Spotify Technology S.A. (NYSE:SPOT) today reported financial
results for the second fiscal quarter of 2019 ending June 30,
2019.
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20190731005324/en/
Dear Shareholders,
On balance, the business outperformed our expectations in 2Q19,
with Gross Margin up slightly Y/Y, despite our investments in
podcasting, and with revenue growing more than 2.5x faster than the
growth in operating expenses (ex. Direct Listing fees in Q2’18),
Operating Margin was near breakeven for Q2.
MONTHLY ACTIVE USERS (“MAUs”)
Total MAUs grew 29% Y/Y to 232 million, outperforming the high
end of our 222-228 million MAU guidance range.
Outperformance was broad based, with most of our geographic
regions growing faster than our expectations. Timing of certain
global music releases yielded some incremental benefit, as did our
launch on PlayStation consoles across the Middle East and Latin
America. Of note, two markets that have been long tied to physical
music distribution, Germany and Japan, both hit milestones during
Q2, performing materially better than forecast. Additionally, our
newest market India performed well and in line with expectations.
However, the most significant source of upside has been improvement
in long-term retention due to our continued product innovation,
particularly evident in our emerging geographies.
As a company, our goal is to continually innovate by testing and
learning from new product launches. During Q2, we launched a number
of new product initiatives across our major regions. Of note, we
rolled out Spotify Lite more widely, and this offering is now
available in 36 markets. We also expanded our beta test of Spotify
Stations (our genre based, radio-like, lean-back experience) to the
US in late May/early June. While these are two of the more recent
high profile tests, we are constantly adding and expanding upon our
offerings in select markets. Some of these may become global
products and some may never leave beta. We believe that launching
and innovating rapidly has led to a better overall user experience,
and will continue to improve retention and consumer satisfaction.
Some initiatives may work, some may not, but we believe the
learnings from quick innovation will inform our future product road
map. Speed of iteration will trump quality of iteration.
PREMIUM SUBSCRIBERS
We finished Q2 with 108 million Premium Subscribers globally, up
31% Y/Y but below the midpoint of our guidance range of 107-110
million. Intake from our bi-annual campaign was in line with our
expectations, monthly churn declined both sequentially and Y/Y to a
record low 4.6%, and our winback percentage on gross ads
reaccelerated Q/Q. However, intake into our Student product was
below plan. As we have discussed previously, our goal is to perform
at roughly the 70th percentile of our guidance range and we missed
on subs. That’s on us. The good news is that the shortfall was
execution related, rather than softness in the business, and we
expect to make up the lost ground before year-end.
As mentioned above, our mid-year campaign kicked off in mid-May
and ran through the end of June offering three months of Spotify
Premium for $0.99 or equivalent. Intake was largely in line with
our expectations, with notable strength seen across our emerging
markets.
FINANCIAL METRICS
Revenue
Total revenue was €1,667 million in Q2, representing growth of
31% Y/Y. Premium revenue was €1,502 million of the total and grew
31% Y/Y, ahead of our expectations. Ad-Supported revenue was €165
million and grew 34% Y/Y, a meaningful acceleration of growth from
Q1.
For the Premium business, average revenue per user (“ARPU”) was
€4.86 in Q2, down less than 1% Y/Y (down 2% excluding the impact
from foreign exchange rates). Downward pressure on ARPU continues
to moderate, and we continue to expect that ARPU declines through
the remainder of the year will be in the low single digits. As we
mentioned last quarter, 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.
For the Ad-Supported business, Direct revenues outperformed our
forecast primarily due to strength in the US. Audio was our fastest
growing product for the third consecutive quarter, up 38% Y/Y, and
Asia remained our fastest growing region.
Programmatic and Ad Studio revenue growth accelerated to 71% in
Q2, and now account for approximately 30% of total Ad-Supported
revenue. Programmatic growth in the US exceeded 50%, and our next 5
largest markets in aggregate increased triple digits Y/Y.
We are seeing increased demand for podcast advertising following
our recent acquisitions and continued development of owned and
exclusive non-music audio content. While still relatively small, we
continue to expect fast revenue growth from podcasts through the
remainder of 2019 and into 2020. Over time, our ambition is to
reinvent the podcasting ad experience by building a new tech stack
to enable targeting, measurement, and reporting capabilities like
we have for our core Ad-Supported offering.
