Spotify Technology S.A. (NYSE:SPOT) today
reported financial results for the fourth fiscal quarter of 2018
ending December 31, 2018.
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20190206005298/en/
Dear Shareholders,
Results for Q4 2018 outperformed our expectations and, for the
first time in company history, Operating Income, Net Income, and
Free Cash Flow were all positive.
MONTHLY ACTIVE USERS
MAUs grew 29% Y/Y to 207 million, outperforming the high end of
our 199-206 million MAU guidance range. This outperformance was
broad based, with growth in most markets exceeding our
expectations, primarily as a result of improved retention relative
to our forecast. Latin America and other emerging regions continue
to see especially strong growth.
During Q4 our footprint expanded to 78 countries from 65 as we
launched our service across 13 countries in the Middle East and
North Africa in mid-November. Performance to date has exceeded our
initial expectations, and we hope to build on this momentum in
2019.
We also reached an important milestone as users listened to more
than 15 billion hours of content on the platform during Q4.
Importantly, engagement grew across both the Ad-Supported and
Premium tiers.
PREMIUM SUBSCRIBERS
Premium Subscribers reached 96 million, up 36% Y/Y, hitting the
high end of our guidance range of 93-96 million. Outperformance was
largely attributable to better than expected intake from our Google
Home promotion and annual Holiday campaign.
Our Google Home promotion marked the first ever hardware bundle
offering in company history. For a limited time during Q4, master
account holders of our Family Plan in the US were able to claim a
Google Home Mini speaker free of charge. We believe home voice
speakers are a critical area of growth, particularly for music and
audio content, and we are evaluating a number of ways to explore
and refine our offering in this arena.
We ran our annual Holiday conversion promotion during Q4, which
outperformed our expectations for new subscriber additions. Over
the course of 6 weeks, almost 7 million subscribers were added
through this campaign, including a single day record of almost
500,000. In December, we also launched our annual Wrapped Holiday
brand campaign where existing users were able to explore stats
about their listening habits throughout the year. The campaign saw
the highest traffic ever to the Wrapped site spotifywrapped.com,
with 28 million users visiting the site in just one week (up from
20 million last year total.) The Holiday campaign became the #1
trending topic on Twitter globally and generated over 5 billion
streams of the “Your Top Songs 2018” playlist, now the fastest
growing personalized playlist in Spotify history.
Growth in both Family and Student plans was healthy, and churn
continues to trend down, improving more than 30 bps Y/Y in Q4. We
expect to see a sequential increase in churn in Q1 owing to the
rapid campaign growth in Q4. Despite these seasonal effects, we
expect churn to continue to decline over the course of 2019.
FINANCIAL METRICS
Revenue
Total Q4 revenue was €1,495 million, up 30% Y/Y. Foreign
exchange rates negatively impacted our Premium segment and
positively impacted our Ad-Supported segment yielding minimal
impact on our consolidated results.
Premium revenue was €1,320 million in Q4, up 30% Y/Y. Average
revenue per user (“ARPU”) was €4.89 in Q4. This represents a 7% Y/Y
decline (6% excluding the impact from foreign exchange rates). The
downward pressure on ARPU continues to be driven by product mix
(Family Plan and Student Plan as a percentage of the total base),
and is increasingly driven by market mix as growth in our
relatively lower ARPU markets is outpacing geographies with higher
ARPU. Despite the decline in ARPU, Lifetime Value per Subscriber
(“LTV”) has remained constant Y/Y as improvements in churn offset
the decline in ARPU.
Ad-Supported revenue of €175 million re-accelerated its Y/Y
growth in Q4 to 34% (31% excluding the impact from foreign exchange
rates) as compared to 30% Y/Y growth in Q3. Revenue from North
America continued to accelerate, growing 41% Y/Y (37% excluding
movements in F/X). Both Audio and Video format ads grew more than
40% in Q4. While Audio remains our largest contributor to Total
Revenue, the recent implementation of cost-per-completed-view
pricing across a larger amount of our video inventory offers a
runway to accelerated future growth. The changes we made in late Q2
to our data policies to improve our ability to measure performance
and show advertising effectiveness continued to drive strong
performance in Q4 with revenue growth in third party measurement
products of 77% Y/Y.
Growth in our Programmatic and Self-Serve (Ad Studio) channels
continue to outpace the growth of Direct. Combined they grew ~60%
Y/Y and together account for ~25% of our total Ad Sales revenue.
