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Spotify - record MAU net adds, but costs weigh

Total revenue rose 23% to €2.9bn, supported by double digit growth across Premium and Ad-Supported revenues...

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Total revenue rose 23% to €2.9bn, supported by double digit growth across Premium and Ad-Supported revenues. Underlying Monthly Active Users (MAUs) reached 433m which was 5m ahead of guidance, reflecting a record number of net additions for Q2.

Increased non-music content spending, rising publishing rates and higher staff and advertising costs, meant Spotify generated an operating loss of €194m, compared to €12m profit last year.

The group expects to add around 17m MAUs in the third quarter and operating losses of €218m.

The shares rose 7.7% in pre-market trading.

View the latest Spotify share price and how to deal

Our view

Spotify has had a tough start to the year. And while second quarter progress has no doubt been more positive, we're not convinced just yet that the group's on completely stable ground.

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. That means that a sustained slowdown in user growth would break that funnel system.

The second quarter was a relief in this sense, but given ongoing economic jitters and cost of living concerns, the group's not out of the woods.

We should note that Spotify's enormous scale remains very much intact, and the music is still playing. There were some positive signs in the latest numbers, including strong demand for less lucrative, but increasingly popular non-music content like podcasts.

Spotify's business is very scalable. Extra subscribers should help it exit loss-making territory on a sustained basis. 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.

Performance is being helped by an about-turn in advertising revenue too. The pandemic saw marketing spending in the firing line, as companies hunkered down for the storm, but corporate wallets are appearing from the parapet once more. Sadly, we remain cautious that these good fortunes could once again reverse - there are some unfavourable advertising trends in the wider sector as inflation concerns rumble on.

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 on a sustained basis, the virtuous circle of higher revenues, lower average costs and improved cash flow will stall.

We still admire Spotify's 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. But we're a little more cautious than we have been in a while - we'd like sustained proof that monthly active users are still queuing up.

Spotify key facts

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.

Second Quarter Results

Overall MAU strength was led by "successful" marketing campaigns in Rest of World, reactivations in Europe and Gen Z strength in Latin America.

Premium revenue rose 22% to €2.5bn, reflecting a 14% rise in subscribers to 188m. Excluding the impact of exchange rates, average revenue per user (ARPU) was flat at €4.54, as the positive effect from last year's price hikes were offset by growth in multi-user accounts. Underlying gross margin was flat at 28.8%.

Within Ad-supported, revenue increased 31% to €360m. The music business and podcast did particularly well. The total number of ad-supported MAUs rose 22% to 256m. Non-music content, product enhancement spend and increased publishing rates mostly offset the more lucrative revenue mix towards podcasts, meaning gross margins were eroded by 9.8 pecentage points to just 1.1%.

Spotify generated free cash flow of €37m, broadly flat with last year. There was a net cash position of €3.6bn as at 30 June.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 27th July 2022