Spotify Adds Users, Reports Loss After Big Investments in Podcasts

Spotify Technology SA's stock price fell by 2.19% today. Spotify reported strong user growth in its most recent quarter, but the company still posted a loss. This is due to the heavy investment Spotify has made in building up its podcast business.

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Spotify is aiming to become a more efficient business this year, following an intense period of spending. The company's chief content and advertising business officer, Dawn Ostroff, will leave the company. Ostroff spearheaded the company's expansion into podcasting, helping acquire studios and ink deals with high-profile figures such as Joe Rogan, Michelle Obama and Kim Kardashian.

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Spotify reported 489 million monthly active users, up 20% from a year earlier. The company highlighted growth in India and Indonesia as a result of marketing campaigns, as well as strength from its eighth annual Wrapped campaign and the holiday season.

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Spotify's paying subscribers rose 14% to 205 million in the last quarter, beating the company's expectations. This growth was driven by promotions and household plans.
Spotify has expanded its offerings to include audiobooks, giving users access to a catalog of more than 300,000 titles from independent authors and major publishers. Users can purchase and listen to audiobooks on a pay-per-download basis. This move signals Spotify's evolution from a pure-play music service to a more diversified audio business.

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Chief Executive Daniel Ek has said that Apple's App Store policies have hindered the rollout of Spotify's audiobook offerings. Spotify has directed users to make purchases through a web browser instead of inside the app. While this is a more cumbersome user experience, it means that Apple won't be taking a commission of up to 30% for downloads. Spotify has been fighting Apple over its in-app purchase policies for years.

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Free cash flow, a measure of the cash a company generates from operations, was negative €73 million in the third quarter of 2020. This is compared to €103 million in the same quarter of 2019 and €35 million in the second quarter of 2020. The company had warned investors that free cash flow would likely be negative for the period due to the timing of certain payments. However, the company said that free cash flow was positive for the full year and that it expects this trend to continue in 2021.
Spotify reported a loss of €270 million, or €1.40 per share, for the year ended December 31, 2018, compared with a loss of €39 million, or 21 euro cents per share, for the year ended December 31, 2017. The company attributed the increase in operating expenses to head-count growth from its ad sales team, platform investment and acquisitions, as well as overall higher advertising expenses.

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For years, executives have said that the company will prioritize investment over profits in order to attract users around the world and expand into new forms of audio. However, last fall the company indicated that profitability is expected to improve this year as it moves on from a period of heavy investment.
The company has announced that it is expecting increased companywide efficiencies and faster revenue growth in the coming year. It is clear that the company is focused on making improvements and ensuring its long-term success.

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Last week, Spotify announced it was laying off around 600 employees, or roughly 6% of its workforce. The move is part of the company's broader cost-cutting measures after it went on a spending spree during the pandemic.

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The average revenue per user for the subscription business climbed 3% to €4.55 in the quarter, but fell 1% on a constant currency basis. The metric has been pressured as the company attracts new subscribers through discounted plans and lower prices in newer markets. However, Spotify began raising the price of its family plan over a year ago in dozens of markets, including the U.S., which has helped increase revenue on a per-user basis.

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In October, Mr. Ek said that subscribers can expect price hikes for the Spotify service sometime in 2023. This would follow similar increases in the cost of music services from companies such as Apple Inc. and Amazon.com Inc. The premium Spotify service in the U.S. has cost $9.99 since it was launched there in 2011. However, Mr. Ek has said that Spotify has implemented dozens of price increases in markets around the world without losing customers. Subscriptions, the largest top-line contributor, rose 18% to €2.72 billion. Ad revenue rose 14% to €449 million. Ad revenue from podcasts, which has become a particular growth area for Spotify, made up 14% of total revenue for the period.

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In the December quarter, revenue rose 18% to €3.17 billion, slightly below the company’s expectations for €3.2 billion. Spotify said that, excluding the impact of foreign exchange, revenue growth was ahead of expectations.

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The company has forecast monthly active users of 500 million and premium subscribers of 207 million for the current period. It expects revenue to be €3.1 billion.
News Corp's Dow Jones & Co. has a content partnership with Spotify's Gimlet Media unit. The partnership allows Dow Jones to provide its content to Gimlet's listeners.