Gross Margin
Gross Margin was 26.0% in Q2, 50 bps above the high end of our
guidance range of 23.5-25.5%. The performance was largely driven by
better than expected streaming delivery costs as a result of
efficiencies driven by usage optimization work, slower than
anticipated release of original podcast content, and better than
expected royalty margin resulting from slight differences in
product and geographic mix.
Premium Gross Margin was 27.2% in Q2, up from 25.9% in Q1 and up
30 bps Y/Y. Ad-Supported Gross Margin was 15.8% in Q2, up
seasonally from 11.3% in Q1 but down 50 bps Y/Y.
Operating Expenses / Income (Loss)
Operating expenses of €437 million in Q2 increased 4% Y/Y (12%
Y/Y excluding the costs associated with our Direct Listing in Q2
2018). Operating Losses totaled €3 million yielding an Operating
Margin of (0.2%), an improvement of 690 bps Y/Y (450 bps excluding
the costs associated with our Direct Listing in Q2 2018). Our
better than expected loss in the quarter was a result of higher
Gross Profit and lower than expected spend across artist marketing,
R&D, and G&A.
The growth in our share price in Q2 increased operating expenses
more than plan because of higher social charges. The increased
social expense was approximately 40 basis points higher than
forecast due to the increase in our stock price during Q2. 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 upward or downward
movements will impact our reported operating expenses.
IFRS 16
Starting 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 €10 million of lease liability interest
expense in finance costs during the second quarter of 2019.
Free Cash Flow
We generated €90 million in net cash flows from operating
activities and €50 million in Free Cash Flow in Q2. Each nearly
tripled Y/Y. 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 €40 million
associated with our office builds in Q2. Delays of certain projects
have pushed certain costs originally anticipated in Q2 into future
quarters. We expect to complete these projects over the next four
quarters at a cost of roughly €190 million. We expect the level of
spend to be relatively consistent with our Q2 cash outflow over the
period.
We ended Q2 with €1.6 billion in cash and cash equivalents,
restricted cash, and short term investments.
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 Q2, the
Company repurchased 1,372,896 shares at a total cost of $186.9
million and an average cost of $136.14 per share. In total, the
Company has repurchased 3,079,576 shares at a total cost of $412.4
million and an average cost of $133.82 per share.
Podcasts
Tens of millions of users are now streaming podcast content on a
monthly basis, and more are discovering new forms of audio content
each day. Our podcast audience grew more than 50% Q/Q and has
nearly doubled since the start of the year. Our Content team
continues to find and support engaging material across a wide range
of genres and geographies. Q2 saw the launch of a number of
original and/or exclusive titles like Jemele
Hill is Unbothered and Riggle’s
Picks in the US, The Dark Side
of… and The Two Princes from
the recently acquired Parcast and Gimlet studios, respectively,
Adam och Kompani in Sweden, and
3 Shots of Tequila in the UK. In
addition to these titles, more than 30,000 new podcasts were
delivered through our Spotify for Podcasters platform. We also
launched a new product feature called Your
Daily Drive to better serve the in-car listening experience
that intertwines up to the minute news from partners including NPR,
The Wall Street Journal, and The New York Times with music specific
to your listening history.
Additionally, we announced a multi-year partnership with
President Barack Obama and Michelle Obama’s production Company,
Higher Ground, to produce exclusive
content for the Spotify platform. The Obamas formed Higher Ground
to produce powerful stories to entertain, inform, and inspire, and
to lift up new, diverse voices in the entertainment industry. Under
the Higher Ground partnership, President and Mrs. Obama will
develop, produce, and lend their voices to select podcasts,
connecting them to listeners around the world on wide-ranging
topics.
Major Label License Renewals
We have reached agreement with two of our four major label
partners on the renewal of our global sound recording licenses, and
are in active discussions with the other two. This is the sixth
round of label negotiations we’ve worked through in our thirteen
year history and, while it is typically a long drawn-out process,
it has become part of the normal cadence of the business.
Two-Sided Marketplace
We are making good progress on the development of a set of
marketplace services and are actively building and testing
prototype products with some label partners. We’ll have more to say
about these products if and when they commercially launch. We
expect the launch to begin in early 2020.
During our Investor Day last year, we mentioned that the number
of top tier artists (those representing the vast majority of
streams) grew almost 30% in two years, from 16,000 artists to
22,000 at the time of the presentation. Today, that cohort has
grown another 36% to more than 30,000. This figure signifies
accelerating growth in discovery and is a leading indicator of
success in our mission to enable more than 1 million artists to
live off their work. We now have more than 400,000 creators and
their teams using Spotify for Artists, one of our marketplace
tools. This is up 33% YTD.
