Acquiring Two Major Podcast Companies, Spotify Posts a Profit in Q4 2018

Spotify bets big on podcasting to fuel its growth in 2019.

Spotify has released its financial results for the fourth fiscal quarter of 2018.

For the first time in the company’s history, operating income, net income, and free cash flow were all positive.

Premium subscribers reached 96 million, up 36% year-over-year.  The company attributed the ‘better-than-expected’ gain from its Google Home promotion and annual holiday campaign.

In addition, monthly active users (MAUs) grew to 209 million, up 27% over the previous year quarter.  Spotify had expected 206 million.  The company attributed the growth to improved retention rates and strong growth in Latin America and other emerging markets.

During Q4 2018, the streaming music giant expanded to 78 countries from 65.  This increase came from its launch in the 13 countries in the Middle East and North Africa (MENA) region.

Engagement also grew across both the ad-supported and premium tiers.  Consumers listened to over 15 billion hours of content.

Breaking down the financial metrics, total Q4 revenue reached €1.5 billion ($1.7 billion), up 30%.

Premium revenue also grew 30% to €1.3 billion ($1.5 billion).  Due to Family Plan and Student Plan subscribers, as well as growth in emerging markets, average revenue per user (ARPU) fell 7%.  According to Spotify, Lifetime Value per Subscriber (LTV), a previously unused metric, has remained constant year-over-year.  This also offset the sharp decline in ARPU.

Ad-supported revenue rose 34% to €175 million ($199 million).  This beat out the 30% year-over-year ad-supported revenue growth in Q3 2018.  Revenue from North America grew 41%.  Both audio and video ads also grew over 40%.

The company added growth in its programmatic and self-serve (Ad Studio) channels, outpacing the growth of Direct advertising.  Combined, both grew around 60% over the previous year quarter.  Together, they accounted for around 25% of Spotify’s ad sales revenue.  Over 2,000 advertisers used Ad Studio in Q4 2018 to run campaigns.

Gross margin stood at 26.7%, above the company’s guidance range of 24-26%.

Premium gross margin rose to 27.3%, up from 26.1% in Q3.  Ad-supported gross margin also grew to 22.1%, up from 18.6% in Q3.

The company added its ad-supported gross margin remains strong in its top five markets, and very weak in its other 73 markets, including MENA.

In addition, over 300,000 artists now use Spotify for Artists.  More than 1,000 global music publishers have requested access to the beta version of Spotify Publishing Analytics.

Breaking down operating expenses and income, Spotify posted operating expenses of €305 million ($347 million), down 17% over the previous year quarter.  This resulted in the company’s first ever quarterly operating profit, reaching €94 million ($107 million).

The company also generated €150 million ($171 million) in net cash flow from operating activities.  Free cash flow also grew 12% to €84 million ($95.6 million).

Spotify ended the quarter with €1.8 billion ($2.1 billion) in cash and cash equivalents, restricted cash, and short term investments.

Spotify also shared its outlook for Q1 and full-year 2019.

For the first fiscal quarter, the company expects between 215-220 million monthly active users.  Total premium subscribers may reach between 97-100 million.  Total revenue may hit €1.35-€1.6 billion ($1.5-$1.8 billion).  Gross margin will remain steady at 22.5-22.5%.  Operating loss may reach between €50-120 million ($57-$137 million).

For the full year of 2019, Spotify expects 245-265 million monthly active users.  Total premium subscribers may reach 117-127 million.  Total revenue may reach €6.4-6.8 billion ($7.2-$7.7 billion).  Gross margin will remain steady at 22.0-25.0%.  Operating loss will total €200-€360 million ($227.7-$409.8 million).

Betting big on podcasts.

In addition, Spotify has confirmed two strategic acquisitions to accelerate growth in podcasting.

The streaming music giant has completely acquired Gimlet Media and Anchor.

Financial terms of the deals remain undisclosed.

The company wrote in a blog post,

With these acquisitions, Spotify is positioned to become both the premier producer of podcasts and the leading platform for podcast creators.  Gimlet will bring to Spotify its best-in-class podcast studio with dedicated IP development, production, and advertising capabilities.  Anchor will bring its platform of tools for podcast creators and its established and rapidly growing creator base.

Daniel Ek, Co-Founder and CEO, added,

These acquisitions will meaningfully accelerate our path to becoming the world’s leading audio platform, give users around the world access to the best podcast content, and improve the quality of our listening experience as well as enhance the Spotify brand.  We’re proud to welcome Gimlet and Anchor to the Spotify team, and we look forward to what we will accomplish together.