Spotify Technology S.A. (SPOT) is a music-streaming subscription service legally domiciled in Luxembourg, but whose operational headquarters is located in Stockholm, Sweden, where the company was first launched. Its streaming services are monetized through both premium subscriptions and advertising, officially designated as its Premium Service segment and Ad-Supported Service segment, respectively.

Spotify offers its services globally with a presence in 79 countries and territories, and boasts 271 million monthly active users (MAUs) and 124 million Premium Subscribers as of December 31, 2019. Some of the company's primary competitors include Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Google, whose parent company is Alphabet Inc. (GOOGL). Unlike these rivals, Spotify doesn't have devices on which its music-streaming service is preloaded, putting the company at a significant competitive disadvantage.

Key Takeaways

  • Spotify provides music-streaming services.
  • The biggest share of Spotify's revenues come from its Premium Service, which provides online and offline ad-free music streaming to paying subscribers.
  • Spotify aims to continue generating revenue through the retention of current users, attraction of new ones, and conversion of users of the Ad-Supported Service to the Premium Service.
  • Spotify posted a net loss in 2019 more than double the previous year's net loss, but revenue growth remained strong.

Spotify's Financials

Spotify files financial statements with the U.S. Securities and Exchange Commission (SEC), but as a foreign entity, the company is not required to file in accordance with Generally Accepted Accounting Principles (GAAP). Instead, Spotify files in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The company does report certain non-IFRS measures, including earnings before interest, taxes, depreciation, and amortization (EBITDA), and Free Cash Flow (FCF).

Spotify's revenue rose a robust 28.6% to €6.8 billion in 2019, matching last year’s rate of growth, which had been the company’s slowest over the past four years. Nearly half of Spotify's revenue originated in the following three countries: the U.S. at €2.5 billion, the U.K. at €727 million, and Luxembourg at €4 million, for a combined revenue share of 48.4%. The other 51.6%, or €3.5 billion, originated in other countries throughout the world.

Despite the strong revenue growth, the company recorded a net loss of €186 million for 2019. While relatively low compared to the past four years, that loss was more than double the loss experienced in 2018.

Spotify's Business Segments

Spotify monetizes its streaming services through two main business segments: Premium Service and Ad-Supported Service. The company provides segment break downs of revenue and gross profit, the latter of which was reported as €1.7 billion in 2019, generating a consolidated gross margin of 25%.

Premium Service

Spotify offers music-streaming services to both paying and non-paying members. However, paying members, known as Premium Subscribers, are able to enjoy unlimited online and offline access to Spotify's entire music catalog without having to listen to commercials. Spotify generates revenue from its Premium Service segment through the sale of a variety of subscription pricing plans.

The segment posted revenue of €6.1 billion in 2019, comprising 90.0% of total revenue for the year. Gross profit came in at €1.6 billion, or 94.1% of 2019's total gross profit, for a gross margin of 27%. The segment's revenue grew 29.0% throughout 2019, slightly higher than 2018’s growth of 28.4%. Gross profit grew 29.1% in 2019, a significant slowdown from the previous year’s growth rate of  55.8%. The segment’s gross margin remained at 2018’s level of  27%.

Ad-Supported Service

Members who do not pay for a premium subscription are able to access Spotify's Ad-Supported Service. Such users have limited online access to the company's music catalog and their streaming experience is interspersed with advertisements. Spotify's revenue from its Ad-Supported Service segment is generated through the sale of display, audio, and video advertising space on its non-premium streaming platform.

The segment posted €678 million in revenue in 2019, comprising 10.0% of total revenue for the year. Gross profit was reported as €101 million, or 5.9% of total gross profit, for a gross margin of 15%. The segment's revenue grew 25.1% throughout 2019 compared to 30.3% throughout 2018. Gross profit grew 4.1% in 2019, a significant slowdown from the 125.6% growth posted in 2018. Gross margin fell to 15% from 18% in 2018.

Spotify's Recent Developments

Despite a greater net loss this year compared to last, Spotify’s revenue growth remained strong and consistent with last year’s growth. The company will look to maintain that robust growth as it strives to reach more milestones like the one that took place in the final quarter of 2018. In a note to shareholders, Spotify reported that its operating income, net income and free cash flow in Q4 all came in positive for the first time in the company's history.

One of Spotify's most impressive areas of recent growth has been in user engagement with podcasts. In its Q3 2019 letter to shareholders, the company noted that it saw the number of podcast hours streamed grow at an exponential rate and that certain aspects of the increased engagement were "extraordinary, almost too good to be true." During that three-month period, subscriber growth, gross margins, and operating profit all exceeded Spotify's own expectations.