Spotify's Losses More Than Double To $581M, Revenues Rise to $3B

Toru Yamanaka/AFP/Getty Images
Daniel Ek, Spotify Co-Founder/CEO

The news comes just as the streaming service today announced it has 140 million active users.

Spotify losses more than doubled in 2016 to 556.7 million euros ($581.4 million) on revenues of 2.933 euros ($3.064 billion) from the 230.9 million ($241.6 million) in red ink tallied in the prior year, when sales, restated, were $1.93 billion ($2.014 billion), according to the streaming service's annual financial report.

While Spotify losses are mounting, it's important to note that Spotify's revenue increased by 52.1 percent. Within the red ink, the company's operating loss increased 47.8 percent to 349.4 million euros ($412.3) from the 236.3 million ($246.8 million) operating loss reported in the prior year.

The news comes just as the streaming service today announced it has 140 million active users of which more than 50 million are paid subscribers, according to numbers the platform released last March. 

Other key takeaways in today's yearly report include an increase in premium revenue of 52% and an increase in ad revenues of 50%. The report also noted Spotify had raised $1 billion from institutional investors; will pay out a minimum guarantee of 2 billion euros ($2.2 billion) in royalty payments over the next two years following multi-year licensing agreements with "certain" labels and publishers; and the service's launched in Japan, the second largest music market.

One of the key components of the wider net loss was a non-cash charge of 336.6 million euros ($351.5 million) in financing costs due to fair value movements on the $1 billion in convertible debentures it issued in March last year; as compared to the prior year when that expense only totaled 26.2 million euros. Also, the company lost 13.3 million euros ($13.9 million) on foreign currency exchange translation, versus last year when it was almost a wash.

The restatement for Spotify's financials for 2015 (and 2014) was due to errors in previous years. Consequently, 2015's revenue of 1.928 billion euros was restated from 1.945 billion euros ($2.03 billion), but the bigger adjustment was the widened operating loss to 236.3 million euros in 2015 from the previously stated 184.5 million euros ($192.7 million), which resulted in the net loss growing to 231 million euros from 173 million euros ($180.7 million).

As part of its results, Spotify stated that it has guaranteed payments to rights owners of about 2 billion euros ($2.09 billion) for royalty payments over the next two years.

Overall its revenue from its paid subscription model total 2.64 billion euros ($2.76 billion), while ad-supported revenue grew to 295 million euros ($308.1 million). That means that the paid subscription model grew at a rate of 52 percent from the prior year, while ad-supported revenue grew by 50 percent. Paid subscribers increased to 48 million from 28 million, while overall users increased to 126 million from 91 million. (On Wednesday, Spotify announced that that total user figure is now at 140 million.)

Breaking out revenue another way, the U.S. accounted for 1.167 billion euros ($1.22 billion), up 58.2 percent from 737.06 million euros ($770.4 million) in the prior year. Meanwhile, Spotify's U.K. operation grew 27.5 percent to 339.9 million euros ($355 million) from 266.5 million euros $278.3 million); Sweden grew to 201.6 million euros ($210.6 million) from 181.6 million euros ($189.7 million), and the rest of the world grew 64.9 percent to 1.226 billion euros ($1.28 billion) from 743.4 million euros ($767 million).

Looking at that another way, the U.S. accounted for 39.8 percent of revenue in 2016 for the company, while the U.K. was 11.6  percent of revenue; Sweden, 6.9 percent; and the rest of the world 41.8 percent. That compares with the prior year when the U.S. was 38.2 percent of revenue; Sweden was 13.8 percent; and the rest of the world was 38.5 percent.

The company says cost of revenue totaled $1.28 billion euros, which is 84.6 percent of overall revenue. While they say the cost of revenue primarily consists of royalty and distribution costs, it looks like they are including almost another 15 percent of total revenue in there, if you consider that the interactive, on-demand streaming model offers typical payouts content costs of 70 percent-72.5 percent. So in addition to royalties to rights holders, Spotify also includes things like customer service costs, credit card and payment processing fees for subscription, and salaries of certain employees. 

Consequently, Spotify actually hides how much they pay out to content owners, unlike, say, Pandora which accounts for cost of revenue in a similar manner, but then further breaks out the actual cost of content paid to rights owners. In another unusual move, unlike most companies that release financial results, Spotify doesn't make them available on its website and doesn't issue a press release on them.

Moving over to Spotify's balance sheet, the company now carries a negative net worth of 242.4 million euros ($242.4 million), versus a positive net worth of 227.9 million ($238 million) last year. Cash grew to 755 million euros ($788.5 million) from 597 million euros ($623 million); and it also reported short-term investments of 830.3 million euros ($867.2 million), likely including the proceeds from the capital it raised in the bond offering.

According to its financial statements, Spotify continues to get more generous in paying wages and other benefits, including stock-based payments, to its employees as time goes by. Last year, the cost per employee grew to an average of 172,000 euros ($180,000) per employee annually, versus the 164,000 Euros ($171,000) on average it paid to employees in 2015. And that's up from the 133,000 euros ($139,000) in averages wages and benefits paid to employees in 2014. Within that, the average annual salary in 2016 was 107,000 euros ($112,000), up from 103,000 euros ($108,000) ; and 84,000 euros ($88,000) paid in 2014.