SPOTIFY HITS 108M PAID SUBSCRIBERS

Spotify reached 108m subscribers and 232m monthly active users in the second quarter of 2019, while the business side outperformed the company’s expectations.

Total revenue hit $1.86b (€1.667b) in the quarter, a 31% rise over Q2 2018, growing more than 2.5x faster than the growth in operating expenses. Basically, the company almost broke even in the quarter.

Premium revenue was $1.67b of the total, a 31% spike, while ad-supported revenue was up 34% to $184m.

Gross Margin was 26% in Q2, largely driven by better than expected streaming delivery costs as a result of efficiencies. Premium Gross Margin was 27.2%, up from 25.9% in Q1.

Spotify reported that it has renewed agreements with two major label partners (Sony and Merlin) and is "in active discussions with the other two [Universal and Warner]." (Spotify considers indie collective Merlin a major). In its report, the company wrote, “while it is typically a long drawn-out process, it has become part of the normal cadence of the business.”

“If you look at the number one thing our customers are saying is help me find more great music,”CEO Daniel Ek told analysts in a conference call. “And the number one thing our artists are telling us is help me connect with my fans. And so it's actually the same question both are asking us to help solve.

“We believe that we can do something that's net positive from a user-experience point of view, while at the same time also helping labels and artists with the real pressure point for them: they have to participate in the marketplace by spending a lot of money, go onto other digital platforms, and market that content in a non-native environment. You then have to click a couple of links and then end up a minute or two later listening to that content.”

Europe continues to be Spotify’s greatest user base with 36% (83.5m) of the MAUs with North America at 28% (65m). On the premium side, Europe goes up to 40% (43.2m) with North America at 30% (32.4m).

In the call with analysts, Ek said user engagement in this quarter up 35% year-over-year as users listened to more than 17b hours of content on the platform.

The company also touted the success of its Spotify for Artists tool, up 33% YTD to more than 400,000 creators and their teams.

The company noted that the sub count, while up 31% year over year, was not as high as they had projected. “Our goal is to perform at roughly the 70th percentile of our guidance range and we missed on subs. That’s on us,” they wrote. “The good news is that the shortfall was execution related, rather than softness in the business, and we expect to make up the lost ground before year-end.”

By the end of Q3 (9/30), Spotify expects to have 240m-245m MAUS and 110m-114m Premium Subscribers. By year’s end the company projects that it will have between 120m and 125m Premium Subscribers and 250m-265m MAUs.

Ek noted that they shifted large initiatives such Spotify Lite and Spotify Stations in the quarter, but also made less visible moves—about 50 to 100 minor experience changes. “That, all in all, leads to higher engagement,” he said, which leads to higher retention in the business. And that's for me the exciting thing right now is that there is a lot of those kind of small tweaks that we can do that in aggregate, really compounds into an overall better experience and increases engagement.”