Spotify Shares Drop After Guidance for Higher R&D Spending; User Numbers Rise
A tweak to the high end of Q4 subscriber guidance and comments on some higher coming spending drove a 5.7 percent decline in Spotify shares Thursday to $141.16, after Q3's shareholder letter. Chief Financial Officer Barry McCarthy said on an earnings call that accelerated pace of R&D investment in Q4 will "pressure operating margins more."
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Spotify is shoring up partnerships as competition heats up in the streaming music industry, CEO Daniel Ek said. He cited a global relationship with Samsung, where Spotify is included in the setup experience for new Samsung smartphones and will be the preferred music provider (see 1808090034), and a promotion giving Spotify’s $14.99 family plan subscribers a free Google Home Mini speaker, which began Thursday and runs through year's end. Spotify comes pre-installed on Google Home minis.
Commenting on the company's role as an independent player, Ek said Spotify’s strategy is to partner with as many players as possible on the hardware side. “There’s a lot of customers out there that have devices of many of these ecosystems,” he said, mentioning Amazon and Apple, and Spotify’s goal is to be the “top-notch user experience on all of those devices.”
Ek sees a lot of growth opportunity ahead in the market for the radio listeners who haven’t jumped to paid streaming. “The vast majority of the minutes being spent on radio today haven’t yet moved online,” he said. Podcasts are part of its vision, and the company is investing in monetization for creators and improving the user experience, including the ability to fast-forward through podcasts and discover content.
In September, it announced a beta test of a direct upload feature that allows do-it-yourself creators and independent artists to upload their content directly to Spotify, enabling them to reach new fans and get compensated. It hopes to expand the program. It launched a playlist submission feature in July, enabling artists and labels to submit unreleased music to the Spotify editorial team for consideration for its O&O playlists, with more than 67,000 artists and labels submitting. More than 30 percent of Spotify consumption happens through these types of playlists, and some 250,000 creators and teams use Spotify for Artists monthly, he said.
Spotify’s monthly average users (MAUs) grew 28 percent over Q3 2017, with Latin America and other emerging markets outpacing growth in more-established markets. Ad-supported users totaled 109 million at the end of the quarter, a 20 percent increase, and the premium subscriber based was 87 million, up 40 percent. The company began offering in Q3 a multi-partner content bundle for students with Spotify, Hulu and Showtime content for $4.99 monthly.
Revenue in Q3, ended Sept. 30, was $1.5 billion.
In a Thursday research note to investors, Pivotal Research Group analyst Jeffrey Wlodarczak said Spotify remains the “clear global leader” in a music streaming market in the "3rd/4th inning." As long as MAU growth remains strong, customer usage increases, churn declines, gross margins move higher and the competitive landscape remains stable, Pivotal sees Spotify’s value rising materially. Risks include potential subscriber misses, concentration of power at companies that control Spotify’s music content, competing companies’ ability to subsidize music, and Google and Apple’s control of the operating systems for virtually all smartphones, he said.