Spotify reported strong results for the fourth quarter, at the high end of its outlook thanks to a strong holiday sales campaign. As flagged in its previous quarterly report, the company expects some pressure on margins in 2019, as it launches a new strategy to grow revenue through offering podcasts and other audio content besides music. The group confirmed the acquisitions of Gimlet Media and Anchor to drive the podcast business and said more takeovers are planned this year.
The music streaming service finished the year with 207 million monthly active users, up 29 percent from 2017 and better than its forecast thanks to improved retention, Spotify said. Premium subscribers increased 36 percent over the year to 96 million, at the high of guidance, helped by better-than-expected intake from a promotion with Google Home smart speakers in Q4 and the annual holiday campaign. Spotify said it sees smart speakers as an important growth area and will look at more offers like this.
Fourth-quarter revenue rose 30 percent year-on-year to EUR 1.495 billion, in line with the outlook. A 34 percent increase in ad revenue and the subscriber growth helped offset a 7.7 percent annual fall in ARPU to EUR 4.89 in Q4. Spotify said ARPU is down due to relatively stronger customer growth in lower-priced emerging markets as well as a higher share of family and student plans in the customer mix.
The gross margin was up by 220 basis points to 26.7 percent in Q4, above the high end of the guidance range. Excluding a licence fee adjustment and other one-time gains, the margin was 25.8 percent. After a 17 percent reduction in operating costs in the quarter, Spotify posted its first ever quarterly operating profit, at EUR 94 million. Free cash flow was also a positive EUR 84 million, up 12 percent from a year ago.
Slower customer growth in 2019
Spotify forecast a small slowdown in customer growth in 2019. Monthly active users are expected to reach 215-220 million in Q1 and 245-265 million by the end of 2019, equal to annual growth of 18-28 percent. Premium subscribers will grow to an estimated 97-100 million in Q1 and 117-127 million by year-end.
This implies annual revenue growth of 19-36 percent in Q1, to EUR 1.35-1.55 billion, while the gross margin will reach 22.5-24.5 percent and the operating result is expected in the red again, at a loss of EUR 50-120 million.
Spotify expects full-year revenues of EUR 6.35-6.8 billion, up 21-29 percent. This includes an estimated EUR 25-30 million in revenue from acquisitions. The takeovers and new focus on podcasts will lead to an extra EUR 40-50 million in operating expenses over the year and put pressure of 20-30 basis points on the gross margin, which is forecast at 22.0-25.0 percent over the full year. Overall, Spotify predicts an operating loss of EUR 200-360 million in 2019.
Multiple acquisitions planned
Spotify finished 2018 with total cash of EUR 1.8 billion. In addition to its ongoing share buyback, the company said it plans to spend USD 400-500 million on “multiple” acquisitions this year. The expansion into podcasts is expected to help lower churn and drive revenue growth and margins, and Spotify said it plans to “lean into” the strategy in the course of 2019, through acquisitions as well as investing in in-house content production and exclusive content.
The first acquisitions in the new strategy have already been announced, for an undisclosed amount, and are expected to close in Q1. These are podcast content producer Gimlet Media and Anchor, active in podcast creation, publishing, and monetization services. Gimlet will bring to Spotify its podcast studio with dedicated IP development, production and advertising capabilities. Anchor will bring its platform of tools for podcast creators and an established and rapidly growing creator base.