Spotify Technology gave the market a pleasant surprise yesterday when it announced its results for the third quarter of the year, with monthly active users (MAUs) up 30% year-on-year to reach 248-million.
This makes it the world’s biggest content streaming services by number of subscribers. The picture changes if one defines YouTube as a content streaming service, as the latter has well over a billion active users. However, in music streaming, Spotify rules.
“The business met or exceeded our expectations in 3Q19, with accelerating MAU growth, and better than expected Subscriber growth, Gross Margins, and Operating Profit,” the company said in its results release. “For the 8th consecutive quarter, free cash flow was positive. We continue to see exponential growth in podcast hours streamed (up approximately 39% Q/Q (quarter on quarter) and early indications that podcast engagement is driving a virtuous cycle of increased overall engagement and significantly increased conversion of free to paid users.”
The company said developing regions continued to be a significant driver of its outperformance. Growth in Latin America accelerated sequentially for the 2nd consecutive quarter, while Southeast Asia remains the fastest growing region, excluding India
Spotify passed the real test of success, namely growth in paid subscribers, which jumped 31% year-on-year to 113-million Premium Subscribers globally.
“Net Subscriber growth exceeded our expectations and was led by strong performance in both Family Plan and Student Plan. All other product offerings were mostly in line with expectations.
“Within Family Plan we launched a slate of product upgrades, the first meaningful changes in some time. Subscribers now have access to new features designed specifically for families including parental controls to filter explicit content, a Family Mix playlist with personalised songs for the whole family, and a family hub where master account holders can easily manage all settings in one place.”
Spotify says it continues “to feel very good about our competitive position in the market”.
“Relative to Apple, the publicly available data shows that we are adding roughly twice as many subscribers per month as they are. Additionally, we believe that our monthly engagement is roughly 2x as high and our churn is at half the rate. Elsewhere, our estimates imply that we continue to add more users on an absolute basis than Amazon. Our data also suggests that Amazon’s user base skews significantly more to ‘Ad-Supported’ than ‘Premium’, and that average engagement on our platform is approximately 3x.”
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Financial metrics
Spotify reported the following financial metrics for Q3 2019:
“Total revenue of €1,731 million grew 28% Y/Y in Q3. Consolidated revenue modestly beat our expectations with Premium outperforming and Ad-Supported weaker than forecast. Premium revenue was €1,561 million, up 29% Y/Y, while Ad-Supported revenue was €170 million, up 20% Y/Y.
“For the Premium business, average revenue per user (“ARPU”) of €4.67 in Q3 was down 1% Y/Y (down 3% excluding the impact from FX rates). The largest driver of ARPU decline continues to be product mix, although geographic mix also plays a role. As a reminder, approximately 75% of the impact to ARPU is attributable to product mix changes, and the remainder a function of changes in geographic mix and other factors.
“For the Ad-Supported business, revenue growth of 20% Y/Y underperformed our expectations in Q3. Roughly 80% of the miss was related to self-inflicted implementation and integration issues we experienced with the rollout of a new order management software to replace Google’s Doubleclick Sales Manager which was sunset in July. This resulted in a combination of lost orders and under delivery of other orders totaling about €9 million of “lost” revenue.
“The balance of the revenue shortfall related to a slowdown in programmatic growth from 65% Y/Y in Q2 to 48% in Q3, mostly related to a slowdown in video PMP revenue. Programmatic revenue was sluggish early in the quarter but regained momentum during Q3. Podcasting revenue outperformed expectations with strong Y/Y growth but is still a relatively small slice of the total Ad-Supported business at less than 10% of total ad revenues.
“Operating expenses of €387 million in Q3 increased 11% Y/Y, significantly less than the pace of revenue growth. Operating Profit was €54 million, an Operating Margin of 3.1%. Share price performance and the associated social charges were a significant driver of this outperformance versus expectations, but we would have been profitable even without this impact. Other drivers of our better than expected profit in the quarter were higher Gross Profit and lower than expected spend across artist marketing, promotion of original content, R&D, and G&A.”
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Podcast growth
Spotify was upbeat about the prospects of its podcast offering:
“We continue to see exponential growth in podcast hours streamed (39% Q/Q for 3Q19), albeit off of a small base. Podcast adoption has reached almost 14% of total MAUs. The U.S. accounts for the largest share of podcast streams but share of listening is higher and growing faster in several European countries. Podcast engagement is clearly a growing global phenomenon.
“For music listeners who do engage in podcasts, we are seeing increased engagement and increased conversion from Ad-Supported to Premium. Some of the increases are extraordinary, almost too good to be true. We’re working to clean up the data to prove causality, not just correlation. Still, our intuition is the data is more right than wrong, and that we’re onto something special. So expect us to lean into our early success with podcasting and to share more insights with you when we’ve established causality.
“We continue to ship updates to our podcast experience, and now have more than 500,000 podcast titles available on the platform. Q3 saw the launch of 22 original and several other exclusive titles from Spotify Studios such as The Ringer: The Hottest Take and The Conversation with Amanda de Cadenet in the U.S. We also announced the release of a number of Gimlet and Parcast originals, including Gimlet’s The Clearing and The Journal, as well as Natural Disasters, Medical Mysteries, and the Summer of ‘69 from Parcast Studios. We are continuously working to expand our global podcast library with the introduction of El Primer Café in Colombia, and London, Actually in the UK.”