Q3 AND Q4 2019 OUTLOOK
These forward-looking statements reflect Spotify’s expectations
as of July 31, 2019 and are subject to substantial uncertainty.
Q3 2019 Guidance:
- Total MAUs: 240-245 million
- Total Premium Subscribers: 110-114 million
- Total Revenue: €1.57-€1.77 billion
- Gross Margin: 23.2-25.2%
- Operating Profit/Loss: €2-€(78) million
Q4 2019 Guidance:
- Total MAUs: 250-265 million
- Total Premium Subscribers: 120-125 million
- Total Revenue: €1.74-€1.94 billion
- Gross Margin: 23.7-25.7%
- Operating Profit/Loss: €(31)-€(131) million
Our quarterly 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.
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: (866) 393-4306
Participant International Dial-In Number: (734) 385-2616
Conference ID: 9375306
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
Six months ended
June 30, 2019
March 31, 2019
June 30, 2018
June 30, 2019
June 30, 2018
Revenue
1,667
1,511
1,273
3,178
2,412
Cost of revenue
1,233
1,138
944
2,371
1,800
Gross profit
434
373
329
807
612
Research and development
151
155
143
306
258
Sales and marketing
200
172
173
372
311
General and administrative
86
93
103
179
174
437
420
419
857
743
Operating loss
(3
)
(47
)
(90
)
(50
)
(131
)
Finance income
8
34
41
42
56
Finance costs
(64
)
(156
)
(343
)
(220
)
(497
)
Finance income/(costs) - net
(56
)
(122
)
(302
)
(178
)
(441
)
Loss before tax
(59
)
(169
)
(392
)
(228
)
(572
)
Income tax expense/(benefit)
17
(27
)
2
(10
)
(9
)
Net loss attributable to owners of the
parent
(76
)
(142
)
(394
)
(218
)
(563
)
Loss per share attributable to
owners
of the parent
Basic and diluted
(0.42
)
(0.79
)
(2.20
)
(1.21
)
(3.25
)
Weighted-average ordinary shares
outstanding
Basic and diluted
180,409,115
180,613,539
179,077,124
180,510,763
173,459,249
Condensed consolidated statement of financial position
(Unaudited) (in € millions)
June 30, 2019
December 31, 2018
Assets
Non-current assets
Lease right-of-use assets
398
—
Property and equipment
243
197
Goodwill
464
146
Intangible assets
55
28
Long term investments
1,883
1,646
Restricted cash and other non-current
assets
68
65
Deferred tax assets
10
8
3,121
2,090
Current assets
Trade and other receivables
429
400
Income tax receivable
2
2
Short term investments
586
915
Cash and cash equivalents
909
891
Other current assets
66
38
1,992
2,246
Total assets
5,113
4,336
Equity and liabilities
Equity
Share capital
—
—
Other paid in capital
3,854
3,801
Treasury shares
(365
)
(77
)
Other reserves
1,197
875
Accumulated deficit
(2,741
)
(2,505
)
Equity attributable to owners of the
parent
1,945
2,094
Non-current liabilities
Lease liabilities
517
—
Accrued expenses and other liabilities
11
85
Provisions
5
8
Deferred tax liabilities
2
2
535
95
Current liabilities
Trade and other payables
440
427
Income tax payable
4
5
Deferred revenue
290
258
Accrued expenses and other liabilities
1,327
1,076
Provisions
53
42
Derivative liabilities
519
339
2,633
2,147
Total liabilities
3,168
2,242
Total equity and liabilities
5,113
4,336
Interim condensed consolidated statement of cash flows
(Unaudited) (in € millions)
Three months ended
Six months ended
June 30, 2019
March 31, 2019
June 30, 2018
June 30, 2019
June 30, 2018
Operating activities
Net loss
(76
)
(142
)
(394
)
(218
)
(563
)
Adjustments to reconcile net loss to net
cash flows
Depreciation of property and equipment
17
17
4
34
13
Amortization of intangible assets
3
4
2
7
4
Share-based payments expense
37
26
23
63
41
Finance income
(8
)
(34
)
(41
)
(42
)
(56
)
Finance costs
64
156
343
220
497
Income tax expense/(benefit)
17
(27
)
2
