Spotify Hits 138 Million Paid, 299 Million Total Users

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Spotify CEO Daniel Ek

The music streamer's loss widened as stock gains boosted payroll taxes. Advertising revenue beat the firm's forecast and started improving in June, but fell 21 percent for the second quarter amid the coronavirus pandemic.

Music streaming giant Spotify said Wednesday that its second-quarter loss widened as recent stock gains led to higher payroll taxes, but its user base grew to 138 million premium, or paid, subscribers and 299 million total active monthly users as of the end of June.

That was up 8 million premium users from 130 million as of the end of March and up 13 million total users from 286 million, coming in at the high end of management's forecasts. The firm had, for example, predicted it would end the second quarter with 133 million-138 million paid subscribers. In the second quarter of 2019, it had added 8 million premium and 15 million total users.

Spotify, led by CEO Daniel Ek, said advertising revenue was down 21 percent in the latest quarter, but beat the firm's forecast, amid a hit from the novel coronavirus pandemic in the latest period. Management has said the company is less advertising-dependent than other media companies, with ads account for only around 10 percent of its total revenue.

"Last quarter we noted a marked deceleration in sales brought on by the global health crisis where the last three weeks in March were down more than 20 percent relative to our forecast," Spotify said. "Performance continued to lag our expectations through April and May, but we significantly outperformed expectations in the month of June. Quarter-to-date through May, ad-supported revenues were down 25 percent year-over-year, but performance in the month of June showed significant improvement and was only down 12 percent."

It added: "Our direct and programmatic channels were hit particularly hard, both declining double digits year-over-year. Conversely, both our ad studio and podcast channels saw double-digit growth and exceeded our forecast."

Spotify said it swung to a second-quarter loss of €356 million ($418 million) from a year-ago loss of €76 million in the year-ago period. Its operating loss of €167 million ($196 million) compared with a a year-ago loss of €3 million.

Quarterly revenue of nearly €1.89 billion ($2.22 billion) grew 13 percent, while operating expenses increased 48 percent, "well above forecast."

Explained the company: "Core operating expenses grew slightly less than expected as certain marketing expenditures have been pushed to later in the year. Reported operating expense was significantly higher than forecast as a result of the accrual of higher than expected social charges related to the strong gains in our stock price during the quarter."

Social costs are "payroll taxes associated with employee salaries and benefits, including share-based compensation that we are subject to in various countries in which we operate," Spotify explained. For example, the Stockholm-based firm must pay a 31.42 percent tax to the Swedish government on the profit employees in the country realize on the exercise of stock options.

About its user trends in the second quarter, Spotify said: "Growth in North America exceeded our expectations, accelerating ... relative to growth in the second quarter last year. We saw retention continue to improve." India also outperformed the firm's forecast in the latest quarter "thanks to strong performance from marketing campaigns in the region."

And Spotify said Latin America and the rest of the world continue to see the fastest growth, growing 33 percent and 58 percent, respectively. But it highlighted that "parts of Latin America and rest of the world saw slower than expected growth in April and May as we saw lower intake, an increase in churn, and increases in payment failures from our premium users." Things "rebounded significantly in June as we saw increased reactivations and a step down in churn," it added.

For the current third quarter, Spotify predicted monthly active users to grow to 312 million-317 million, with premium subscribers to reach 140 million-144 million.

On Wednesday earnings conference call, Ek was asked about the impact the addition of Joe Rogan's podcast will have on Spotify's business. It was "too early" to say, he replied, but touted it as a "big show" and said the firm was "encouraged by the reaction we have seen in the marketplace" to the deal. Ek said the company must learn how to market and merchandise to existing Rogan fans and other Spotify users.

Overall, he said the firm's podcasting strategy was "not about one single shows," but the "drum beat" of new original programming. Ek summarized Spotify's podcasting programming strategy focus this way: "There is something for everyone."

Ek was also asked why creators like Howard Stern, whose current deal with SiriusXM runs through the end of the year, may want to consider Spotify. The Spotify CEO said he couldn't speak for Stern, but highlighted that "there are more great creators around the world that are turning to Spotify." He touted the fact that the firm has a big and international platform, along with interactive capabilities that allow creators to build direct relationships with fans.

Spotify's video strategy also was a topic on the earnings call. "It’s just another capability we are adding for creators to connect" with fans, Ek said. "We are an audio-first platform," and he expects the majority of usage for the foreseeable future to remain audio-focused even though video will grow. Concluded Ek: "I don’t think you should expect it to be another YouTube."