Spotify, SiriusXM Stand Out This Earnings Season Amid Virus Crisis

Entertainment companies this earnings season have spent much time discussing the novel coronavirus pandemic’s impact on TV advertising revenue, film units and theme parks divisions, but audio entertainment trends have surprised Wall Street on the upside, providing a bright spot amid the virus crisis.

Streaming music giant Spotify and satellite radio powerhouse and Pandora owner SiriusXM both reported better-than-expected results and trends. And some Americans say they’re listening to music streaming services more amid the pandemic than they were before the novel coronavirus hit stateside.

About 18 percent of U.S. respondents in a new Hollywood Reporter/Morning Consult poll say they listen to music via a streaming service more as many states are under stay-at-home orders, while 40 percent said their music consumption is “about the same” as it was months ago. Some 10 percent of Americans say that they’ve subscribed to a music streaming service since Jan. 1. (The poll was conducted among a nationally representative group of 2,200 U.S. adults from April 30 to May 3.)

“SiriusXM and Spotify both reported a strong first quarter,” noted Macquarie Capital analyst Tim Nollen. “Due to COVID, advertising growth will slow, but new forms of content like podcasts and live streams should drive user retention.”

SiriusXM said the pandemic “did not have a material effect on our revenue and expenses during the quarter ended March 31,” but CEO Jim Meyer highlighted that “auto sales, advertising and customer responses to marketing campaigns all fell swiftly in the second half of March.”

The firm said it expects the pandemic to “adversely affect our subscriber revenue due to the decline in sales of new and used vehicles, reduced drive time, increased churn and the inability of our vendors to fully staff call centers; cause a decline in advertising revenues in our Pandora and SiriusXM businesses as third parties pull back on advertising spending generally.”

However, SiriusXM CFO David Frear said “we can track the listening changes directly to commute times” and “have picked up quite a bit on consumer electronics devices with the whole growth in smart speakers,” even if that doesn’t make up for the commute-related listener loss.

Added Meyer: “We launched a free online listening period. With most of us staying home, we see an opportunity to get more Americans to stream SiriusXM, as well as unique occasion to get our existing subscribers to stream more. Our programming group has been in overdrive. Our content right now not only sounds great, but it’s super relevant, and the response has been remarkable.”

Concluded B. Riley FBR analyst Zack Silver in an April 30 report: “We are now assuming that SiriusXM can do a little better this year relative to our prior outlook. … COVID-19 will create substantial headwinds for SiriusXM over the balance of the year; but the financial impact seems somewhat more modest than we initially feared.”

He added: “While the COVID-driven plunge in auto sales and advertising should be temporary, we believe that recent efficiency initiatives taken in response to the pandemic could produce lasting margin benefits as the economy normalizes.”

SiriusXM’s stock rose after the earnings update, but has dropped 1.6 percent from the night before its earnings update through the end of trading Thursday.

Spotify grew its paid subscriber base to 130 million in the first quarter, with CEO Daniel Ek predicting that the broader shift from linear to on-demand audio usage would “likely be accelerated by the COVID-19 crisis,” even if near-term usage has been affected by the pandemic and moved from the car to homes. Spotify lowered his 2020 advertising forecast, but emphasized that ad revenue accounts for only 10 percent of its total  revenue.

On the earnings call, Ek also argued: “Many people are discovering new devices to consume content on — like smart TVs, smart speakers, Xbox, PlayStation. And … those have been growing at more than 50 percent just this quarter, so enormous change. I would expect, as you learn that behavior, you’re going to listen. And then as you are coming back to the car, you will obviously listen in the car, too. So, we may see a greater engagement than in the past, which would be great if that was the case, but it is too early to say.”

Guggenheim Securities analyst Michael Morris said that before the Spotify earnings update “concerns had been fueled by data indicating lower global Spotify usage during COVID-driven lockdowns.” His April 29 review report summarized his takeaway in its headline: “Strong First-Quarter User Trends Despite Out of Home Consumption Fears.”

Evercore ISI analyst Kevin Rippey similarly titled a report that day: “More in rhythm than we thought.” He acknowledged: “Spotify first-quarter results are catching bears offsides this morning, ourselves included. We had been expecting a weaker user and subscriber result/outlook, as app data into the print was showing a sharp decline in late March.”

Spotify’s stock has risen 5.9 percent between the night before its earnings report and the end of Thursday trading.

Meanwhile, technology giant Apple in its earnings update also impressed Wall Street with its biggest quarterly revenue ever at its services unit, which includes Apple TV+, Apple Music and Apple Arcade, hitting more than $13.3 billion. Apple Music subscriptions posted a double-digit percentage gain over the year-ago period, setting an all-time record.

Late Thursday, radio and streaming audio giant iHeartMedia posted a 1.9 percent revenue decline for the first quarter, with the virus crisis starting to drag down advertising starting in March. But the nation’s largest radio station owner reported an 80 percent gain in its growing podcasting business. And on the earnings call, chairman and CEO Bob Pittman mentioned “some evidence” of possible ad trend improvements in May.

He also said that the firm’s podcasting revenue growth was about three times its “very strong” podcast usage growth, suggesting that this meant the company was gaining share. The exec added that there was “real growing interest in audio before the downturn” from marketers, concluding: “Our hope and our expectation is that audio will benefit during this downturn.”

“Broadcast Advertising Pressured, Podcasting Continues to Shine,” Guggenheim Securities analyst Curry Baker wrote in the title for his Friday report. “Starting in mid-March, COVID-19 began to have a material impact on advertising with the duration and magnitude still unknown. … Podcasting continues to shine as a growth driver even in this tough advertising environment.”

iHeartMedia’s stock rose in Friday morning trading following the earnings update, being up 10 percent as of 9:35 a.m. ET.

Analysts will look for more data points ahead of the next quarterly earnings season to gauge how audio listening trends evolve amid the pandemic and the expected step-by-step reopening of cities and businesses.

After all, earnings season data has for now changed some perceptions of the audio space. In an April 28 report just as earnings season started off, for example, Bernstein analyst Todd Juenger predicted audio firms would lose a step due to the virus pandemic and resulting recession.

“For music, the evidence suggests decreased time spent commuting has resulted in a decrease of time spent listening to streaming music and podcasts,” he wrote. “This is directly harmful to advertising revenue and could even decrease consumer willingness to pay for premium subscriptions (or decrease pricing power) over time. Post-COVID, we expect the incidence of work-from-home will increase, which would mean a permanent step-down in time spent commuting.”

After Spotify’s earnings report, though, he shared a note with investors with the headline “Sticky fingers,” acknowledging, “It’s hard not to come away impressed with the apparent stickiness of the product.”