Business context and reporting period
Spotify Technology S.A. is a Luxembourg-incorporated global audio streaming company reporting under IFRS as issued by the IASB, with the Euro as its reporting currency. This Form 20-F covers the fiscal year ended December 31, 2020; it is an annual filing rather than a standalone fourth-quarter filing. Spotify operates Premium subscription and Ad-Supported segments across 93 countries and territories.
- 345 million monthly active users (MAUs), up 27% year over year.
- 155 million Premium Subscribers, up 24% year over year.
- 199 million Ad-Supported MAUs, up 30% year over year.
- Content consumption reached 92 billion hours, up 26% year over year.
- Spotify acquired The Ringer for €170 million and Megaphone for €195 million during 2020 and expanded exclusive podcast content, including The Joe Rogan Experience.
Financial performance and position
| Metric (€ millions, except per-share data) | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | 7,880 | 6,764 | 16% |
| Premium revenue | 7,135 | 6,086 | 17% |
| Ad-Supported revenue | 745 | 678 | 10% |
| Gross profit | 2,015 | 1,722 | 17% |
| Gross margin | 26% | 25% | +1 percentage point |
| Operating loss | (293) | (73) | Worsened by €220 |
| Net loss attributable to owners | (581) | (186) | Worsened by €395 |
| Basic loss per share | (€3.10) | (€1.03) | Worsened |
| Operating cash flow | 259 | 573 | Down €314 |
| Free cash flow | 183 | 440 | Down €257 |
- Premium gross margin improved to 28% from 27%, principally because Spotify used relatively more free trials and fewer discounted trials.
- Ad-Supported gross margin fell sharply to 1% from 12%; gross profit declined to €6 million from €79 million. Drivers included higher per-play royalties, podcast costs and delivery costs.
- Research and development expense increased 36% to €837 million; sales and marketing increased 25% to €1,029 million; general and administrative expense increased 25% to €442 million.
- Finance income declined to €94 million from €275 million, while finance costs increased to €510 million from €333 million. Foreign-exchange losses and fair-value changes in warrants were significant contributors.
- The €128 million income-tax benefit primarily reflected deferred tax recognition related to the unrealized increase in the fair value of Spotify’s Tencent Music Entertainment investment.
- Cash and cash equivalents were €1,151 million and short-term investments were €596 million at year-end, for total cash and short-term investments of €1,747 million, compared with €1,757 million in 2019.
- Total assets were €6,326 million and equity attributable to owners was €2,805 million. Accumulated deficit was €3,290 million.
- Spotify reported no material outstanding indebtedness other than lease liabilities. Lease liabilities totaled €608 million, including €577 million classified as non-current.
Material changes versus the prior comparable period
- Revenue growth remained strong, but profitability deteriorated: operating loss increased from €73 million to €293 million and net loss increased from €186 million to €581 million.
- Operating cash flow and free cash flow declined substantially, primarily because of the higher operating loss and working-capital movements, partly offset by lower capital expenditures.
- Premium growth supported revenue and Premium gross margin, but Premium average revenue per user declined 9% to €4.31, principally from subscriber mix and foreign-exchange movements.
- Ad-Supported revenue grew 10%, despite reduced advertising demand in the first half of 2020 and COVID-19-related disruption, but the segment’s cost growth outpaced revenue growth.
- Operating expenses increased materially as Spotify continued investing in product development, personnel, marketing, podcasts and international expansion. Share-based compensation expense increased to €176 million from €122 million, and social-cost expense related to share-based compensation rose to €168 million from €37 million.
- Investing cash outflows increased to €372 million from €218 million, including €336 million for business combinations, €78 million of capital expenditures and net purchases of short-term investments.
- Financing cash flow was positive at €285 million, compared with negative €203 million in 2019, largely because of €319 million of proceeds from stock-option exercises and the absence of material cash share repurchases during 2020.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear formal full-year 2021 financial guidance range in the supplied text. Management states that existing cash, short-term investments and expected operating cash flow should be sufficient for working capital, capital expenditures and other liquidity needs for at least the next 12 months, while noting that future capital requirements could differ materially from current forecasts.
- COVID-19 reduced advertising demand in the first half of 2020 and changed listening patterns. Advertising revenue returned to growth in the second half, but management continued to identify pandemic-related uncertainty.
- Spotify expects continued investment in content, technology, research and development, sales and marketing, international expansion and acquisitions. These investments may delay or prevent sustained profitability.
- As of December 31, 2020, contractual obligations totaled €5.45 billion, including €3.576 billion of content-related minimum guarantees, €902 million of lease obligations, €898 million of purchase obligations and €74 million of deferred or contingent consideration.
- Spotify depends on third-party licenses for most streamed content. Major-label and Merlin content represented approximately 78% of music streams in 2020. License renewals, royalty rates, minimum guarantees, most-favored-nation clauses and royalty estimation may materially affect margins and cash flow.
- U.S. mechanical royalty rates for 2018–2022 were vacated by the D.C. Circuit, so Spotify used management estimates pending new rates. A later determination could benefit or adversely affect results.
- Legal, regulatory and tax exposures include copyright claims, privacy and data-security requirements, competition matters involving Apple, indirect-tax matters, transfer-pricing audits and an advance pricing agreement under negotiation between Sweden and the United States.
- Spotify’s approximately 8% investment in Tencent Music Entertainment was carried at €2.228 billion at year-end and generated a significant unrealized gain in other comprehensive income. A 10% change in TME’s share price would produce an estimated value range of approximately €2.005 billion to €2.451 billion.
- Founders Daniel Ek and Martin Lorentzon controlled approximately 75.4% of combined voting power through ordinary shares and beneficiary certificates, limiting minority shareholders’ influence.
- Spotify does not expect to pay cash dividends in the foreseeable future. The company’s share repurchase authorization, with approximately €350 million remaining at year-end, was scheduled to expire April 21, 2021 unless renewed.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Cost of revenue and rights-holder liabilities were identified as the critical audit matter because of complex royalty calculations, systems and estimates.
Most important facts an investor should verify
- Whether Ad-Supported gross margin can recover from 1% and whether podcast investments generate sufficient incremental revenue.
- The timing and ultimate cost of the €3.576 billion of content minimum guarantees and other fixed commitments.
- Actual outcomes of U.S. mechanical royalty proceedings, rights-holder audits and pending copyright or licensing disputes.
- Premium subscriber growth, churn, plan mix and the effect of declining Premium ARPU on future gross margin.
- The sustainability of positive operating and free cash flow while Spotify continues acquisitions and heavy investment.
- The valuation volatility and concentration risk associated with the Tencent Music Entertainment investment.
- COVID-19 effects on advertising demand, consumer spending, listening behavior and operating costs.
- Potential dilution and earnings volatility from stock-based compensation, warrants and outstanding equity awards.
- Tax audits, transfer-pricing negotiations and the ability to utilize approximately €2.196 billion of tax-loss carry-forwards.