Spotify Technology S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K reports the interim condensed consolidated financial statements for Spotify Technology S.A. for the three and six months ended June 30, 2018. The company operates a global music streaming service with two reportable segments: Premium (subscription-based) and Ad-Supported. On April 3, 2018, the company completed a direct listing of its ordinary shares on the New York Stock Exchange (NYSE).
Key Financial Metrics
| Metric (in € millions) | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2018 |
|---|---|---|
| Revenue | 1,273 | 2,412 |
| Gross Profit | 329 | 612 |
| Gross Margin | 26% | 25% |
| Operating Loss | (90) | (131) |
| Net Loss | (394) | (563) |
| Net Loss Per Share (Basic & Diluted) | (2.20) | (3.25) |
| Operating Cash Flow | N/A | 114 |
| Free Cash Flow | N/A | 92 |
| Cash and Cash Equivalents | 810 (as of June 30, 2018) | 810 (as of June 30, 2018) |
| Short-term Investments | 885 (as of June 30, 2018) | 885 (as of June 30, 2018) |
| Outstanding Debt | 0 | 0 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 26% year-over-year (YoY) for both the three and six-month periods, driven by a 40% increase in Premium Subscribers (83 million as of June 30, 2018) and a 23% increase in Ad-Supported MAUs.
- Margin Expansion: Consolidated gross margin improved to 26% (Q2 2018) and 25% (H1 2018) from 23% and 18% in the prior year periods, respectively. This was primarily due to new licensing agreements reducing content costs.
- Increased Losses: Net loss widened significantly to €394 million (Q2) and €563 million (H1) compared to €188 million and €361 million in the prior year. This was largely driven by non-cash finance costs related to the fair value adjustment of warrants and Convertible Notes following the direct listing.
- Convertible Notes Exchange: In January 2018, the company exchanged remaining Convertible Notes for ordinary shares. Upon the April 2018 direct listing, the company recorded a €123 million expense to mark-to-market the notes before reclassifying the balance to equity.
- Operating Expenses: Research and Development (R&D) expenses increased 51% YoY in Q2 due to headcount growth. General and Administrative (G&A) expenses increased 47% YoY, largely due to €30 million in direct listing costs.
Guidance, Outlook, and Risks
- Outlook: Management expects seasonal trends to become more pronounced, with Premium subscriber growth accelerating during bi-annual trial programs (summer/winter) and Ad-Supported revenue peaking in Q4 due to holiday advertising demand.
- Capital Expenditures: The company has planned capital expenditures of over €300 million over the next 12 to 18 months for office build-outs in major cities including New York, London, and Stockholm.
- Liquidity: As of June 30, 2018, the company held €810 million in cash and cash equivalents and €885 million in short-term investments. Management believes these resources are sufficient for at least the next 12 months.
- Legal Risks: The company faces ongoing litigation regarding copyright infringement. A class action settlement (Ferrick et al.) was preliminarily approved for approximately $43 million plus fees, but appeals are pending. Additionally, six new lawsuits filed since July 2017 allege infringement of over 10,000 musical compositions, seeking statutory damages up to $150,000 per work.
- Market Risks: Significant exposure to currency fluctuations (Euro strengthening negatively impacted revenue) and share price volatility affecting the fair value of warrant liabilities.
Key Facts for Investor Verification
- Subscriber Metrics: Verify the 83 million Premium Subscribers and 180 million Monthly Active Users (MAUs) reported as of June 30, 2018, noting the methodology change to include users who may limit ad exposure.
- Non-GAAP Measures: Review the reconciliation of EBITDA (loss of €84 million for Q2) and Free Cash Flow (€92 million for H1) to understand operational performance excluding non-cash finance costs.
- Derivative Liabilities: Confirm the valuation of warrant liabilities (€623 million as of June 30, 2018) and their sensitivity to share price changes, which significantly impact reported net loss.
- Licensing Costs: Monitor the impact of new licensing agreements on cost of revenue and the potential for minimum guarantee payments (€854 million total contractual obligation).
- Legal Exposure: Track the status of the pending appeals regarding the class action settlement and the potential financial impact of the six new copyright infringement lawsuits.