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 92 countries and territories, and boasts 299 million monthly active users (MAUs) and 138 million Premium Subscribers as of June 30, 2020. 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 Q2 2020 more than 4.5 times the previous quarter's net loss, but revenue continued to grow.

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 13.3% to €1.9 billion in Q2 2020, which ended June 30, 2020. Nearly half of Spotify's revenue originated in the following three countries: the U.S. at €706 million, the U.K. at €202 million, and Luxembourg at €1 million, for a combined revenue share of 48.1%. The other 51.9%, or €980 million, originated in other countries throughout the world.

Despite growing revenue, the company recorded a net loss of €356 million in Q2 2020. It was more than 4.5 times the net loss reported in the year-ago period.

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 €479 million in Q2 2020, 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 €1.8 billion in Q2 2020, comprising about 93% of total revenue for the quarter. Gross profit came in at €495 million, comprising all of Spotify's gross profit for the quarter. The segment's revenue grew 17.0% compared to Q2 2019. Gross profit grew 19.9% compared to the same three-month period a year ago. The segment’s gross margin rose one percentage point to 28%.

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 €131 million in revenue in Q2 2020, comprising about 7% of total revenue for the quarter. The segment reported a gross loss of €16 million, bringing the company's total gross profit down to €479 million. The segment's revenue fell 20.6% compared to Q2 2019.

Spotify's Recent Developments

Despite a significantly greater net loss this quarter compared to the year-ago quarter, Spotify continues to see growth in its Monthly Active Users (MAUs) and Premium Subscribers. Total MAUs grew 29% compared to the same quarter in 2019, and Premium Subscribers grew 27%.

How Spotify Reports Diversity & Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Spotify and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Spotify releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Spotify discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Spotify breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.

Spotify Diversity & Inclusiveness Reporting
  Race Gender Ability Veteran Status Sexual Orientation
Board of Directors        
C-Suite
 
     
General Management        
Employees ✔ (U.S. Only) ✔ (Americas and Asia-Pacific Region Only) ✔ (Americas and Asia-Pacific Region Only) ✔ (Americas and Asia-Pacific Region Only)