Spotify Hits 100M Premium Subs; Buckingham Sees 20% Upside

Music streaming service Spotify Technology SA SPOT reported first-quarter results Monday before the market open. 

The Headline Numbers

Spotify's first-quarter EPS loss of 88 cents missed the consensus estimate for a 39-cent loss, while sales of $1.69 billion beat the $1.66-billion estimate. 

The company reported roughly 33-percent revenue growth and a narrower loss for its first quarter. Premium revenue, accounting for roughly 92 percent of the total revenues, climbed 34 percent. Average revenue per user, or ARPU, remained flat at 4.71 euros ($5.26). 

Excluding the currency impact, ARPU was down 2 percent, with product mix changes and geographic mix accounting for the decline.

Ad-supported revenue, though growing 24 percent, was below expectations, the company said.

Spotify noted a small incremental benefit from podcasts in the first quarter following its acquisitions of Gimlet Media and Anchor in February, and the successful rollout of Spotify-owned exclusive content. The company expects podcasts revenue to accelerate through 2019.

"The results came in at the high end of expectations and seem to confirm that Spotify is not imminently getting 'big footed' by its large full ecosystem tech company competitors," Buckingham Research Group's Matthew Harrigan said in a Monday note. 

Strong User Metrics

Total monthly active users, or MAUs, climbed 26 percent year-over-year and 5 percent quarter-over-quarter to 217 million. Premium subscribers hit the 100-million mark by virtue of 32-percent year-over-year growth and 6-percent sequential growth.

The company had guided to 215-220 million MAUs and 97-100 million premium subscribers.

In comparison, rival Apple Inc. AAPL's Apple Music reportedly has half as many paid subscribers globally. 
Spotify attributed the momentum to a promotion in the U.S. and Canada and continued strong growth in its family plan. 

"We also saw strong growth from the expansion of our Google Home Mini promotion, as well as the price reduction to our Spotify Premium + Hulu offering in the U.S.," Spotify said.

During the quarter, Spotify forayed into India, quickly ramping up to more than 2 million users in the country.

Spotify now has a presence in 79 countries.

Even as the service's user base expands, churn remained flat year-over-year and quarter-over-quarter. 

Forward Expectations

Spotify said it expects second-quarter MAUs to grow 23-27 percent to 222-228 million and premium subscriber numbers to increase 29-34 percent to a range of 107 million to 110 million.

The company guided revenue to 1.51 billion euros to 1.71 billion euros; gross margins to 23.5-25.5 percent; and its operating loss to 15 million to 95 million euros. 

For the full year, Spotify expects MAUs of 245 million to 265 million; a premium subscriber count of 117 million to 121 million; revenue of 6.35 billion euros to 6.8 billion euros; gross margins of 20-25 percent; and an operating loss of 180 million to 340 million euros. 

The company also said ARPUs are likely to decline by low single digits through the remainder of 2019, better than the 4.5-percent drop Buckingham's Harrigan is modeling.

Harrigan said he expects the EU approval of the Article 17 on March 26 to have a favorable effect on Spotify and the music industry, as Alphabet Inc GOOGGOOGL-owned YouTube may now be forced to install filters for removing free user-generated shared content that infringes copyrights.

Buckingham has a Buy rating on the shares of Spotify with a $165 price target.

Spotify shares were down 0.67 percent at $137.32 at the time of publication Monday. 

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