Spotify Reaches 130M Paid Subs, Pandemic Hits Advertising, CEO Sees On-Demand Audio Gain

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Spotify CEO Daniel Ek

"Our outlook for most of our key performance indicators has remained unchanged with the exception of revenue where a slowdown in advertising and significant changes in currency rates are having an impact."

Music streaming giant Spotify said Wednesday that it swung to a first-quarter profit and grew its user base to 130 million premium, or paid, subscribers and 286 million total active monthly users as of the end of March.

However, it reduced its full-year revenue guidance range, citing the advertising hit caused by the novel coronavirus pandemic and currency exchange rates. Management said the company was less advertising-dependent than other media companies, saying ads account for only around 10 percent of its total revenue.

Spotify CEO Daniel Ek on Wednesday's earnings conference call predicted that the broader shift from linear to on-demand audio usage would "likely be accelerated by the COVID-19 crisis." He said while many observers concentrate on the competition between various streaming services, Spotify remains focused on winning over linear radio audiences. "The 20-year trend is that anything linear dies, and on-demand wins," he said, predicting this trend would accelerate during the pandemic.

Spotify said the premium sub figures for the latest quarter exceeded its expectations, with the overall user result matching its estimates. The fourth quarter had been its highest net add quarter ever, allowing the company to finish 2019 with 124 million paid subs and 271 million total active monthly users.

About the coronavirus pandemic and its fallout, the company said: "Despite the global uncertainty around COVID-19 in the first quarter, our business met or exceeded our forecast for all major metrics. For the second quarter and the remainder of the year, our outlook for most of our key performance indicators has remained unchanged with the exception of revenue where a slowdown in advertising and significant changes in currency rates are having an impact."

It added: "Our business remains very healthy with more than €1.8 billion (nearly $2 billion) in liquidity, and we expect to be free cash flow positive for the year. Overall, despite some changes in listening patterns, we are encouraged with the trends we are seeing and continue to be optimistic about the underlying growth fundamentals of the business."

Providing some additional color on trends in key markets, the company said: "Beginning in late February, we saw some impact to our business. While monthly average users and subs remained in line with our forecast and held steady, in hard hit markets like Italy and Spain, we saw a notable decline in daily active users and consumption. But over the last few weeks, we've seen listening start to rebound, and in many markets, consumption has meaningfully recovered. In this environment, we are seeing an evolution of Spotify's relationship with its consumers."

Among pandemic-driven usage, changes highlighted by Spotify are reduced usage in cars from fewer people commuting amid stay-at-home orders, wearables and web platforms, while audiences accessing the service through TV and game consoles has "grown materially, in excess of 50 percent." For ad-supported monthly average users in the U.S., "game consoles have been a top two or three platform in terms of consumption for the better part of the month," it said.

"It's clear from our data that morning routines have changed significantly. Every day now looks like the weekend," Spotify said about the changed consumer behavior because of the pandemic. "This trend was seen more significantly in podcasts than in music, likely due to the fact that car and commute use cases have changed quite dramatically. However, listening
time around activities like cooking, doing chores, family time and relaxing at home have each been up double digits over the past few weeks."

Ek opened Wednesday's earnings call by highlighting the "profound" changes brought on by the pandemic and said it remains unclear when things may return to near-normal. He said almost all of Spotify's podcast originals have continued production during the virus crisis, with some increasing their frequency and new shows launching. He also said that classical and chill music usage has been up on Spotify, along with news and wellness and health content.

Spotify said it swung to a profit of €1 million ($1.09 million) from a year-ago loss of €142 million in the first quarter. Its operating loss of €17 million ($18.5 million) compared with an operating loss of €47 million in the year-ago period. Quarterly revenue of nearly €1.85 billion ($2.00 billion) grew 22 percent. Operating expenses in the latest period jumped 16 percent to €489 million ($531 million).

The bottom-line results beat Wall Street estimates, while revenue came in slightly below expectations as advertising revenue, which had been on the upswing in recent quarters, fell 32 percent.

For all of 2020, Spotify continues to forecast total monthly average users of 328 million-348 million and 143 million-153 million premium subscribers. It lowered its full-year revenue estimate to €7.65 billion-€8.05 billion from €8.08 billion-€8.48 billion.

"Our general view is that investors are not prepared for the magnitude of likely negative estimate revisions, as Spotify has not neatly fit a particular COVID narrative," Evercore ISI analyst Kevin Rippey had written in his earnings preview report. "Data checks indicate that stay-at-home orders have led to a reduction in active users, as consumers have more entertainment choices when not on-the-go; lower engagement coupled with a challenged consumer backdrop creates headwinds for user/subscriber growth; and a substantial pullback in large brand advertising will create a drag on Spotify's ad revenue."