Spotify Technology S.A. Form 6-K Summary
Business Context and Reporting Period
This filing covers the interim condensed consolidated financial statements for the three and nine months ended September 30, 2018. Spotify Technology S.A. is a global music streaming service operating in 65 countries. The company completed a direct listing on the New York Stock Exchange (NYSE) on April 3, 2018. The business operates two reportable segments: Premium (subscription-based) and Ad-Supported (advertising-based).
Key Financial Metrics
| Metric (in € millions) | 3 Months Ended Sept 30, 2018 | 9 Months Ended Sept 30, 2018 |
|---|---|---|
| Revenue | 1,352 | 3,764 |
| Gross Profit | 342 | 954 |
| Gross Margin | 25% | 25% |
| Operating Loss | (6) | (137) |
| Net Income/(Loss) | 43 | (520) |
| EBITDA | 1 | (113) |
| Free Cash Flow | N/A | 125 |
| Cash and Cash Equivalents | 1,095 | 1,095 |
| Total Debt | 0 | 0 |
Note: Net income for the three months ended September 30, 2018, includes a significant tax benefit of €125 million driven by unrealized gains on long-term investments.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 31% year-over-year (YoY) for the quarter and 28% YoY for the nine-month period. Premium revenue grew 31% (quarter) and 28% (nine months), while Ad-Supported revenue grew 30% (quarter) and 28% (nine months).
- User Growth: Monthly Active Users (MAUs) reached 191 million (up 28% YoY). Premium Subscribers reached 87 million (up 40% YoY). Ad-Supported MAUs reached 109 million (up 20% YoY).
- Profitability: Operating loss narrowed significantly to €6 million for the quarter compared to a €73 million loss in the prior year quarter. However, the nine-month operating loss widened to €137 million from €291 million in the prior year, primarily due to increased operating expenses.
- Cost of Revenue: Gross margin improved to 25% for both the quarter and nine-month period (up from 22% and 19% respectively in 2017), driven by new licensing agreements and reduced dispute charges.
- Debt Elimination: The company exchanged its remaining Convertible Notes for ordinary shares in January 2018. As of September 30, 2018, the company has no outstanding indebtedness.
Guidance, Outlook, and Risks
- Outlook: Management expects seasonal trends to continue, with Premium subscriber growth accelerating during bi-annual trial programs (summer and winter) and Ad-Supported revenue peaking in the fourth quarter due to holiday advertising demand.
- Capital Expenditures: The company has planned capital expenditures exceeding €275 million for office build-outs in New York, London, Los Angeles, Stockholm, and Boston, expected to be substantially complete by the end of 2019.
- Legal Contingencies: A class action settlement regarding copyright infringement (Ferrick et al.) was approved by the court in May 2018 but is currently under appeal. Additionally, six new lawsuits filed since July 2017 allege unlawful reproduction 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 valuation of warrants and long-term investments (specifically the investment in Tencent Music Entertainment Group).
Investor Verification Checklist
- Net Income Quality: Verify the sustainability of the Q3 2018 net income of €43 million, which is heavily influenced by a €125 million tax benefit from unrealized gains on the Tencent Music Entertainment Group (TME) investment, rather than core operating profitability.
- ARPU Trends: Monitor Premium Average Revenue Per User (ARPU), which declined 6% YoY in Q3 and 10% YoY for the nine-month period due to the growth of lower-priced Family Plans and foreign exchange headwinds.
- Legal Exposure: Assess the potential financial impact of pending copyright infringement lawsuits, which could result in material damages if statutory penalties are applied to the alleged 10,000+ infringed works.
- Debt-Free Status: Confirm the elimination of Convertible Notes and the absence of current debt obligations, noting that future financing may be required to fund planned capital expenditures.
- Investment Valuation: Review the fair value of long-term investments (€1,589 million), which are subject to significant volatility based on the private market valuation of TME.