Though Spotify reported an operating loss for the second quarter of 2018, the popular streaming music service also reported growth in paid subscriptions and revenue. At the end of the second quarter, Spotify (NYSE: SPOT) had 180 million monthly active users, a 30 percent increase, and 83 million premium subscribers, a 40 percent increase. Total revenue for the quarter was €1.273 million, a 26 percent increase year-over-year.

Other highlights, including operating and net losses, include:

• Premium revenue was €1.150 million, a 26 percent increase year-over-year. Premium revenue represents 90.3 percent of total revenue.
• Ad-supported revenue was €123 million, a 20 percent increase year-over-year. The majority of this revenue comes from Spotify’s Direct channel, but Programmatic & Ad Studio products are growing and account for more than 20 percent of total ad revenue. The company launched a new automated, self-serve ad platform in the U.S., U.K., Canada and Australia in Q2. Ad spending is growing fastest on the company’s mobile platform.
• Gross margin was 25.8 percent, in line with the company’s guidance of 24 to 26 percent.
• Premium gross margin was 26.9 percent. Ad-supported gross margin was 16.3 percent.
• Operating expenses were €419 million.
• Operating loss was €90 million, or about 7 percent of total revenue, including a €30 million cash expense related to the company’s listing on the New York Stock Exchange in April and €32 million of accrued social costs for options and RSUs.
• Net cash flows from operating activities were €30 million, and free cash flow was €18 million.
• At the end of Q2, the company held €1.7 billion.

User and subscription numbers include:

• Monthly active users were 180 million, a 30 percent increase year-over-year, with higher growth in Latin America and other countries outpacing growth in established markets.
• Ad-supported (free) monthly active users were 101 million, a 23 percent increase year-over-year.
• Average revenue per user (ARPU) was €4.89, a 12 percent decrease year-over-year
• The spring, Spotify rolled out a new user interface for its free users. This was the company’s first major redesign since 2014. Spotify anticipates this new interface to increase engagement, retention and conversion to its paid products.
• Premium subscribers were 83 million, a 40 percent increase. Spotify attributes this increase to the family plan and a special bundled offer with Hulu, as a follow-up to a successful Spotify Student + Hulu offer made last fall.
• Approximately 200,000 artists are now using Spotify for Artists where artists can manage their profiles.

Other items of note include the company’s shift in how it estimates the number of active users, including users who may be using ad blockers or other technology to avoid seeing ads. Spotify estimates these users to represent less than 5 percent of total free users and less than 3 percent of total monthly active users. The company is also working on removing users that may be bots.

In its Q2 earnings news release, Spotify also referenced GDPR.

“We did see some GDPR disruption across our European markets during Q1 but seem to be largely past that now,” said Spotify. “We are, and will remain, GDPR compliant thanks to a terrific cross-functional effort.”

To improve long-term margins, the company is focusing on connecting artists with their fans.

“Those goals are informed by a vision for building a two-sided marketplace where millions of artists can reach millions of fans. To succeed, we said we need to help more artists connect with more fans. The path to success involves building services and tools for labels and artists focused on promotion, marketing and career management,” said Spotify in a news release. “This will be a multi-year journey, but we’re making exciting progress. In the last quarter, we have grown the number of unique artists listened to on our platform by 5 percent.”

Spotify offered the following outlook for the third quarter:

• Total monthly active users between 199 million and 207 million, a 24 percent to 30 percent increase year-over-year
• Total premium subscribers between 93 million and 97 million, a 30 percent to 37 percent increase year-over-year
• Total revenue of €1.35 billion to €1.55 million, an 18 percent to 35 percent increase year-over-year
• Gross margins between 24.5 percent and 26.5 percent
• Operating loss between €20 million and €100 million

After the July 26 earnings report, its second since filing its IPO, Spotify enjoyed a brief spike in its stock price, going from $187.99 per share on July 25 to $196.28 per share on July 26. The stock closed at $186.27 per share on Friday at 5:39 p.m. EDT. Despite the dip on Friday, Spotify stock is still higher than its opening price of $132.00 per share on April 2.

Insider Take:

Spotify went public this spring, so it is understandable that there is a bit of an unsteady period as the company finds its way on the New York Stock Exchange. The company is putting up solid numbers though, with continued growth in virtually every category. Possible negatives could be future lawsuits over royalties, changes to royalty formulas and competitors like Apple Music and Pandora.