Spotify Hits 113 Million Paid Subs as CFO Says Streaming Will Win in Audio

Daniel Ek  -  Code Conference - Publicity-H 2018
Asa Mathat for Vox Media

The music streaming giant, led by CEO Daniel Ek, reports its latest financials, unveils that its CFO will leave and says it feels "very good" about its position compared with competitors Apple and Amazon.

Music streaming giant Spotify on Monday reported a surprise swing to a third-quarter operating profit and said it grew its user base to 113 million premium, or paid, subscribers and 248 million total active monthly users as of the end of September.

That compared with 108 million premium and 232 million total active monthly users as of the end of June, 100 million premium and 217 million monthly users as of the end of March and 96 million and 75 million, respectively, as of the end of 2018.

The company's third-quarter user figures exceeded Wall Street estimates and its own forecast for premium users. "Net subscriber growth exceeded our expectations and was led by strong performance in both Family Plan and Student Plan," leaving premium subs up 31 percent over the year-go period, the firm said. "Total monthly active users grew 30 percent...outperforming the high end of our guidance. Developing regions continue to be a significant driver of this outperformance."

Spotify also addressed the competitive landscape. "We continue to feel very good about our competitive position in the market," it said. "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 two times 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 three times [theirs]."

Spotify forecast it would end 2019 with 255 million to 270 million monthly active users, which came in above previous expectations, and 120 million to 125 million premium subscribers.

The company, led by Spotify CEO Daniel Ek, also announced its CFO would exit. "After playing a pivotal role in Spotify’s listing and helping to establish Spotify as a public company, Barry McCarthy will retire from Spotify on January 15, 2020, stepping down as the company’s CFO," the company said. He will be replaced by Paul Vogel, who is currently Spotify’s vp financial planning and analysis, treasury and investor relations. 

McCarthy, a former Netflix CFO who oversaw the music streamer's direct stock market listing and ran its financial operations for the first year and a half after that, on Monday compared his current to his former employer. "There are many differences, but there are lots of parallels between the way the stock market relates to Spotify and the stock market related to Netflix," he said. "There were long periods of time when before the stock market sort of figured out Netflix, just like it will eventually figure out Spotify."

He suggested that Wall Street has so far not fully understood the opportunity and upside behind Spotify's push into podcasting and other growth opportunities compared it to how the Street initially underestimated Netflix's move into streaming. "In October of last year for the first time you heard us begin to speak about the increased investment and the erosion of margin and we said absolutely nothing about the benefits that would be associated with the spending," he said. "But the benefits over the long-term are quite clear."

McCarthy concluded: "We can see in video that streaming wins and linear dies. The same thing is going to happen in audio. That means broadcast radio is going to tip. Who eventually becomes dominant in that space is a game still to be played. At the moment, we are the largest and, I think, competitively advantaged. And it's our game to lose."  

Spotify on Monday reported that it swung to a third-quarter operating profit of $59.9 million (54 million euros), compared with an operating loss of 6 million euros in the year-ago period. Net income rose from 43 million euros to $267.4 million (43 million euros). Quarterly revenue rose 28 percent to $1.92 billion (1.73 billion euros), while operating expenses increased 11 percent.

Ek on the earnings conference call touted the company's continued push into the podcasting business, saying it has yielded increased engagement and improved conversion of users to paid subscribers.

Spotify earlier this year filed an antitrust complaint against Apple in Europe. "In recent years, Apple has introduced rules to the App Store that purposely limit choice and stifle innovation at the expense of the user experience — essentially acting as both a player and referee to deliberately disadvantage other app developers," Ek said back then, adding that Spotify was looking to avoid a marketplace with a "small group of dominant platforms."

Spotify's stock rose more than 8 percent in pre-market trading.