Spotify Technology S.A. (NYSE:SPOT) today
reported financial results for the first fiscal quarter of 2019
ending March 31, 2019.
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20190429005261/en/
(Graphic: Business Wire)
Dear Shareholders,
Results for Q1 2019 were largely positive with most metrics
outperforming our expectations and landing at the high end of, or
exceeding, our Q1 guidance.1
MONTHLY ACTIVE USERS (“MAUs”)
MAUs grew 26% Y/Y to 217 million, slightly lower than the
midpoint of our 215-220 million MAU guidance range.
We launched India in late February expanding our global market
footprint to 79 countries. More than 1 million users signed up for
Spotify in our first week in the market, and growth has continued
to outpace our expectations. We now have more than 2 million users
in India.
PREMIUM SUBSCRIBERS
Premium Subscribers grew to 100 million, up 32% Y/Y, reaching
the high end of our guidance range of 97-100 million, and marking
an important milestone in Company history. Outperformance was
driven by a better than plan promotion in the US and Canada and
continued strong growth in Family Plan. We also saw strong growth
from the expansion of our Google Home Mini promotion, as well as
the price reduction to our Spotify Premium + Hulu offering in the
US.
In March, we extended our partnership with Google by expanding
our Google Home Mini promotion to two new markets, the UK and
France. The new promotional offer is substantially similar to the
deal offered in the US in Q4. In the UK and France, new and
existing Family Plan master account holders can claim a free Google
Home Mini voice speaker. We believe that voice speakers are a
critical area of growth, particularly for music and podcasts, and
we intend to continue to pursue opportunities to expand our
presence in that area.
We announced a significant step forward in our ongoing
partnership with Samsung during Q1 whereby the Spotify app will be
preloaded on millions of new devices globally. New users in the US
who purchase Samsung’s flagship Galaxy S10 device with the Spotify
app preloaded also will have access to a special six month free
trial offer for Spotify Premium.
Additionally, we expanded our partnership with Hulu during Q1 by
offering their limited commercial plan to our Standard $9.99
subscribers at no additional charge. This promotion replaces our
existing $12.99 Spotify + Hulu bundle and builds upon the success
and popularity of our Spotify Student + Hulu plan available in the
US.
Family and Student plans continue their fast growth and have
continued to increase as a percentage of our total subscribers.
Churn was flat with Q4 and also roughly the same as Q1 of 2018.
FINANCIAL METRICS
RevenueTotal Q1 revenue of €1,511 million grew 33%
Y/Y.
Premium revenue of €1,385 million in Q1 grew 34% Y/Y, the third
quarter of accelerating Y/Y growth in the last four quarters.
Average revenue per user (“ARPU”) was €4.71 in Q1, roughly flat Y/Y
(down 2% excluding the impact from foreign exchange rates).
Downward pressure on ARPU has moderated, and we expect that ARPU
declines through the remainder of the year will be in the low
single digits. As we’ve spoken about in previous quarters, the
declines in ARPU are a result of shifts in both product and
geographic mix. Approximately 75% of the impact to ARPU is
attributable to product mix changes, and the remainder a function
of changes in geographic mix and other factors.
Ad-Supported revenue of €126 million grew 24% Y/Y. We saw a
small incremental benefit from podcasts during Q1 following our
acquisitions of Gimlet Media and Anchor in February and the
successful rollout of Spotify owned and exclusive content (The Joe
Budden Podcast, Amy Schumer Presents: 3 Girls, 1 Keith, Dope Labs,
etc.) We expect the revenue from podcasts to accelerate through
2019. Over time, our ambition is to develop a more robust
advertising solution for podcasts that will allow us to layer in
the kind of targeting, measurement, and reporting capabilities we
have for the core Ad-Supported business.
Ad-Supported revenue growth underperformed our expectations in
Q1, primarily in the US and primarily with our sponsored sessions
video product. The performance shortfall was pricing related. We
have course corrected and are seeing strong growth across the ads
business in Q2.
