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Spotify (SPOT) Reports Q1 Revenues of EUR1.85 billion, DAUs Up 31% YoY; Lowers FY20 Revenue Outlook

April 29, 2020 6:09 AM EDT

Spotify (NYSE: SPOT) reported Q1 EPS of (EUR0.20), versus (EUR0.79) reported last year. Revenue for the quarter came in at EUR1.85 billion, versus EUR1.86 billion reported last year.

Dear Shareholders,

Despite the global uncertainty around COVID-19 in Q1, our business met or exceeded our forecast for all major metrics. For Q2 and the remainder of the year, our outlook for most of our key performance indicators has remained unchanged with the exception of revenue where a slowdown in advertising and significant changes in currency rates are having an impact. Our business remains very healthy with more than €1.8 billion in liquidity and we expect to be free cash flow positive for the year. Overall, despite some changes in listening patterns, we are encouraged with the trends we are seeing, and continue to be optimistic about the underlying growth fundamentals of the business.

COVID-19 IMPACT

While we are pleased with how our business has performed so far, our thoughts and attention are most focused on the health and well-being of our employees, the greater creative community and society at large. We are in unprecedented times and, like most, we are trying to navigate this uncertainty as best we can. We are fortunate that as a business we are able to operate with very little disruption and our hope is that providing music, information, and an escape for many can provide some joy and comfort.

Operationally, we are now in week 7 of our entire employee base working remotely. The team has universally risen to this new temporary reality, and it’s been inspiring to watch everyone support each other virtually. From a performance standpoint, we are encouraged and haven’t seen any falloff in overall employee productivity despite the current work from home situation.

Our hiring was also in line with expectations in the quarter. That being said, we have taken steps to slow hiring for the remaining three quarters of 2020 and have reduced open headcount by roughly 30% from prior growth expectations. We will continue to grow, and believe we are in a great position to invest in product and innovation. We also recognize it may be more challenging to effectively recruit and onboard given the inherent uncertainty moving forward.

Changing Consumer Engagement

Beginning in late February, we saw some impact to our business. While MAUs and Subs remained in line with our forecast and held steady, in hard hit markets like Italy and Spain, we saw a notable decline in Daily Active Users and consumption. But over the last few weeks, we’ve seen listening start to rebound, and in many markets, consumption has meaningfully recovered.

In this environment, we are seeing an evolution of Spotify’s relationship with its consumers. For example, when we saw consumption starting to decline we would have assumed that MAUs and Paid Subscribers would be negatively impacted, but that wasn’t the case. In fact, both new and reactivated MAUs grew substantially even during lockdown periods in major markets. Additionally, despite some of the consumption changes, the ratio of Daily Active Users relative to Monthly Active Users was strong in the quarter. We did see a bit of a decline over the last few weeks of March; however, the average DAU/MAU ratio for the quarter was higher than in Q1 of 2019.

Not surprisingly, we have seen usage in Car, Wearable, and Web platforms drop (double digits in some instances). However, the audience through TV and Game Consoles has grown materially, in excess of 50% over the same time period. In fact, for Ad-Supported MAU in the US, game consoles have been a top 2 or 3 platform in terms of consumption for the better part of the month, and connected device usage generally is up more than 40% among Ad-Supported users globally.

It’s clear from our data that morning routines have changed significantly. Every day now looks like the weekend. This trend was seen more significantly in Podcasts than in Music, likely due to the fact that Car and Commute use cases have changed quite dramatically. However, listening time around activities like cooking, doing chores, family time, and relaxing at home have each been up double digits over the past few weeks. Audio has also taken on a greater role in managing the stress and anxiety many are feeling in today’s unprecedented environment. Two in five consumers we surveyed in the US said they were listening to music to manage stress more than they typically do, which explains the recent rise we’ve seen in searches for “chill” and “instrumental”. We’ve also seen an uptick in consumption of podcasts related to wellness and meditation over the last few weeks.

The past few months have only strengthened our belief in the Freemium model. As mentioned, we have seen strong growth in users, both new and returning. Historically, over 60% of our Premium users start as Ad-Supported users, so continuing to grow the top of the funnel is very healthy for our ecosystem. We also know that roughly 70% of churned users are back with Spotify within 45 days of leaving, which includes coming back through either our Premium or Ad-Supported experience. While our sincere hope is for some sense of “normalcy” to return to people’s lives as quickly as possible, we do believe our model is uniquely positioned to not just weather this storm, but to come out the other side even stronger.

MONTHLY ACTIVE USERS (“MAUs”)

Total MAUs grew 31% Y/Y to 286 million, in line with our forecast and expectations.

GUIDANCE:

Spotify sees Q2 2020 revenue of EUR1.75-1.95 billion.

Spotify sees FY2020 revenue of EUR7.65-8.05 million.

For earnings history and earnings-related data on Spotify (SPOT) click here.



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