More than 2,000 advertisers used our Ad Studio platform in Q4 to
run campaigns. We continue to expect these automated channels to
become an increasingly significant portion of our Ad-Supported
revenue, and for operating margins to expand as a result.
Gross Margin
Gross Margin was 26.7% in Q4, above the high end of our guidance
range of 24-26%, and up 220 bps Y/Y. Several one-time items
contributed to the growth in gross margin, the largest of which was
a license fee adjustment relating to prior periods that was booked
in Q4. Excluding non-recurring items in Q4, our GM would have been
25.8%. This 25.8% includes the impact from the Google Home Mini
offer.
Premium Gross Margin was 27.3% in Q4, up from 26.1% in Q3, and
up 200 bps Y/Y. Ad-Supported Gross Margin was 22.1% in Q4, up from
18.6% in Q3, and up 350 bps Y/Y.
As a reminder, Ad-Supported Gross Margins are relatively strong
in our top five markets and relatively weak in our 73 other
markets, including newly launched markets. As these markets grow,
we believe margins should too. Our Ad-Supported Gross Margin does
not show the same seasonality as our Premium Gross Margin, and has
tended to increase quarterly during the calendar year.
Spotify for Artists
Today, more than 300,000 creators and their teams use our Artist
platform on a monthly basis, and we added several more features to
our creator marketplace tool in Q4. On October 3, 2018 we launched
Spotify for Podcasters, a platform where podcast creators who host
their podcasts elsewhere can make their shows available to Spotify
users by providing us with their podcast feed. Users have access to
episode performance, daily stats on listener demographics,
location, engagement, and more—great tools to help learn more about
and grow audiences. More than 10,000 podcasters are using this tool
on a monthly basis to gain deeper insight into their audience.
Today, there are more than 185,000 podcast titles available on our
platform, and consumption continues to grow rapidly. In Q4 we had
14 titles exclusive to Spotify including the 2nd season of
Crimetown, The Rewind with Guy Raz, and the Dissect Mini Series
hosted by Lauryn Hill.
On November 8, 2018 we launched Spotify Publishing Analytics in
Beta, the first analytics tool from a music streaming service built
specifically for publishers. The tool gives publishers daily
streaming statistics for the works and recordings they have
identified, including playlist performance, as well as the ability
to view data for each of the songwriters on their roster. More than
1,000 users from music publishers around the world requested access
to the beta version of the site within the first two weeks of
launch, and we plan to expand the offering throughout 2019.
Operating Expenses / Income (Loss)
Operating expenses of €305 million in Q4 were down 17% Y/Y,
resulting in an Operating Profit of €94 million. This is Spotify’s
first ever quarterly Operating Profit.
Movements in our share price in Q4 had a sizeable impact on our
reported results, although the business would have been profitable
regardless. The stock price decline resulted in a significant
reduction of accrued social costs for stock options and RSUs,
leading to a significant delta between our guidance and reported
results. 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
accrued cost. Removing the impact of these costs, our results would
have been slightly above the high end of our Q4 guidance. Strong
gross margin and slower than planned headcount growth were the
primary drivers of this performance.
As of December 31, we had 4,165 full-time employees and
contractors globally. Hiring in the quarter continued to focus
heavily on our Research & Development efforts with more than
40% of headcount additions in that area.
IFRS 16
Starting January 1, 2019, we adopted the new lease accounting
standards dictated by IFRS 16. This requires that certain leases
which were accounted for as operating leases be treated as capital
leases going forward. Certain leases will be reclassified as assets
and liabilities on the balance sheet which will yield increased
depreciation and interest expense, offset by a reduction in rental
expense.
Free Cash Flow
We generated €150 million in net cash flows from operating
activities and €84 million in Free Cash Flow in Q4, up 12% 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 €65 million associated with
our office builds in Q4. We expect to complete these projects in
2019 at a cost of roughly €200M.
We ended Q4 with €1.8 billion in cash and cash equivalents,
restricted cash, and short term investments.
Growth through Acquisition
Today we announced that we have entered into definitive
agreements to acquire two of the leading players in the emerging
podcast marketplace. We want to acquire more, and have
line-of-sight on total spend of $400-$500M on multiple acquisitions
in 2019. Growing podcast listening on Spotify is an important
strategy for driving top of funnel growth, increased user
engagement, lower churn, faster revenue growth, and higher margins.
We intend to lean into this strategy in 2019, both to acquire
exclusive content and to increase investment in the production of
content in-house. The more successful we are, the more we’ll lean
into the strategy to accelerate our growth, in which case we would
update guidance accordingly.