Two of our strongest areas of growth in Q1 were measurement and
programmatic revenues. Measurement related revenues doubled from
20% to 40% of total ad revenues Y/Y, while Programmatic and
Self-Serve grew 53% Y/Y and now account for 26% of Total
Ad-Supported Revenue.
In April of last year we officially unveiled a new Ad-Supported
experience on Spotify. The updated user experience provided greater
consumer control and an increased focus on curation and
personalization. The net result has been a 12% increase in Content
Hours per MAU across our free tier. This means accelerating growth
in ad inventory, which should mean stronger Ad-Supported revenue
growth.
Gross MarginGross Margin was 24.7% in Q1, above the high
end of our guidance range of 22.5-24.5%. Outperformance relative to
our expectations resulted from a combination of outperformance of
Premium Subscribers, slower than anticipated release of original
podcast content, and supply constraints of Google Home Mini devices
relating to our Family Plan promotion.
Premium Gross Margin was 25.9% in Q1, down from 27.3% in Q4 and
down 20 bps Y/Y. Ad-Supported Gross Margin was 11.1% in Q1, down
seasonally from 22.1% in Q4 and down 160 bps Y/Y.
Spotify for ArtistsIn October 2018, we launched Spotify
for Podcasters in beta, a platform that provides podcast creators
with tools and data insights about audience demographics. Early
adoption continues to gain momentum, as the number of podcast
creators using the platform has nearly doubled in the first 6
months. More than 20,000 podcast teams are now using the platform
on a monthly basis. Additionally, more than 50,000 shows have been
submitted to Spotify through Spotify for Podcasters, enabling
listeners around the world to discover new and unique content that
suits their interests. Today there are more than 250,000 podcast
titles available on our platform. In Q1 we launched 15 originals
and exclusives including Podkinski in Germany, Gynning & Berg
in Sweden, and our daily news podcast, Cafe da Manha in Brazil, a
format we hope to expand to other countries in Latin America.
Last month Spotify for Artists launched a new feature called
Unique Links. This tool enables artists to share a customized URL
that links to a playlist featuring their track(s) at the top of the
playlist. By offering greater personalization of Editorial
playlists, we’ve increased the number of artists featured on
playlists by 30% and the number of songs listeners are discovering
by 35%.
In Q1 we continued to develop tools for Spotify Publishing
Analytics. We introduced playlist add annotations which allow
publishers to see when their songs are added to playlists and
understand which playlists drive spikes in listening. To date we’ve
seen engagement from 40 of the top music publishers around the
world.
Operating Expenses / Income (Loss)Operating expenses of
€420 million in Q1 increased 30% Y/Y. Operating Losses totaled €47
million yielding an Operating Margin of (3.1%), an improvement of
50 bps Y/Y. Our better than expected loss in the quarter was a
result of higher Gross Profit and lower than expected marketing
spend.
The growth in our share price in Q1 significantly increased our
operating expenses for the quarter. The increase in our stock price
resulted in a significant increase of accrued social costs for
stock options and RSUs. As a reminder, social costs are payroll
taxes associated with employee salaries and benefits, including
stock 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 material upward or downward movements can have an
outsized impact on our reported operating expenses.
IFRS 16Starting January 1, 2019, we adopted the new lease
accounting standards dictated by IFRS 16. This required certain
leases which were accounted for as operating leases be treated as
finance leases going forward. Certain leases were reclassified as
assets and liabilities on the balance sheet which yielded increased
depreciation and interest expense, offset by a reduction in rental
expense. We recognized €9 million of lease liability interest
expense in finance costs during the first quarter of 2019.
Free Cash FlowWe generated €209 million in net cash flows
from operating activities and €173 million in Free Cash Flow in Q1.
Both more than doubled Y/Y. Free Cash Flow in Q1 benefited from the
growth of accounts payable. 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 paid out
approximately €37 million associated with our office builds in Q1.
