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Spotify - Subscriber numbers better than expected

Nicholas Hyett | 29 April 2019 | A A A
Spotify - Subscriber numbers better than expected

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Spotify Technology S A EUR0.025

Sell: 123.63 | Buy: 123.64 | Change 0.90 (0.73%)
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First quarter Monthly Active Users were 26% ahead of where they were last year at 217m. Total revenue rose 33%, hitting EUR1.5bn, with an operating loss for the quarter of EUR47m.

The shares rose 3.8% in pre-market trading.

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Our view

Since its unconventional stock market listing last year, the world's largest music streaming service has reported consistently impressive growth figures.

MAUs and revenues are both on an upward trajectory. And while Spotify expects to remain loss-making this year, we can see a clear route to sustainable profitability if recent trends continue. The business should be very scalable. More subscribers help lower operating costs as a percentage of revenue, which ultimately moves the company into profit.

More listeners improves Spotify's bargaining power with major record labels too, especially with global streaming revenues growing by 41.1% last year to 38.4% of all recorded music revenue. Spotify is also working to provide a route to market for smaller artists, developing tools to help them thrive.

There are opportunities to upsell too. Over half of Spotify listeners are low revenue, ad-supported customers and the recent foray into podcasts seems to be delivering positive results. Transferring users onto subscriptions and grabbing more listeners offer more potential growth drivers.

The path to profits isn't without pitfalls though. If Spotify can't deliver the required growth, the virtuous circle of higher revenues, lower costs and improved cash flow will break.

Competing with the likes of Amazon and Apple is no small ask, while the launch of discounted student and family packages has hit average revenue per user. There's also been teething problems around staff recruitment, and R&D spend is ramping up.

Nonetheless, we think Spotify's well positioned in the long term. It's got increasingly direct access to content producers, relatively low and flexible costs, and a roll-out story that should help it leverage the benefits of scale.

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First Quarter Results

The company added a total of 10m users in the last quarter alone, boosted by launching in India where Spotify now has 2m users.

Premium revenue rose 34% to EUR1.3bn, and now accounts for 92% of total revenues. That came as subscriber numbers rose 32% to 100m, the higher end of prior guidance. Underlying average revenue per user (ARPU) of EUR4.71, is 2% lower than a year earlier, due to a changing geographic and product mix, including promotional prices like student and family packages. Churn was flat quarter-on-quarter, and broadly the same as a year earlier.

Ad-supported revenue rose 24% to EUR126m, boosted by the group's recent podcast acquisitions. Podcast revenue is expected to increase further in 2019.

Gross margins of 24.7% were ahead of Spotify's guidance, thanks to better than expected premium subscriber growth.

Operating expenses rose 30% to EUR420m, as a strong share price performance increased the cost of share awards to staff.

Free cash flow, which more than doubled year-on-year to EUR173m, benefitted from the group delaying payments to suppliers. The group finished the quarter with short-term investments, cash and cash equivalents of EUR1.7bn.

Guidance for the full year remains broadly unchanged, although operating losses are now expected to be around EUR20m lower than suggested at the start of the year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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