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Spotify - revenue and subs at top end of guidance

Sophie Lund-Yates, Equity Analyst | 28 April 2021 | A A A
Spotify - revenue and subs at top end of guidance

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Spotify Technology S A EUR0.025

Sell: 238.34 | Buy: 238.38 | Change -8.10 (-3.28%)
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First quarter revenue rose 16% to €2.1bn, which reflects a 24% increase in monthly active users (MAUs) to 356m. User numbers were within the group's guidance range, but "modestly below" internal expectations.

Spotify reported an operating profit of €14m, compared to a loss of €17m this time last year. This reflected lower than planned operating expenses, relating to payroll taxes linked to the group's share price performance.

The shares fell 1.7% in pre-market trading.

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Our view

Subscriber numbers are the most important metric to watch at Spotify. While the growth in Monthly Active Users might have disappointed slightly, in reality we think the long term attractions remain in play.

Spotify's model depends on people signing up to its service, whether that's through a free trial, or the free-to-use ad supported service. A decent proportion of these users then ultimately become premium, or paying, users, boosting revenue and margins in the process.

This modus operandi remains intact, helped in part by less lucrative, but increasingly popular non-music content like podcasts. Monthly Active Users (MAUs) are still growing, feeding the top of the revenue funnel. Some of that's being supported by less-lucrative promotions, but on balance this is still a very positive step in the right direction.

Looking beyond the disruption the business is very scalable, meaning extra subscribers should help it exit loss-making territory on a sustained basis. More subscribers help lower operating costs as a percentage of revenue, which ultimately moves the company into profit. More listeners improve Spotify's bargaining power with major record labels too. The company is also working to provide a route to market for individual artists, developing tools to help them thrive.

Unlike some rival streaming services Spotify is self-sufficient from a cash perspective. That means there's no need to rely on investors for new cash, giving it flexibility. It allows it to pounce on opportunity - like the Megaphone deal to help boost its reach in the mushrooming podcast industry.

The path to long-term profit generation isn't without pitfalls though. If Spotify can't deliver the required growth, the virtuous circle of higher revenues, lower average costs and improved cash flow will break. Competing with the likes of Amazon and Apple is no small ask either. And the continued promotional activities, and increased popularity in less lucrative geographies, have hit average revenue per user.

The current disruption could delay the journey to sustainable profit growth, but it hasn't been derailed. Spotify is 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. Investors should keep in mind though that there are likely to be near-term ups and downs.

Spotify key facts

  • Price/sales ratio: 4.6
  • Average Price/sales ratio since listing (2018): 3.7
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First quarter results

Premium subscribers accounted for €1.9bn of revenue, growing 14% year-on-year. There was double digit subscriber growth across all regions, but growth was led by North America. South Korea was the biggest driver of growth in new markets. Subscribers rose 21% to 158m overall.

Churn rates were down "modestly" compared to last year, and flat compared to the preceding quarter. Average revenue per user of €4.12 was down 1%, ignoring the effect of exchange rates, and reflected a less lucrative mix of products.

Ad supported users made up €216m of group revenue, rising 46% and there are now 208m monthly active users.

The overall increase in Monthly Active Users was boosted by the US, Mexico, Russia, and India, but growth was weaker than planned in Latin America and Europe. Europe is the biggest region, making up 34% of MAUs, followed by North America (24%), Latin America (22%) and Rest of World (20%).

Gross margins were flat year-on-year at 25.5%, as non-music (things like podcasts) costs are growing at a faster rate than these revenues.

Free Cash Flow was up €61m to €41m, thanks to more favourable timing on some licensor payments and higher profits. The group had net cash of €2.4bn at the end of March 2021, and €3.1bn in cash and cash equivalents, restricted cash, and short term investments.

Next quarter, Spotify expects MAUs of 366-373m, and revenue of €2.16bn - €2.36bn. For the full year the group's lowered its MAU target to 402m - 422m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.