Spotify Technology S.A. annual report, Q4 FY2022

Spotify Technology S.A. — Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2022, prepared under IFRS as issued by the IASB and reported in euros. The filing is an annual Form 20-F rather than a standalone quarterly filing; selected fourth-quarter operating metrics are disclosed. Spotify operates Premium subscription and Ad-Supported audio streaming businesses across 184 countries and territories.

Business context and operating scale

At year-end, Spotify had 489 million monthly active users, up 20% from 406 million, including 205 million Premium Subscribers, up 14% from 180 million.
Ad-Supported MAUs were 295 million, up 25% year over year.
Users streamed 132 billion hours of content during 2022, up 20%.
The platform offered more than 100 million tracks and approximately 5 million podcast titles. Audiobooks were launched in selected markets during 2022.
The company completed acquisitions of Podsights and Chartable, Findaway, and Sonantic for aggregate stated consideration of approximately €293 million.

Financial performance and key metrics

Metric	2022	2021	Change
Revenue	€11,727 million	€9,668 million	+21%
Premium revenue	€10,251 million	€8,460 million	+21%
Ad-Supported revenue	€1,476 million	€1,208 million	+22%
Gross profit	€2,926 million	€2,591 million	+13%
Consolidated gross margin	25%	27%	Down 2 points
Operating income/(loss)	€(659) million	€94 million	Down €753 million
Net loss attributable to owners	€(430) million	€(34) million	Loss increased
Basic loss per share	€(2.23)	€(0.18)	Worsened
Net cash from operating activities	€46 million	€361 million	Down €315 million
Free cash flow	€21 million	€277 million	Down €256 million

Premium gross margin declined from 29% to 28%, primarily due to higher publishing licensing rates, enhanced product costs, and a €24 million charge related to excess and obsolete inventory and adverse purchase commitments.
Ad-Supported gross margin fell sharply from 10% to 2%. Ad-Supported cost of revenue increased 33%, exceeding 22% revenue growth, driven by content, streaming delivery, advertising measurement, royalty, and product costs.
Operating expenses increased substantially: research and development rose 52% to €1,387 million, sales and marketing rose 39% to €1,572 million, and general and administrative expense rose 39% to €626 million.
Finance income was €421 million, including fair-value gains, foreign-exchange gains, and interest income. Finance costs were €132 million. The net finance benefit was €289 million.
Premium ARPU increased 5% for the full year to €4.52, primarily due to favorable foreign-exchange movements. Fourth-quarter Premium ARPU was €4.55, up 3% year over year.

Liquidity, debt, capital allocation, and balance sheet

Cash and cash equivalents plus short-term investments totaled €3,350 million at December 31, 2022, down from €3,500 million.
Cash and cash equivalents were €2,483 million, compared with €2,744 million at year-end 2021.
Outstanding debt consisted primarily of US$1.5 billion principal amount of 0% Exchangeable Senior Notes due March 15, 2026. Their IFRS fair value was €1,128 million at year-end.
Total contractual obligations were €4,658 million, including €1,409 million of content-related minimum guarantees, €1,402 million of Exchangeable Notes principal, €890 million of lease obligations, and €917 million of purchase obligations.
Management stated that available cash, short-term investments, and expected operating cash flow should cover working capital, capital expenditures, and other liquidity needs for at least the next 12 months.
2023 planned capital expenditures were approximately €19 million.
Under the share repurchase program approved in 2021, Spotify had repurchased 469,274 shares for €91 million through year-end 2022; approximately €837 million remained authorized on a euro-translated basis. No dividends were paid or expected in the foreseeable future.
Equity attributable to owners was €2,401 million, while accumulated deficit was €3,647 million.

Material changes versus the prior comparable period

Revenue grew 21%, but profitability deteriorated materially as cost of revenue and operating expenses grew faster than revenue.
Spotify shifted from €94 million of operating income in 2021 to a €659 million operating loss in 2022.
Operating cash flow declined from €361 million to €46 million, and free cash flow declined from €277 million to €21 million.
Premium Subscribers, total MAUs, and Ad-Supported MAUs continued to grow strongly, but Ad-Supported gross margin contracted from 10% to 2%.
Cash and short-term investments declined by €150 million despite continued revenue growth.
The fair value of Spotify’s approximately 8% investment in Tencent Music Entertainment increased from €852 million to €1,094 million, with the change recorded primarily in other comprehensive income rather than operating profit.
Share-based compensation expense increased from €223 million to €381 million.
Rights-holder accrued fees increased from €1,378 million to €1,665 million, and rights-holder liabilities older than 12 months totaled approximately €441 million.

Guidance, outlook, management commentary, risks, and unusual items

The filing does not provide formal 2023 revenue, margin, subscriber, or profitability guidance.
Management described the macroeconomic environment as challenging because of inflation, higher interest rates, the Russia-Ukraine conflict, supply-chain disruptions, and continuing COVID-19 effects. Hiring was reduced during 2022.
On January 23, 2023, Spotify announced a workforce reduction and estimated severance-related charges of approximately €35 million to €45 million.
Subsequent license agreements signed after year-end included approximately €116 million of minimum guarantee and spending commitments over the next three years.
Spotify remains dependent on third-party licenses for most streamed content. Major record-label content represented approximately 75% of label-delivered audio streams in 2022, creating concentration and renewal risk.
Content commitments and minimum guarantees may pressure margins if Premium Subscriber growth, retention, advertising sales, or user engagement underperform.
Royalty calculations and rights-holder liabilities require significant estimates while negotiations, audits, and statutory rate proceedings remain unresolved. The filing identifies cost of revenue and rights-holder liabilities as the critical audit matter.
Other material risks include competition, advertising monetization and measurement, podcast and audiobook economics, cybersecurity and privacy regulation, foreign-exchange volatility, tax audits and transfer pricing, reliance on Google Cloud Platform, and volatility in the Tencent Music investment.
Founders Daniel Ek and Martin Lorentzon controlled approximately 74.3% of combined voting power through ordinary shares and beneficiary certificates, limiting minority shareholder influence.
Ernst & Young AB issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022.

Important facts for investors to verify

Whether revenue growth can continue to outpace royalty, content, infrastructure, research and development, and personnel costs.
The trajectory of Premium and Ad-Supported gross margins, particularly the sustainability of the 2% Ad-Supported gross margin.
Whether operating cash flow and free cash flow recover after the 2022 decline.
The timing and cash requirements of the €1.409 billion content-related minimum guarantees and other contractual commitments.
Potential changes to royalty rates, unresolved rights-holder claims, audit outcomes, and the adequacy of accrued royalty liabilities.
The financial impact of the 2023 workforce reduction, including the estimated €35 million to €45 million severance charge.
Cash requirements or dilution risks associated with the 2026 Exchangeable Notes, including possible cash settlement or repurchase obligations.
The valuation sensitivity of the Tencent Music investment and other fair-value instruments to market, currency, and regulatory conditions.
The accuracy and comparability of MAU, Premium Subscriber, stream, and advertising metrics, which are internally calculated and not independently validated.