beginning of the period 733 477 735
477 755 Net exchange losses on cash and cash equivalents 9
(10 ) (35 ) (1 ) (39 )
Cash and cash equivalents at period
end 810 733 732
810 732
Reconciliation of IFRS to Non-IFRS
Results(Unaudited)(in € millions, except percentages)
Three months ended Six months
ended
June 30,2018
June 30,2017
June 30,2018
June 30,2017
IFRS revenue 1,273 1,007 2,412 1,909 Foreign exchange effect on
2018 revenue using 2017 rates 76 176 Revenue excluding foreign
exchange effect 1,349 2,588 IFRS revenue year-over-year change % 26
% 26 %
Revenue excluding foreign exchange effect
year-over-year change %
34 % 36 % IFRS Premium revenue 1,150 904 2,187 1,732 Foreign
exchange effect on 2018 Premium revenue using 2017 rates 67 154
Premium revenue excluding foreign exchange effect 1,217 2,341 IFRS
Premium revenue year-over-year change % 27 % 26 %
Premium revenue excluding foreign exchange
effect year-over-year change %
35 % 35 % IFRS Ad-Supported revenue 123 103 225 177 Foreign
exchange effect on 2018 Ad-Supported revenue using 2017 rates 9 22
Ad-Supported revenue excluding foreign exchange effect 132 247 IFRS
Ad-Supported revenue year-over-year change % 20 % 27 %
Ad-Supported revenue excluding foreign
exchange effect year-over-year change %
28 % 40 %
EBITDA(Unaudited)(in €
millions)
Three months ended Six months
ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Net loss attributable to owners of the parent (394 ) (169 ) (188 )
(563 ) (361 ) Finance (income)/costs - net 302 139 108 441 141
Income tax expense/(benefit) 2 (11 ) 1 (9 ) 2 Depreciation and
amortization 6 11 12 17 26
EBITDA (84 ) (30 ) (67
) (114 ) (192 )
Free Cash Flow(Unaudited)(in €
millions)
Three months ended Six months
ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Net cash flows from operating activities 30 84 72 114 165 Capital
expenditures (5 ) (6 ) (5 ) (11 ) (6 ) Change in restricted cash (7
) (4 ) (8 ) (11 ) (36 )
Free Cash Flow 18
74 59 92 123
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Spotify Technology S.A.Investor Relations:Paul
Vogelir@spotify.comorPublic Relations:Graham
Jamespress_internal@spotify.com
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