Spotify: "We are not Netflix"

Audio platform has been grouped together with Netflix by investors

Opening the Q1 2022 Spotify earnings call, founder Daniel Ek explicitly addressed the comparisons to Netflix:

“I do want to almost take a step back and say that I think a lot of people are grouping us and Netflix together. And I have said this before, but I will say it again, besides both being media companies and being primarily subscription revenue companies, that is kind of where the similarities end for me. With Spotify, for instance, we are a platform. Netflix is not. With Spotify, we have a free service. Netflix does not. We have hundreds of millions of pieces of content. Netflix makes its own original content solely and license a little bit. It is just vastly different businesses. And again, we have seen competition in Spotify since 2015. And when I look at the video landscape, it seems like competition is (just) heating up. There (are) a lot of other dissimilarities between the 2 businesses…we feel audio is an overlooked market that is growing, and it is going to be really big”

Q1 2022 was a great quarter for Spotify – despite global macro concerns, political instability and winding down activities in Russia.

• Normalized MAU was approximately 419 million in the quarter, still roughly 1 million ahead of plan, led by strong results in Latin America, Indonesia, Brazil and Mexico

• On the Premium front, Spotify reached 182 million subscribers. Exit from Russia led to 1.5 million disconnects in that market. Adjusting for that impact, net subscriber growth finished ahead of plan and was aided by outperformance in Latin America and Europe

• Podcast MAU to total MAU hit an all-time high in the quarter; streams on podcasting hit an all-time high in the quarter

• No change in churn

• Podcast content keeps growing, keeping the two-sided flywheel turning: as of Q1 2022, Spotify had more than 4 million podcasts, up 53% year-over-year and up from 3.6 million in Q4 2021

• ARPU was up 6% year-on-year and 3% on a constant currency basis. Note that Q1 2022 was likely the last quarter with the benefit of price increases in FY 2021, so management is not expecting the same level of ARPU growth in the next 3 quarters. It will be flat to up slightly for the FY 2022

• Ad revenue grew 31%, but it was trending closer to 35-36% growth prior to Russia's invasion of Ukraine

Outlook for Q2 2022 is upbeat:

• On a like-for-like basis, Spotify sees very healthy MAU gains. Excluding Russia and the MAU benefit caused by the March service outage, guidance of 428 million MAU implies an increase of approximately 14 million net MAU, a healthy uptick in organic growth versus the 9 million reported in Q2 2021 and 13 million in Q2 2020. Much of the MAU growth is expected to come from Southeast Asia and India

• Q2 2022 Premium subscriber guidance of 187 million implies net adds of 6 million ex Russia

• Due to massive hiring in Q1 and into Q2, operating losses are expected to widen; Spotify however is cashflow positive and expects to be FCF positive for FY 2022, despite aggressive content and headcount investments

Since its direct listing in 2018, Spotify has added podcast as its second core business. But unlike music, podcasting is a true two-sided marketplace, with disparate owners of content relying on Spotify as the aggregator of demand and supply. There are no large intermediaries (equivalent of record majors) to deal with here, and Spotify connects podcasters directly to the largest global pool of listeners. See below quote from founder Daniel Ek:

“…for investors, structurally, podcasting should be a better business model than music from a gross margin perspective…thanks to the investments we are making to modernize audio advertising, the recent third-party survey validate this belief showing that Spotify is the must buy audio ad partner in the US, and we are delivering more impact for advertisers and publishers through our acquisitions like Podsites and Chartable…We are already seeing the impact these moves are high on renewal rates and deal sizes…(when) we look at the comparisons like radio, i.e. audio consumption patterns, we still see the sort of ceiling being probably 2x to 3x from where we are today in hours. So, plenty of growth left ahead. And this is in some of our more mature markets. So obviously, massive growth opportunities left in that, too. So definitely, no engagement ceiling in sight for us”

Continued growth from its podcast business will be a game changer – and value driver – for Spotify, despite what the markets might suggest.

(Author is a shareholder of Spotify)

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