Spotify Q4 Revenue, Earnings Fall Short; Buying Ringer

“We bought the next ESPN,” said Ek. Looking out a decade, the executive predicted “radio is moving online because users get a much better user experience,” saying on-demand listening “is tailored to their needs.” Ringer will be a valuable property for Spotify as “billions” of people gravitate to sports audio, bringing a new group of “highly loyal sports and pop culture fans,” he said.

Podcasts are driving user retention, which leads to higher conversion, said Ek. Spotify outlined a plan last year to expand beyond music, and has made “significant progress” toward its goal to be the top global audio platform, he said. The audio services company had 200 percent growth in podcast hours streamed; the category is driving overall health in the business, Ek said.

More than 16 percent of Spotify’s monthly active users engage with podcasts. Spotify added personalized elements in Q4, launching Your Daily Podcasts in priority podcast markets including the U.S., U.K., Germany, Mexico, Brazil, Canada and Australia. MAU grew 31 percent to 271 million, beyond the high end of guidance. Premium subscribers grew 29 percent to 124 million.

Premium subscribers brought in $1.8 billion in revenue, above forecast. Advertising-supported business, weaker than forecast, delivered $239 million. Average revenue per user dropped 5 percent due to extension of a family plan trial offer, management said.

Commenting on Spotify’s slow start in the ad-supported business, Chief Financial Officer Paul Vogel cited a new order management system put in place in Q3 that carried over into Q4. The company is optimistic about programmatic audio, and Vogel highlighted the launch of dynamic ad breaks. The addition of a streaming audio insertion tool should help monetize podcasts, he said, saying ads should be stronger in 2020, ramping through the year as podcast inventory grows.

Citing historical trends, management pointed to MAU growth as a leading indicator of future subscriber additions, “which is then followed by revenue gains in both premium and ad-supported users.” Spotify expects trends to continue but has been “appropriately conservative” on 2020 guidance, particularly around the podcast segment that’s “still reasonably new.”

By region, 35 percent of Spotify MAUs are in Europe, 27 percent in North America, 22 percent in Latin America and 16 percent in rest of world, the fastest growing segment. For Q1, Spotify projects total MAUs of 279 million-289 million (126 million-131 million premium) subscribers, and total revenue of $1.88 billion-$2.1 billion. Full-year guidance calls for 328 million-348 million MAUs (143 million-153 million premium) and total revenue of $8.9 billion-$9.3 billion.

Pivotal Research's Jeff Wlodarczak, keeping his “hold” rating on the stock, said competition from players “that are not necessarily focused on ever becoming profitable is an obvious overhang." The analyst's bigger medium-long-term concern is the four music labels that control more than 90 percent of Spotify’s music “constantly extracting their pound of flesh.”

Wlodarczak compared Spotify’s position to the U.S. pay-TV industry, where big distributors’ EBITDA margins “collapsed from 85% to 15%.” As growth in pay-TV viewers slowed -- and eventually went negative -- media players used their market power, and the competitive distributor climate, “to jam through ever larger price increases for their content,” he noted. Labels will offset slowing growth “by taking a greater share of SPOT’s profitability, permanently limiting their ability to generate material profits,” said the analyst. Pivotal believes success with podcasts or other non-music-related ventures will “inevitably be clawed back,” though it’s unlikely labels will make a serious push on higher music rates “until perhaps 2021.”