Q1 2019 AND FULL YEAR OUTLOOK
These forward-looking statements reflect Spotify’s expectations
as of February 6, 2019 and are subject to substantial
uncertainty.
NOTE: Our full year guidance includes the revenue and costs
associated with the announced acquisitions that we expect to close
in Q1. In aggregate, the impact of M&A on our guidance includes
an increase of €25-30 million to revenue, a negative impact of
20-30 basis points to GM, and an increase of €40-50 million to
operating expenses.
Q1 2019 Guidance:
- Total Monthly Active Users
(“MAU”): 215-220 million, up 24-27% Y/Y
- Total Premium Subscribers:
97-100 million, up 29-33% Y/Y
- Total Revenue: €1.35-€1.55
billion, up 19-36% Y/Y
- Gross Margin: 22.5-24.5%
- Operating Profit/Loss:
€(50)-(€120) million
Full Year 2019 Guidance:
- Total Monthly Active Users
(“MAU”): 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:
€(200)-(€360) million
As with last year, our quarterly and annual guidance includes 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.
WARRANTS
Our founders, Daniel Ek and Martin Lorentzon, hold warrants in
the company. We account for these warrants on a mark-to-market
basis in “Finance Income” on our P&L. In Q4, we recorded a Fair
Market Value gain on these warrants amounting to €373 million,
primarily due to the decrease in our share price in the public
market. These gains were considered in the calculation of Diluted
EPS for Q4 and FY 2018.
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 Q4, the
company repurchased 687,271 shares at a total cost of $87.3 million
and an average cost of $127.01 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 Co-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) 393-4306Participant
International Dial-In Number: (734) 385-2616Conference ID
1293144
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
Year ended December 31,
2018
September 30,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Revenue 1,495 1,352 1,149 5,259
4,090 Cost of revenue 1,096 1,010
867 3,906 3,241
Gross profit 399 342 282 1,353
849 Research and development 100 135 123 493 396 Sales and
marketing 163 146 173 620 567 General and administrative 42
67 73 283
264
305 348
369 1,396 1,227
Operating income/(loss) 94 (6 )
(87 ) (43 ) (378 )
Finance income 389 10 36 455 118 Finance costs (2 ) (85 ) (545 )
(584 ) (974 ) Share in (losses)/earnings of associate —
(1 ) — (1 ) 1
Finance income/(costs) - net 387
(76 ) (509 ) (130
) (855 ) Loss before tax
481 (82 ) (596 ) (173
) (1,233 ) Income tax expense/(benefit)
39 (125 ) — (95 ) 2
Net income/(loss) attributable to
owners of the parent
442 43 (596
) (78 ) (1,235 )
Earnings/(loss) per share attributable
to owners of the parent
Basic 2.44 0.24 (3.87 )
(0.44 ) (8.14 ) Diluted 0.36 0.23
(3.87 ) (0.51 ) (8.14 )
Weighted-average ordinary shares outstanding Basic
181,067,994 180,510,524 154,126,524
177,154,405 151,668,769 Diluted
190,511,148 188,120,122
154,126,524 181,210,292 151,668,769
Condensed consolidated statement of financial
position(Unaudited)(in € millions)
December 31,
2018
December 31,
2017
Assets Non-current assets
Property and equipment 197 73 Intangible assets including goodwill
174 162 Investment in associate — 1 Long term investments 1,646 910
Restricted cash and other non-current assets 65 54 Deferred tax
assets 8 9
2,090
1,209 Current assets Trade and other
receivables 400 360 Income tax receivable 2 — Short term
investments 915 1,032 Cash and cash equivalents 891 477 Other
current assets 38 29
2,246 1,898 Total assets
4,336 3,107 Equity and
liabilities Equity Share capital — — Other paid in
capital 3,801 2,488 Treasury shares (77 ) — Other reserves 875 177
Accumulated deficit (2,505 ) (2,427 )
Equity
attributable to owners of parent 2,094
238 Non-current liabilities Convertible
notes — 944 Accrued expenses and other liabilities 85 56 Provisions
8 6 Deferred tax liabilities 2 3
95 1,009 Current
liabilities Trade and other payables 427 341 Income tax payable
5 9 Deferred revenue 258 216 Accrued expenses and other liabilities
1,076 881 Provisions 42 59 Derivative liabilities 339
354