We expect to complete these projects over the next 12 months at a
cost of roughly €200 million. As a result, we are expecting a
sequential increase in capital expenditures for office space in Q2
of approximately €25 million.
We ended Q1 with €1.7 billion in cash and cash equivalents,
restricted cash, and short term investments.
Q1 Investments UpdateIn Q1 the value of our Tencent Music
(“TME”) investment increased by €652 million to €2.3 billion. The
change in value was accounted for as a gain in Other Comprehensive
Income. We also spent €308 million in total purchase consideration
to acquire Gimlet Media and Anchor FM, and subsequent to the
quarter end, we acquired a third podcasting company, Cutler Media,
LLC (“Parcast”), for total purchase consideration of approximately
€50 million. The combined purchase consideration for all three
podcast companies was €358M which is roughly equivalent to
Spotify’s cumulative FCF over the last three quarters, or
alternatively, 55% of the Q2 increase in the value of our TME
investment.
Growth of Global Recorded Music Market AcceleratesThe
International Federation of the Phonographic Industry (“IFPI”)
released its annual Global Music Report in April 2019. IFPI
reported that industry growth accelerated to 9.7% in 2018 to $19.1
billion, an increase from 8.1% in 2017 and the fourth consecutive
year of growth. While Physical declined 10% and Downloads declined
21%, Streaming grew 34%, and now accounts for 47% of all industry
revenue. Streaming is the engine driving the growth in recorded
music revenue and Spotify is the engine driving the growth in
Streaming.
Q2 2019 AND FULL YEAR OUTLOOK
These forward-looking statements reflect Spotify’s expectations
as of April 29, 2019 and are subject to substantial
uncertainty.
Q2 2019 Guidance:
- Total MAUs: 222-228 million, up
23-27% Y/Y
- Total Premium Subscribers:
107-110 million, up 29-34% Y/Y
- Total Revenue: €1.51-€1.71
billion, up 18-35% Y/Y
- Gross Margin: 23.5-25.5%
- Operating Profit/Loss:
€(15)-(€95) million
Full Year 2019 Guidance:
- Total MAUs: 245-265 million, up
18-28% Y/Y
- Total Premium Subscribers:
117-127 million, up 21-32% Y/Y
- Total Revenue: €6.35-€6.8
billion, up 21-29% Y/Y
- Gross Margin: 22.0-25.0%
- Operating Profit/Loss:
€(180)-(€340) million
Our quarterly and annual guidance continues to include an
estimate of the impact of social charges on our financial
statements. This expense can vary materially from quarter to
quarter based on fluctuations in the price of Spotify stock, which
impacts our accruals for future expenses. Our forecast guidance
ranges incorporate our best estimate of the impact of social
charges on our income statement; however, material changes in the
value of Spotify’s stock price could have an outsized impact on our
reported profit or loss for the quarter and/or the year.
SHARE REPURCHASE PROGRAM UPDATE
On November 5, 2018, Spotify announced a program to repurchase
up to $1.0 billion of its publicly traded shares. During Q1, the
Company repurchased 1,019,409 shares at a total cost of $138.2
million and an average cost of $135.58 per share. In total, the
Company has repurchased 1,706,680 shares at a total cost of $225.5
million and an average cost of $132.13 per share.
