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Spotify Hits 83 Million Premium Subs in Q2 as Net Loss Doubles

CEO Daniel Ek says direct-licensing deals with artists don't make Spotify a record label

Spotify largely hit expectations on all metrics for the second quarter of 2018, although the music-streaming giant remained firmly in the red with its net loss doubling year over year.

The quarterly results were generally in line with expectations. The company ended the quarter with 180 million monthly active users (7 million net adds) and 83 million Premium subscribers (up 8 million sequentially) worldwide.

Shares of Spotify, which launched an unconventional IPO on the New York Stock Exchange in early April, fell as much as 5% in pre-market trading Thursday after it reported results — but rebounded after the market opened, up 2.4% as of 10 a.m. ET.

Total Q2 revenue was €1.27 billion ($1.49 billion), up 26% from the year-earlier period. Spotify said the topline was up 34% year-over-year adjusting for changes in foreign exchange rates. Subscriber revenue was €1.15 billion ($1.35 billion) in Q2, up 27%. Operating losses grew to €90 million (vs. €79 million in the year-ago quarter), while operating margin of -7.1% improved 70 basis points.

Net loss for the quarter roughly doubled to €394 million ($461 million), versus €188 million in Q2 2017, on higher finance expenses. Spotify is continuing to invest aggressively in the music service; operating expenses rose 26% in Q2, in line with revenue growth. The company faces fierce competition from Apple Music — which topped 50 million subs (including free trials) in May — and others.

On the Q2 earnings call, co-founder/CEO Daniel Ek addressed reports about the company striking direct deals with artists. Ek said this was consistent with how Spotify has always acquired content.

“Licensing content does not make us a label… We are not acting like a record label, nor do we have any interest in becoming a label,” he said, pointing out that Spotify’s licensing agreements with artists do not grant it exclusivity.

Spotify cited “disruption” resulting from the European Union’s General Data Protection Regulation (GDPR), which took effect May 25, a law that requires explicit user consent to allow companies to collect and use their data. The company’s ad-supported revenue grew 20%, to €123 million in Q2.

“We did see some GDPR disruption across our European markets during Q2 but seem to be largely past that now,” the company said in reporting the results. “We are, and will remain, GDPR compliant thanks to a terrific cross-functional effort.” CFO Barry McCarthy, on the earnings call with analysts, said the revenue impact from GDPR was very small, representing about €1 million in the quarter.

Asked if Spotify’s recent hiring of chief content officer Dawn Ostroff, formerly head of Condé Nast Entertainment, represented a big push into original video programming, company execs said no — that it would remain heavily focused on audio and music.

Spotify said its midyear campaign to drive Premium subs “performed well and was a significant portion of our subscriber intake in the quarter.” The Family Plan ($14.99 in the U.S. for up to five concurrent users) continued to be a primary driver of gross adds and lower churn, because of that tier’s relatively strong retention rate, according to the company. In addition, the company widened its offer of a Spotify Premium-Hulu bundle for $9.99 monthly to all consumers in the U.S.

During Q2, Spotify expenses included €30 million related to its direct listing of shares on the NYSE.

For the third quarter, Spotify forecast total monthly active users to be 188 million-193 million, with Premium subs to be 85 million-88 million. It projected revenue of €1.2 billion-€1.4 billion and an operating loss of €10 million-€90 million.

Spotify also provided expectations for Q4, project total MAUs of 199 million-207 million, total Premium subscribers of 93 million-97 million, with revenue of €1.35 billion-€1.55 billion and operating loss of €20 million-€100 million.

As of June 30, Spotify had 3,969 full-time employees and contractors globally, with R&D representing the biggest portion of new hires in the second quarter (accounting for almost half of the added headcount).

Spotify was founded in Stockholm, Sweden, and maintains a large presence there, but its official corporate headquarters is in Luxembourg.

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