Revenue rose 18% to €2.7bn in the fourth quarter, reflecting double digit growth across Premium and Ad-Supported revenue, which were supported by podcasting gains. Better than expected Monthly Active User (MAU) growth saw a quarterly record of 33m net additions.
Gross margins also came in better than expected, partly because of lower spending on podcast content. Despite this, operating losses widened significantly to €231m, reflecting higher staff costs as the group's headcount expanded and also higher marketing costs. Spotify expects total revenue will begin to grow faster than operating expenses in the near-term.
Free cash flow was negative €73m.
Looking ahead, Spotify expects to add 11m MAUs in the current financial quarter.
The shares rose 3.9% in pre-market trading.
Our view
A booming desire to listen to podcasts has seen Spotify deliver a better-than-expected end to the year. We're pleased with progress but the longer-term view hasn't changed.
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. Historically, a decent proportion of these users then ultimately become premium, or paying, users, boosting revenue and margins in the process. Though, that cycle's likely to come under pressure if consumer income's keep getting squeezed.
Finding ways to improve the profitability of its users is key for Spotify because the underlying cost model isn't supportive of margin growth. Spotify's variable cost base, with a large portion of costs coming from royalties paid to record labels and publishers, doesn't leave too much room for natural margin expansion.
There lies one of the toughest hurdles to overcome for Spotify, and the music streaming industry for that matter, which is the reliance of record labels for access to content. Labels can, in theory, push prices up as streaming providers grow the top line, meaning little of that growth falls into profit.
Spotify needs to grow premium users, as mentioned, or increase profits from advertising for those who'd rather listen for free. But, as we've seen in recent results across the industry, advertising spend looks to be coming under pressure as businesses rethink budgets in light of weakening economic conditions.
The other challenge facing Spotify is the lack of real barriers to entry to the market. Competitors with much deeper pockets like Amazon and Apple have the firepower to keep knocking on Spotify's door. Ultimately for listeners there's not much difference between the various products on offer, which means there's little in the way of pricing power on offer.
There are some positives though, unlike some rival streaming services Spotify is self-sufficient from a cash perspective - albeit only marginally. 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.
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. Markets look to share that sentiment with the group trading hands well below its longer-term price to sales ratio.
The Share Research team is ceasing covering of Spotify. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.
Spotify key facts
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