(10
)
(9
)
Other
(10
)
8
(3
)
(2
)
(2
)
Changes in working capital:
(Increase)/decrease in trade
receivables
and other assets
(50
)
35
12
(15
)
27
Increase in trade and other
liabilities
75
155
78
230
148
Increase in deferred revenue
19
13
7
32
16
Increase/(decrease) in provisions
8
—
(4
)
8
(7
)
Interest paid on lease liabilities
(9
)
(4
)
—
(13
)
—
Interest received
4
4
2
8
12
Income tax paid
(1
)
(2
)
(1
)
(3
)
(7
)
Net cash flows from operating
activities
90
209
30
299
114
Investing activities
Business combinations, net of cash
acquired
(36
)
(288
)
(9
)
(324
)
(9
)
Purchases of property and equipment
(40
)
(37
)
(5
)
(77
)
(11
)
Purchases of short term investments
(298
)
(104
)
(444
)
(402
)
(715
)
Sales and maturities of short term
investments
370
383
451
753
881
Change in restricted cash
—
1
(7
)
1
(11
)
Other
(3
)
(4
)
(3
)
(7
)
(13
)
Net cash flows (used in)/from investing
activities
(7
)
(49
)
(17
)
(56
)
122
Financing activities
Payments of lease liabilities
(4
)
(5
)
—
(9
)
—
Repurchases of ordinary shares
(157
)
(126
)
—
(283
)
—
Proceeds from exercise of share
options
20
33
57
53
96
Other
—
—
(2
)
—
2
Net cash flow (used in)/from financing
activities
(141
)
(98
)
55
(239
)
98
Net (decrease)/increase in cash and
cash equivalents
(58
)
62
68
4
334
Cash and cash equivalents at beginning of
the period
966
891
733
891
477
Net exchange gains/(losses) on cash and
cash equivalents
1
13
9
14
(1
)
Cash and cash equivalents at period
end
909
966
810
909
810
Reconciliation of IFRS to Non-IFRS Results
(Unaudited)
(in € millions, except percentages)
Three months ended
Six months ended
June 30,
2019
June 30,
2018
June 30,
2019
June 30,
2018
IFRS revenue
1,667
1,273
3,178
2,412
Foreign exchange effect on 2019 revenue
using 2018 rates
(33
)
(66
)
Revenue excluding foreign exchange
effect
1,634
3,112
IFRS revenue year-over-year change %
31
%
32
%
Revenue excluding foreign exchange effect
year-over-year change %
28
%
29
%
IFRS Premium revenue
1,502
1,150
2,887
2,187
Foreign exchange effect on 2019 Premium
revenue using 2018 rates
(25
)
(51
)
Premium revenue excluding foreign exchange
effect
1,477
2,836
IFRS Premium revenue year-over-year change
%
31
%
32
%
Premium revenue excluding foreign exchange
effect year-over-year change %
28
%
30
%
IFRS Ad-Supported revenue
165
123
291
225
Foreign exchange effect on 2019
Ad-Supported revenue using 2018 rates
(8
)
(15
)
Ad-Supported revenue excluding foreign
exchange effect
157
276
IFRS Ad-Supported revenue year-over-year
change %
34
%
29
%
Ad-Supported revenue excluding foreign
exchange effect year-over-year change %
28
%
23
%
EBITDA (Unaudited) (in € millions)
Three months ended
Six months ended
June 30,
2019
March 31,
2019
June 30,
2018
June 30,
2019
June 30,
2018
Net loss attributable to owners of the
parent
(76
)
(142
)
(394
)
(218
)
(563
)
Finance income/(costs) - net
56
122
302
178
441
Income tax expense/(benefit)
17
(27
)
2
(10
)
(9
)
Depreciation and amortization
20
21
6
41
17
EBITDA
17
(26
)
(84
)
(9
)
(114
)
Free Cash Flow (Unaudited) (in € millions)
Three months ended
Six months ended
June 30,
2019
March 31,
2019
June 30,
2018
June 30,
2019
June 30,
2018
Net cash flows from operating
activities
90
209
30
299
114
Capital expenditures
(40
)
(37
)
(5
)
(77
)
(11
)
Change in restricted cash
—
1
(7
)
1
(11
)
Free Cash Flow
50
173
18
223
92
1Free 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/20190731005324/en/
Investor Relations: Paul Vogel ir@spotify.com Public Relations: Dustee Jenkins
press@spotify.com
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