Spotify reported third-quarter results in line with its guidance, adding another 11 million users for a total 191 million at the end of September. Paid subscribers rose by 4 million in the quarter and were up by 40 percent year-on-year to 87 million, putting the company on track to meet its target for at least 30 percent growth in the full year. However, Spotify slightly trimmed its forecast for Q4 and said it expects pressure on margins in 2019 from increased investment.
Subscriber growth in Q3 was supported by its Family and Student plans, which have stronger retention characteristics and helped lower churn in the quarter. However, the discounts on these plans, as well as lower prices in new emerging markets where the company is expanding, led to a drop in ARPU of 6 percent year-on-year to EUR 4.73. Spotify noted this was much less than the 12 percent annual decline in Q2, and excluding currency effects, the ARPU drop was only 4 percent.
The company's total revenues rose 31 percent year-on-year to EUR 1.352 billion. The gross margin was 25.3 percent, up from 22.3 percent a year ago but down slightly compared to Q2 due to seasonal promotions such as back-to-school offers. The operating loss was better than expected at EUR 6 million, due to shortfalls in hiring, which continued in Q4.
First net profit, but margin pressure in 2019
However, Spotify said it expects to step up investment in content and R&D in 2019 to drive growth opportunities, which will weigh on operating margins. Further guidance on this will be provided with the Q4 report.
Thanks to an accounting effect, the company reported its first net profit for Q3, at EUR 43 million versus a loss of EUR 278 million a year ago. This was due to the realisation of tax assets related to its stake in Tencent Music, ahead of the latter's planned IPO. Spotify also generated EUR 33 million in positive free cash flow in the quarter and said it aims to maintain this, excluding the costs of its new office buildings over the next year.
Google speaker deal
The company largely maintained its forecast for fourth-quarter results, although slightly lowered the high end of the forecast range for subscribers. Total subscribers are expected to reach 199-206 million at year-end, and premium subscribers should reach 93-96 million, in line with or better than the forecast for 30 percent annual growth. The high end of the forecast ranges were lowered by 1 million each.
Revenues are still estimated at EUR 1.35-1.55 billion for the last three months of the year, but the gross margin will be around 50 basis points lower than previously forecast, at 24-26 percent, due to a new deal with Google to promote its smart speaker. Spotify will offer free Google Home Mini speakers to Family plan subscribers in the US during the holiday season. The operating results is estimated between a loss of EUR 35 million and a profit of EUR 15 million in Q4.
