In its third quarter financials, streaming audio service Spotify reports growth in monthly active users (MAUs), subscribers, gross margin and operating profit. For the eighth quarter in a row, the company had positive free cash flow, for the period ended September 30, 2019. In addition, Spotify said that podcasts are increasing overall engagement, and it has significantly increased conversion of free users to paid users.
Other financial highlights for the quarter include the following:
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- Total revenue of 1,731, a 28% increase year-over-year.
- Premium revenue was 1,561, a 29% increase year-over-year.
- Support revenue was 170 million, a 20% increase.
- For paid subscribers, the average revenue per user (ARPU) of 4.67, represented a 1% decrease year-over-year.
- For freemium, ad-supported users, revenue grew 20%, below expectations. Spotify attributed the majority of the miss to implementation and integration issues of a new order management software to replace Googles Doubleclick Sales Manager, which they stopped using in July.
- Podcasting revenue, which represents a small percentage of total revenue, exceeded expectations.
- Operating expenses were 387, an 11% increase.
- Operating profit was 54, representing an operating margin of 3.1%.
Operational highlights for the quarter include:
- Total MAUs increased 30% to 248 million, exceeding company guidance.
- At the end of the third quarter, Spotify had 113 million premium subscribers, a 31% increase year-over-year and an addition of 5 million paid subscribers. This exceeded expectations due to the success of the family and student plans.
- Spotify has 141 million ad-supported, or freemium, users.
- Podcast hours streamed have increased 39% year-over-year.
- Podcast adoption has reached close to 14% of total MAUs.
- Growth in Latin America increased for the second quarter in a row and new user retention improved.
- Southeast Asia is the fastest growing region, except for India.
- Duo pilot expanded from five markets to an additional 14 markets, including most of Latin America.
- Company launched a back-to-school promo in 17 markets in the U.S. and parts of Europe.
- Spotify Premium partnered with AT&T. Spotify is an add-on to select wireless plans with a free six-month trial to eligible subscribers.
In its letter to shareholders, Spotify commented on the competition.
We continue to feel very good about our competitive position in the market. 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 2x 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 Amazons user base skews significantly more to Ad-Supported than Premium, and that average engagement on our platform is approximately 3x, said Spotify in its earnings report.
The company offered the following guidance for the fourth quarter:
- Total MAUs between 255 million and 270 million
- Total premium subscribers between 120 million and 125 million
- Total revenue between 1.74-1.94 billion
- Gross margin between 23.7% and 25.7%
- Operating profit/loss between (31) million and (131) million
Investors reacted favorably to the report. At tne end of trading Friday, Spotify stock was valued at $120.69 per share. After Monday’s earnings report, stock shot up to $140..20 per share. It has since leveled off a bit to $135.99 per share, but that’s still an impressive jump.
Spotify posted some strong results for the third quarter, exceeding expectations and growing its paid subscriber base. It also experimented with promotional offers, new plans and partnerships to reach different segments of its target audience. The company seems to be growing smartly and, so far, investors seem pleased. We are curious to see what the fourth quarter holds.