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, 2019. The filing was submitted on July 31, 2019. Spotify operates a global audio streaming service with two reportable segments: Premium (subscription-based) and Ad-Supported (advertising-based). As of June 30, 2019, the company reported 232 million Monthly Active Users (MAUs) and 108 million Premium Subscribers.
Key Financial Metrics
| Metric (in € millions) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | 1,667 | 1,273 | 3,178 | 2,412 |
| Gross Profit | 434 | 329 | 807 | 612 |
| Gross Margin | 26% | 26% | 25% | 25% |
| Operating Loss | (3) | (90) | (50) | (131) |
| Net Loss (Attributable to Owners) | (76) | (394) | (218) | (563) |
| EBITDA | 17 | (84) | (9) | (114) |
| Free Cash Flow (6 months) | 223 (2019) vs 92 (2018) | |||
| Cash and Cash Equivalents | 909 (as of June 30, 2019) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 31% year-over-year (YoY) for the quarter and 32% for the six-month period, driven primarily by a 31% increase in Premium Subscribers.
- Profitability Improvement: Operating loss narrowed significantly to €3 million for the quarter (from €90 million loss in 2018) and €50 million for the six months (from €131 million loss in 2018). Net loss decreased 81% YoY for the quarter.
- Finance Costs: Net finance costs decreased substantially due to the derecognition of Convertible Notes following the 2018 direct listing and reduced fair value losses on warrants.
- Acquisitions: The company acquired Anchor FM, Gimlet Media, and Cutler Media (Parcast) in the first half of 2019 to bolster podcast capabilities, adding €320 million to goodwill.
- Accounting Changes: Adoption of IFRS 16 (Leases) on January 1, 2019, resulted in the recognition of €398 million in right-of-use assets and €547 million in lease liabilities.
Guidance, Outlook, and Risks
- Outlook: Management expects seasonal trends to continue, with Premium subscriber growth accelerating during bi-annual trial programs (summer/winter) and Ad-Supported revenue peaking in the fourth quarter due to holiday advertising demand.
- Capital Allocation: The company repurchased €283 million of its own shares in the first six months of 2019. Planned capital expenditures for the next 12 months are approximately €190 million for office build-outs.
- Contractual Obligations: Subsequent to the reporting period, Spotify signed multi-year license agreements with minimum guarantee commitments of approximately €850 million for royalty payments over the next two years.
- Risks: Key risks include dependence on third-party content licenses, potential copyright infringement litigation (including ongoing matters in India and the U.S.), currency fluctuations, and the ability to retain users and generate sufficient revenue to achieve sustained profitability.
Investor Verification Checklist
- Verify the impact of the new €850 million minimum royalty guarantee commitments signed post-period on future cash flows.
- Monitor the resolution of pending copyright infringement lawsuits in India (Warner/Chappell, Saregama) and the U.S. (Bluewater, Gaudio, A4V).
- Assess the sustainability of Premium ARPU, which declined slightly (€4.86 vs €4.89) due to the growth of lower-priced Family Plans.
- Review the valuation of the long-term investment in Tencent Music Entertainment (TME), which fluctuates with TME's share price and impacts Other Comprehensive Income.
- Track the execution of the share repurchase program, with approximately €588 million remaining available as of June 30, 2019.