Did Spotify Earnings Hit The SPOT For Investors?

Spotify SPOT opened trading today up 4.6% after a mixed earnings results. The stock broke down over 5% from the opening price as investors weighed earnings and management guidance. Spotify reported less than expected EPS results today posting -$0.90 per share vs. the expected -$0.37. Although this was a huge miss, it still narrowed its losses by 11% from Q1 2018. Revenues beat estimates by 3% and illustrated 33% YoY growth, with this top line growth being driven by continued subscriber expansion.

The mismatch of revenue and earnings was partially due to its Google GOOGL Home Mini promotion along with the price reduction associated with its joint promotion of Spotify Premium + Hulu that they offered in the US. Mispricing in ad-related revenue caused underperformance for this segment, but adjustments were made in the final month of this period which is expected to alleviate this underperformance moving forward.

Business Performance and Overview

Spotify just broke 100 million premium subscribers, which was on the high end of guidance. This milestone is a massive success for the firm, making it the first music-streaming company to hit this figure and further proves its ability to attract and retain new customers. Less than half of Spotify’s monthly active users (MAU) are paid premium subscriptions, with 123 million (56%) being ad-supported, but over 90% of the revenue comes from their premium subscription.

Paid subscribers are growing at a faster pace than ad-supported users, and the goal is to transition these ad-supported users to premium paying customers once they become acclimated to the platform. Also 42% of subscription additions to the service were previous users illustrating that “more and more frequently we’re seeing users come back,” according to Barry McCarthy.

Spotify is extending its product offering with considerable additions in their podcast portfolio. In Q1 SPOT acquired Gimlet, Anchor and Parcast for a total of about $500 million. This expansion demonstrates Spotify’s focus on being the #1 audio streaming platform in the world. This segment is expected to grow SPOT’s ad-revenue by a considerable amount but decrease its average revenue per user.

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