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Developing markets star in another dazzling Spotify quarter

Spotify’s latest heroics put the music streaming service leaps and bounds ahead of its main competitors in terms of subscribers, with 248 million monthly active users (MAUs) dwarfing Apple Music’s 56 million users as of June this year. Even Amazon’s attempts at bundling music streaming with smart speakers and Prime delivery services have proven mostly fruitless – resulting in a measly total of 32 million users across all services, as of July.

The performance gap is daunting. Compared with Amazon, Spotify boasts double the monthly intake of subscribers, double the rate of monthly engagement, and half the rate of churn.

Looking at the financial side of the coin, Spotify’s revenue and profits continue to rise as the company expands further into developing markets – achieving a net profit of €241 million from revenues of €1.73 billion. This should alleviate the misguided worries of investors who deem Apple Music to be serious competition.

The user base looks equally healthy – total MAUs shot up 30% year on year to 248 million, while premium subscriptions grew 31% year on year to 113 million. Spotify puts subscription growth down to the new Family Plan and Student Plan offers, as well as expansion into developing markets.

Q3 net profit of €241 million increased 83% year on year, figures made more striking when compared with the company’s net loss of €76 million in Q2. This dramatic shift was mostly down to finance movements, a debt for equity swap, and lower interest costs and better currency gains.

Profits from premium accounts continues to tower over those from ad-supported revenue. Premium accounts raised a gross profit of €414 million (up 24% year on year), while ad-supported revenue amounted to just €27 million (up just 4% year on year).

Transcripts from the Q3 earnings call show that ad-supported revenue underperformed against targets. Co-founder and CEO, Daniel Ek, put most of the blame on “our dropping the ball on the implementation of a new operating system.”

The ball in question is Google’s Doubleclick Sales Manager, which Spotify stopped using in July. The transition to a new order management software resulted in around €9 million of lost revenue. Ek told investors that “there was demand for that product; we were just simply unable to run it on the site. And the ad business today is performing strongly. So, I own that miss. It’s embarrassing, but it’s not related to the strength of business.”

Faultline has previously praised Spotify for its ability to operate a freemium platform that still pulls in tons of premium subscribers. In recent years, the company has successfully squeezed the gap between paid and free users. We reported how between Q1 2017 and Q4 2018, the company was able to trim this gap by a third, from 30 million to 20 million users.

Although this trend appears to be reverting. The paid/free gap has stretched from 21 million to 28 million in the last quarter – but this should not be a problem so long as premium subscriptions continue to thrive. Q3 saw premium subscriptions make up 93% of gross profit, despite making up less than half of all MAUs.

Public reaction to the Q3 results demonstrates the same six month up-down cycles we’ve seen since the company went public. Within hours of the announcement, Spotify’s share price jumped 17.5% from $120 to $141.

While the company’s share price had been hovering around $150 over the summer, this began to slide around mid-August, hitting a 6-month low of $112 in late September – disconcertingly close to the company’s lowest share price since going public, $106 in December 2018.

The company’s revenue in the US has grown 22% year on year, while the rest of the world – excluding Luxembourg and the UK – has seen revenues increase by 23%. The geographical spread of Spotify’s MAUs were as follows – Europe and North America still made up the majority, with 35% and 27% respectively. Latin America held 22%, while the rest of the world came in at 16%.

Expansion into developing markets was assisted by the launch of Spotify Lite in July across Asia, Africa, Latin America, the Middle East, and Africa. This is a more compact version of the app (just 10MB) which allows for quick installation on challenging networks and greater capabilities on older operating systems. The Duo pilot, which allows the joint discounted purchase of two accounts, was also expanded to 14 new markets including most of Latin America.

Podcasts are still proving to be a key attraction for users, with hours streamed increasing 39% since Q2. Spotify believes this media is key to driving increased user engagement, as well as converting free users to paid subscription.

A notable addition to the quarterly results was the announcement that Spotify’s CFO, Barry McCarthy, is to step down in January 2020. This follows numerous notable exits from the company in the past few months. These include the company’s Chief Accounting Officer, Chief Economist, global Head of Playlisting/Curation and the global Head of Music.

Speaking to investors, Ek said, “The business met or exceeded our expectations by every measure. This quarter showed continued strong growth in users as MAU exceeded our expectations while showing another quarter of accelerating growth. Both subscribers and revenue finished slightly ahead of plan, and our gross margin finished above our guidance range.”

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