Streaming audio platform Spotify closed out 2020 with solid financials, including double-digit revenue and subscription growth. At the end of the year, Spotify reported 155 million premium subscribers, a 24% increase year-over-year, and on the high end of the company’s forecast. Spotify also had 345 million total monthly active users, a 27% increase year-over-year, and 199 million ad-supported monthly active users, a 30% increase year-over-year.

In the fourth quarter, Spotify added 10 million premium subscribers with the majority of those subscribers in Europe, followed by North America. Spotify noted that the average monthly churn rate for premium subscribers is down slightly, and they expect churn to continue to decrease in 2021.

For the full year, Spotify added 74 million net monthly active users, compared to 64 million in 2019.

Spotify said they believe podcast usage has helped drive the increase in monthly active users. In the fourth quarter, Spotify had 2.2 million podcasts on the platform, up from 1.9 million podcasts the prior quarter. Twenty-five percent of total monthly active users listened to a podcast, and consumed hours were nearly double since the prior year.

“We have increasing conviction in the causal relationship between the growth in podcast consumption driving higher LTV and retention among our user base,” said Spotify in their letter to shareholders.

Spotify does not believe COVID-19 had a significant impact on new listeners.

“In 2020, we believe the pandemic had little impact on our subscriber growth and may have actually contributed positively to pulling forward new signups. From a revenue standpoint, advertising was negatively affected in the back half of Q1 and persisted throughout the rest of the year,” Spotify said.

Fourth quarter highlights

Financial highlights for the quarter include the following:

• Total revenue was €2.17 billion, a 17% increase year-over-year.
• Premium subscriber revenue was €1.9 billion, a 15% increase year-over-year.
• Ad-supported revenue was €281 million, a 29% increase year-over-year, higher than expected. Spotify said this revenue category was led by podcast, direct and ad studio channels.
• Average revenue per user was €4.26, an 8% decrease year-over-year.
• Gross profit was €575 million, and gross margin was 26.5%, compared to 24.8% in the third quarter of 2020 and 25.6% in the fourth quarter of 2019.
• Total operating loss was (€69 million).

Operational highlights

During the quarter, Spotify invested in podcast support for connected Google and Alexa devices. Spotify is also now integrated into the PlayStation 5 and Xbox Series X and S gaming consoles. In addition, Spotify worked on the user experience, enhancing the home tab for better discoverability, and they launched a mixed-media morning show called The Get Up which is a mix of music and news.

During the fourth quarter, Spotify acquired Megaphone, an innovative podcast hosting and monetization platform.

“With this acquisition, we have the ability over time to make SAI technology available to third-party publishers on Spotify while growing our pool of targetable podcast inventory for advertisers,” said Spotify.

Other highlights include:

• The Joe Rogan Experience became exclusive to Spotify. At the end of the year, it was the #1 podcast on the platform in 17 markets.
• The Duke (Prince Harry) and Duchess of Sussex launched Archewell Audio, a podcast exclusive to Spotify.
• Other fourth quarter launches include Dare to Lead with Brene Brown, 10 Songs That Made Me, The Ringer Music Show and Paul McCartney’s latest album, McCartney III.

First quarter and full year 2021 guidance

Spotify provided the following guidance for the first quarter and full year 2021.

First quarter:

• Total MAUs: 354 million to 364 million
• Total premium subscribers: 155 million to 158 million
• Total revenue between €1.99 billion and €2.19 billion
• Gross margin: 23.5% to 25.5%
• Operating profit/loss: €(78) million to €(28) million

Full year:

• Total MAUs: 407 million to 427 million
• Total premium subscribers: 172 million to 184 million
• Total revenue between €9.01 billion and €9.41 billion
• Gross margin: 23.7% to 25.7%
• Operating profit/loss: €(300) million to €(200) million

“Looking ahead, we are optimistic about the underlying trends in the business into 2021 and beyond, however, we face increased forecasting uncertainty versus prior years due to the unknown duration of the pandemic and its ongoing effect on user, subscriber and revenue growth,” said Spotify.

Insider Take

While Spotify continues to post losses, the company is in growth mode, including acquisitions of complementary technologies and platforms and exclusive content which is a key differentiating factor. There is, of course, a sizable investment on the front end, but these investments will eventually pay for themselves. Spotify continues to provide a quality user experience and unique content at an affordable price. There are competitors, but we believe Spotify will continue to be successful.