Spotify, the popular Swedish paid music-streaming service, released on Wednesday its fourth quarter financial results of 2018, reporting a quarterly operating profit for the first time of €94 million ($107 million). “For the first time in company history, operating income, net income, and free cash flow were all positive,” Spotify wrote in letter to its shareholders, less than one year after going public. But, the company also warned of a loss of €200 to €360 million ($227 to $409 million) in its 2019 forecast.
Spotify showed growth among its users in Q4, expanding to 207 million monthly active users (up 8 percent from 191 million in Q3). Spotify attributed the growth to improved retention rates and expansion in Latin America and other emerging markets. Premium subscribers reached 96 million — an increase of 11 percent from 87 million in Q3 — largely credited to the success of Spotify’s Google Home promotion and annual Holiday campaign, Spotify Wrapped. Spotify Wrapped brought in 28 million users in one week and generated over five billion streams of the “Your Top Songs 2018” playlist, the company said.
Engagement also grew across both ad-supported and premium tiers, Spotify reported, with consumers listening to over 15 billion hours of content. Spotify expanded its global footprint to 78 countries from 65 recorded in Q3, launching in 13 countries in the Middle East and North Africa in mid-November.
Spotify also announced that 300,000 creators have used Spotify for Artists, a platform for artists to manage their artist profile and view analytics about their listeners and releases. More than 1,000 users from music publishers around the world requested access to the beta version of the site within the first two weeks of its launch, Spotify reported. The streaming site said that it plans to expand the offering throughout 2019.
Spotify's Financial Results
The company reported revenues of €1.495 billion ($1.7 billion) for Q4, an increase of 30 percent y/y and 11 percent from Q3. Of that total, €1.32 billion ($1.5 billion) came from premium subscribers. Ad-supported revenue reached €175 million ($199 million), an increase of 34 percent y/y and 23 percent since Q3. The streaming service also reported that both audio and video format ads grew more than 40 percent in Q4, due to the recent implementation of cost-per-completed-view pricing for video inventory.
The gross margin rose 27.3 percent (up from 26.1 percent in Q3). Ad-supported gross margin also increased 22.1 percent, up from 18.6 percent reported in Q3. Spotify said that its ad-supported gross margins are relatively strong in their top five markets, but relatively weak in 73 other markets, including newly launched markets.
Operating expenses of €305 million ($347 million) in Q4 were down 17 percent y/y, according to Spotify, which resulted in an operating profit of €94 million ($107 million) — the company's first ever quarterly operating profit. The company generated €150 million (170 million) in net cash flow from operating activities and €84 million ($95 million) in free cash flow in Q4, up 12% y/y. Meanwhile, the average revenue per user (ARPU) fell 7% to €4.89 in Q4, largely attributed to Family and Student Plan subscribers.
“We ended Q4 with €1.8 billion in cash and cash equivalents, restricted cash, and short term investments,” Spotify said.
Looking to 2019
(These forward-looking statements reflect Spotify’s expectations as of February 6, 2019 and are subject to substantial uncertainty) - Spotify Technology S.A.
For the first fiscal quarter of 2019, total monthly active users are predicted to reach between 215 to 220 million (up 24-27 percent y/y ). Premium subscribers may land between 97 to 100 million (up 29-33 percent y/y). The gross margin may remain between 22.5-24.5 percent, while operating loss may reach between €50 to €120 million ($57 to $137 million), the company predicts.
Meanwhile, total revenue for 2019 is expected to reach €6.35 to €6.8 billion (up 21-29% y/y). Premium subscribers are expected to increase to about 117 to 127 million (up 21-32% y/y), while monthly active users are projected to increase to 245 to 265 million (18-28 percent y/y). The company warns of a operating profit/loss of about €200 to €360 million ($227 to $409 million).
Growth Through Acquisition
In a separate release, Spotify announced that it was acquiring podcast startups Gimlet Media and Anchor. The terms of the acquisition were not disclosed.
"Growing podcast listening on Spotify is an important strategy for driving top of funnel growth, increased user engagement, lower churn, faster revenue growth, and higher margins," Spotify wrote of the acquisition. "We intend to lean into this strategy in 2019, both to acquire exclusive content and to increase investment in the production of content in-house."