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 Founder and CEO, and Barry McCarthy, our Chief Financial
Officer, will be on hand to answer questions submitted to
ir@spotify.com and via the live chat window available through the
webcast. Participants also may join using the listen-only
conference line:
Participant Toll Free Dial-In Number: (844)
343-9039Participant International Dial-In Number: (647)
689-5130Conference ID: 4598466
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 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
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 and to retain existing users; our
dependence upon third-party licenses for sound recordings and
musical compositions; our lack of control over the providers of our
content and their effect on our access to music and other content;
our ability to generate sufficient revenue to be profitable or to
generate positive cash flow on a sustained basis; our ability to
comply with the many complex license agreements to which we are a
party; 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;
assertions by third parties of infringement or other violations by
us of their intellectual property rights; competition for users and
user listening time; our ability to accurately estimate our user
metrics and other estimates; risks associated with manipulation of
stream counts and user accounts and unauthorized access to our
services; changes in legislation or governmental regulations
affecting us; ability to hire and retain key personnel; our ability
to maintain, protect, and enhance our brand; risks associated with
our international expansion, including difficulties obtaining
rights to stream music on favorable terms; risks relating to the
acquisition, investment, and disposition of companies or
technologies; dilution resulting from additional share issuances;
tax-related risks; the concentration of voting power among our
founders who have and will continue to have substantial control
over our business; risks related to our status as a foreign private
issuer; international, national or local economic, social or
political conditions; and risks associated with accounting
estimates, currency fluctuations and foreign exchange controls.
Other sections of this report describe additional risk factors
that could adversely impact our business and financial performance.
Moreover, we operate in an evolving environment. New risk factors
and uncertainties emerge from time to time, and it is not possible
for our management to predict all risk factors and uncertainties,
nor are we able to assess the impact of all of these risk factors
on our business or the extent to which any risk factor, or
combination of risk factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
We qualify all of our forward-looking statements by these
cautionary statements. You should read this report and the
documents that we have filed as exhibits to this report completely
and with the understanding that our actual future results may be
materially different and worse from what we expect.
Interim condensed consolidated statement of
operations
(Unaudited)
(in € millions, except share and per share
data)
Three months ended March 31,
2019
December 31,
2018
March 31,
2018
Revenue 1,511 1,495 1,139 Cost of revenue 1,138 1,096
856
Gross profit 373 399 283
Research and development 155 100 115 Sales and marketing 172 163
138 General and administrative 93 42 71
420 305 324 Operating
(loss)/income (47 ) 94 (41 )
Finance income 34 389 15 Finance costs (156 ) (2 ) (154 )
Finance income/(costs) - net (122 ) 387
(139 ) Loss before tax (169
) 481 (180 ) Income tax
(benefit)/expense (27 ) 39 (11 )
Net (loss)/income
attributable to owners of the parent (142 )
442 (169 ) (Loss)/earnings per share
attributable to owners
of the parent
Basic (0.79 ) 2.44 (1.01 ) Diluted (0.79 ) 0.36 (1.01
)
Weighted-average ordinary shares outstanding Basic
180,613,539 181,067,994 167,778,952 Diluted
180,613,539 190,511,148 167,778,952
Condensed consolidated
statement of financial position
(Unaudited)
(in € millions)
March 31,
2019
December 31,
2018
Assets Non-current assets Lease right-of-use assets
430 — Property and equipment 235 197 Goodwill 424 146 Intangible
assets 54 28 Long term investments 2,299 1,646 Restricted cash and
other non-current assets 70 65 Deferred tax assets 10 8
3,522 2,090 Current
assets Trade and other receivables 391 400 Income tax
