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Spotify - subscriber growth pads revenue

First quarter revenue rose 19% to €2.7bn, ignoring the impact of currency changes...

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First quarter revenue rose 19% to €2.7bn, ignoring the impact of currency changes. That was better than management's guidance, and reflected double-digit growth in both Premium and Ad-supported revenue. Monthly Active Users (MAUs) also grew beyond expectations.

Gross margins of 25.2% were also ahead of guidance, but lower than last year. The group swung from operating profits of $14m to a $6m loss, reflecting increased costs.

Spotify expects to add 14m MAUs in the current quarter, excluding the impact of the outage and the closure of Russian operations. Operating losses are expected to widen to €197m, partly reflecting the impact of unfavourable exchange rate movements on operating costs.

Shares were up 1.4% following the announcement.

View the latest Spotify share price and how to deal

Our view

Spotify's subscriber growth was better than anticipated in the last quarter--but management was only expecting growth of 3%. The bar's been set relatively low. The forecast for next quarter suggests this level of growth is the new normal, which doesn't leave much too get excited about.

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. More users improve Spotify's bargaining power with major record labels too.

We should note that Spotify's enormous scale remains very much in tact, and the music is still playing. There were some positive signs in the latest numbers, including strong demand for podcasts, which are becoming increasingly margin-friendly as the group invests in new advertising tools.

Advertising revenue is another question mark when it comes to Spotify. For now it seems advertisers are more than willing to open their wallets, but as inflation bites into corporate budgets, they could become a little choosier. The group's also said it plans to increase ad sales as a share of revenue, but this quarter we saw things move in the opposite direction with ad-supported revenue making up just 11% of the total compared to 15% last quarter.

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 Podsights acquisition, which should help increase ad revenue.

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. Achieving the required rate of revenue growth is no small ask, with competition from the likes of Apple and Amazon.

It would appear the high user growth we saw over lockdown wasn't a long-term trend. While we haven't seen a decline, low-single digit user growth is a disappointment.

We still admire Spotify's 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.

First Quarter Results (figures are at constant currency)

Group gross margin was 0.3 percentage points behind last year as increased investment outweighed the benefits of a shift toward higher-margin podcasts and growing marketplace activity. MAUs were relatively evenly spread geographically speaking, with Europe leading the way at 33% and North America, Rest of World and Latin America evenly divided. Growth was strongest in Latin America and Rest of world, with Indonesia, Brazil and Mexico the strongest performers.

Monthly active users (MAU) rose 19% in the first quarter to 422m. This included a 3m one-time benefit from a service outage glitch. Penetration among Gen Z was particularly strong with the rollout of new features and marketing initiatives.

The wind down of Russian operations meant 1.5m premium accounts were disconnected, but the number of premium subscribers still grew 15% to 182m. Average revenue per premium subscriber rose 3% to €4.38 ignoring the impact of exchange rates. This fed into an 19% increase in Premium revenue to €2.4bn.

Ad-supported revenue rose 22% to €282m, helped by a strong performance from Podcasts and double-digit growth in cost per ad-impression in Music.

The group acquired Podsights during the period, a podcast advertising measurement service, as well as Chartable, a podcast analytics platform.

Free cash flow fell by €19m to €22m due to increased licensor payments. Net cash was unchanged at €3.5bn.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 27th April 2022