2,147 1,860
Total liabilities 2,242
2,869 Total equity and liabilities
4,336 3,107
Interim condensed consolidated statement of cash
flows(Unaudited)(in € millions)
Three months ended
Year ended December 31,
2018
September 30,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Operating activities
Net income/(loss) 442 43 (596 ) (78 ) (1,235 ) Adjustments
to reconcile net loss to net cash flows Depreciation of property
and equipment 4 4 11 21 46 Amortization of intangible assets 4 3 2
11 8 Share-based payments expense 23 24 14 88 65 Finance income
(389 ) (10 ) (36 ) (455 ) (118 ) Finance costs 2 85 545 584 974
Income tax expense/(benefit) 39 (125 ) — (95 ) 2 Share in
losses/(earnings) of associate — 1 — 1 (1 ) Other 15 (6 ) (4 ) 7 (3
) Changes in working capital:
Increase in trade receivablesand other
assets
(59 ) (29 ) (46 ) (61 ) (112 ) Increase in trade and other
liabilities 57 86 195 291 447 Increase in deferred revenue 17 5 43
38 77 (Decrease)/increase in provisions (7 ) (3 ) (39 ) (17 ) 8
Interest received 3 3 6 18 19 Income tax (paid)/received (1
) (1 ) — (9 ) 2
Net
cash flows from operating activities 150
80 95 344
179 Investing activities
Purchases of property and equipment (65 ) (49 ) (21 ) (125 ) (36 )
Purchases of short term investments (300 ) (54 ) (482 ) (1,069 )
(1,386 ) Sales and maturities of short term investments 66 279 237
1,226 1,080 Change in restricted cash (1 ) 2 1 (10 ) (34 ) Other
— (22 ) (14 ) (44 ) (59 )
Net cash flows (used in)/from investing activities
(300 ) 156 (279
) (22 ) (435 )
Financing activities Proceeds from exercise of share options
17 50 7 163 29 Purchases of treasury shares (72 ) — — (72 ) — Other
— (1 ) — 1
5
Net cash flow (used in)/from financing activities
(55 ) 49 7
92 34 Net
increase in cash and cash equivalents (205 )
285 (177 ) 414 (222 )
Cash and cash equivalents at beginning of the period 1,095 810 668
477 755 Net exchange gains/(losses) on cash and
cash equivalents
1 — (14 ) —
(56 )
Cash and cash equivalents at period end
891 1,095 477
891 477
Reconciliation of IFRS to Non-IFRS Results(Unaudited)(in
€ millions, except percentages)
Three months ended
Year ended December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
IFRS revenue 1,495 1,149 5,259 4,090
Foreign exchange effect on 2018 revenue
using 2017 rates
2 202 Revenue excluding foreign
exchange effect 1,497 5,461 IFRS revenue year-over-year change % 30
% 29 %
Revenue excluding foreign exchange effect
year-over-year change %
30 % 34 % IFRS Premium revenue 1,320 1,018 4,717 3,674
Foreign exchange effect on 2018 Premium
revenue using 2017 rates
6 184
Premium revenue excluding foreign exchange
effect
1,326 4,901 IFRS Premium revenue year-over-year change % 30 % 28 %
Premium revenue excluding foreign exchange
effect year-over-year change %
30 % 33 % IFRS Ad-Supported revenue 175 130 542 416
Foreign exchange effect on 2018
Ad-Supported revenue using 2017 rates
(4 ) 18 Ad-Supported revenue excluding foreign
exchange effect 171 560 IFRS Ad-Supported revenue year-over-year
change % 34 % 30 %
Ad-Supported revenue excluding foreign
exchange effect year-over-year change %
31 % 35 %
EBITDA(Unaudited)(in € millions)
Three months ended
Year ended December 31,
2018
September 30,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Net income/(loss) attributable to owners of the parent
442 43 (596 ) (78 ) (1,235 )
Finance (income)/costs - net (387 ) 76 509 130 855 Income tax
expense/(benefit) 39 (125 ) — (95 ) 2 Depreciation and amortization
8 7 13 32
54
EBITDA 102
1 (74 ) (11
) (324 )
Free Cash Flow(Unaudited)(in € millions)
Three months ended
Year ended December 31,
2018
September 30,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Net cash flows from operating activities 150
80 95 344 179 Capital expenditures (65 ) (49 )
(21 ) (125 ) (36 ) Change in restricted cash (1 ) 2
1 (10 ) (34 )
Free Cash
Flow 84 33
75 209 109
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/20190206005298/en/
Investor Relations:Paul Vogelir@spotify.com
Public Relations:Dustee Jenkinspress@spotify.com
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