spotify nyse

Spotify has just published its financial results for the second quarter of 2018. The music-streaming service ended June with 180 million monthly active users, including 83 million subscribers.

Those figures were up 30.4% and 40.7% respectively year-on-year, and up 5.9% and 10.7% respectively quarter-on-quarter.

Spotify generated revenues of €1.27bn (around $1.49bn) in Q2 this year, up 26.4% year-on-year. However, the company reported a net loss of €394m (around ($461.4m) compared to a net loss of €188m for the corresponding quarter last year. Spotify’s operating loss increased from €79m to €90m in the corresponding period.

Spotify’s year-on-year revenue growth was 15.4% in Q2 2016, then 15.5% in Q2 2017, so this last quarter’s YoY growth of 26.4% represents a healthy rise.

Spotify’s cost of revenues – including royalties – were €944m (around $1.1bn) in the second quarter this year, accounting for 74.2% of its turnover. That compares to just under 77% in Q2 2017, and 85.4% in Q2 2016.

Spotify’s Q2 revenues of €1.27bn compare to the guidance of €1.1bn-1.3bn it published three months ago, so the company hit the upper end of its forecasts. Likewise, its 83 million subscribers and 180 million active users hit the upper end of its forecasts of 79-83 million and 175-180 million respectively.

Here are some of the other key figures from the latest financial results, starting with the breakdown of listeners between paid and free (ad-supported).

Spotify saw its free listeners grow by 23.2% year-on-year to 101 million. Overall “growth in our emerging regions of Latin America and Rest of World continues to outpace growth in our more established markets” reported the company. 37% of Spotify’s overall listeners are in Europe, 31% in North America, 21% in Latin America and 11% in the rest of the world.

Meanwhile, 31% of its subscribers are in North America: around 25.7 million people. Compare that to the recent claim by the Financial Times that in early July, Spotify had “22m to 22.5m” subscribers in the US specifically (although remember: Canada isn’t included in the latter stat, but is in Spotify’s figures.)

In a call with journalists following the results, CFO Barry McCarthy said that Spotify’s recent revamp of its free tier on mobile is having the impact the company expected.

“We’re seeing more engagement as a result. We continue to see growth we were expecting in the business for free both in the US and outside the US,” he said. “The recurring theme for this quarter, like last quarter, is growth as expected. Kinda: steady as you go.”

Meanwhile, on the 40.7% growth in premium subscribers to 83 million, Spotify said that “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”

This means that Spotify’s conversion rate – the percentage of its listeners who are subscribers – stood at 45.1% in Q2 this year. That compares to 41.8% a year ago, and just under 34% a year before that.

45.1% of Spotify’s listeners are premium subscribers, but they accounted for 90.3% of the company’s revenues in this year’s Q2, compared to 82.2% a year ago.

“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,” reported Spotify.

“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.”

Spotify has spent €258m so far in 2018 on research and development, and €311m on sales and marketing. Since the beginning of 2016, the company’s R&D spend is €861m, and its sales/marketing investment €1.25bn.

Spotify has also published its expectations for the third quarter of 2018, predicting that it will end Q3 with 188-193 million monthly active users and 85-88 million premium subscribers. The company expects Q3 revenues of €1.2bn-€1.4bn (up 17%-36% year-on-year) and an operating loss of between €10m and €90m.

The company also revised its forecasts for the full-year 2018. Where three months ago it was predicting MAUs of 198-208 million including 92-96 million premium subscribers by the end of the year, now it’s forecasting 199-207 million MAUs and 93-97 million premium subscribers.

Spotify has also talked about its issues with “users that may have employed methods to limit or otherwise avoid being served advertisements” on its free tier: it estimates that they “constitute less than 5% of our total reported Ad-Supported MAU figure (less than 3% of Total MAUs)”.

The company also said that “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”.

Notes of interest from Spotify’s earnings call with analysts can be found in this separate article.

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