receivable 2 2 Short term investments 660 915 Cash and cash
equivalents 966 891 Other current assets 52 38
2,071 2,246 Total assets
5,593 4,336 Equity and
liabilities Equity Share capital — — Other paid in
capital 3,834 3,801 Treasury shares (198 ) (77 ) Other reserves
1,491 875 Accumulated deficit (2,665 ) (2,505 )
Equity
attributable to owners of the parent 2,462
2,094 Non-current liabilities Lease
liabilities 555 — Accrued expenses and other liabilities 1 85
Provisions 7 8 Deferred tax liabilities 61 2
624 95 Current liabilities Trade
and other payables 397 427 Income tax payable 4 5 Deferred revenue
273 258 Accrued expenses and other liabilities 1,298 1,076
Provisions 44 42 Derivative liabilities 491 339
2,507 2,147 Total liabilities
3,131 2,242 Total equity and
liabilities 5,593 4,336
Interim condensed consolidated statement of
cash flows
(Unaudited)
(in € millions)
Three months ended March 31,
2019
December 31,
2018
March 31,
2018
Operating activities Net (loss)/income (142 ) 442 (169 )
Adjustments to reconcile net loss to net cash flows Depreciation of
property and equipment 17 4 9 Amortization of intangible assets 4 4
2 Share-based payments expense 26 23 18 Finance income (34 ) (389 )
(15 ) Finance costs 156 2 154 Income tax (benefit)/expense (27 ) 39
(11 ) Other 8 15 1 Changes in working capital: Decrease/(increase)
in trade receivables
and other assets
35 (59 ) 15 Increase in trade and other liabilities 155 57 70
Increase in deferred revenue 13 17 9 Decrease in provisions — (7 )
(3 ) Interest paid on lease liabilities (4 ) — — Interest received
4 3 10 Income tax paid (2 ) (1 ) (6 )
Net cash flows from
operating activities 209 150
84 Investing activities Business combinations,
net of cash acquired (288 ) — — Purchases of property and equipment
(37 ) (65 ) (6 ) Purchases of short term investments (104 ) (300 )
(271 ) Sales and maturities of short term investments 383 66 430
Change in restricted cash 1 (1 ) (4 ) Other (4 ) — (10 )
Net cash flows (used in)/from investing activities
(49 ) (300 ) 139
Financing activities Payments of lease liabilities (5 ) — —
Repurchases of ordinary shares (126 ) (72 ) — Proceeds from
exercise of share options 33 17 39 Other — — 4
Net cash flow (used in)/from financing activities (98
) (55 ) 43 Net increase in
cash and cash equivalents 62 (205 )
266 Cash and cash equivalents at beginning of the period 891
1,095 477 Net exchange gains/(losses) on cash and cash equivalents
13 1 (10 )
Cash and cash equivalents at period
end 966 891 733
Reconciliation of IFRS to Non-IFRS
Results
(Unaudited)
(in € millions, except percentages)
Three months ended March 31,
2019
March 31,
2018
IFRS revenue 1,511 1,139 Foreign exchange effect on 2019 revenue
using 2018 rates (33 ) Revenue excluding foreign exchange effect
1,478 IFRS revenue year-over-year change % 33 %
Revenue excluding foreign exchange effect
year-over-year change %
30 % IFRS Premium revenue 1,385 1,037 Foreign exchange effect on
2019 Premium revenue using 2018 rates (26 ) Premium revenue
excluding foreign exchange effect 1,359 IFRS Premium revenue
year-over-year change % 34 %
Premium revenue excluding foreign exchange
effect year-over-year change %
31 % IFRS Ad-Supported revenue 126 102
Foreign exchange effect on 2019
Ad-Supported revenue using 2018 rates
(7 ) Ad-Supported revenue excluding foreign exchange effect 119
IFRS Ad-Supported revenue year-over-year change % 24 %
Ad-Supported revenue excluding foreign
exchange effect year-over-year change %
17 %
EBITDA
(Unaudited)
(in € millions)
Three months ended March 31,
2019
December 31,
2018
March 31,
2018
Net (loss)/income attributable to owners of the parent (142 ) 442
(169 ) Finance income/(costs) - net 122 (387 ) 139 Income tax
(benefit)/expense (27 ) 39 (11 ) Depreciation and amortization 21
8 11
EBITDA (26 )
102 (30 )
Free Cash Flow
(Unaudited)
(in € millions)
Three months ended March 31,
2019
December 31,
2018
March 31,
2018
Net cash flows from operating activities 209 150 84 Capital
expenditures (37 ) (65 ) (6 ) Change in restricted cash 1 (1
) (4 )
Free Cash Flow 173 84
74
1 Free Cash Flow is a non-IFRS measure. See “Use of Non-IFRS
Measures” and “Reconciliation of IFRS to Non-IFRS Results” for
additional information.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190429005261/en/
Investor Relations:Paul Vogelir@spotify.com
Public Relations:Dustee Jenkinspress@spotify.com
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