But if Spotify can hit the midpoint of its revised 2020 guidance, the company's annual revenue would still grow about 22% from 2019. Subscriber growth should continue through the year as Spotify 2020 forecasts 143 million to 153 million subscribers and 328 million to 348 million monthly active users.
Spotify reiterated some of its main talking points -- listening is going from linear to on-demand, the opportunity is on-demand audio, not video -- but the earnings release's takeaways aren't spin and can be considered trustworthy. Likewise, the company's executives don't hide under subterfuge during its earnings call, and instead give conservative, straightforward comments and insights into their thinking process and expectations.
Here are the main takeaways from the Q1 shareholder letter and earnings conference call.
The pandemic has changed how people listen."There's been a platform shift where more consumption is happening in home," CEO Daniel Ek said. "That will change [marketing] tactics and channels we're reaching consumers on the marketing side. Long-term it's an opportunity to remind people when they come back to the car, like Daily Drive. We feel good about content and there's content for every part of their lives; marketing's job is to remind them of that."
The pandemic is quickening the pace of changes in listener behaviors. "Listeners' move to on-demand will be accelerated due to this pandemic as more and more people are learning new habits and new experiences," Ek said. The audience for TV and game consoles "has grown materially," over 50% greater than Q1 2019. The question is, however, what happens to in-home listening once shelter-at-home orders are lifted.
Music streaming will be relatively unaffected by the coronavirus pandemic. "Music streaming as a category will not be as impacted as other categories," said Ek.
Listener engagement was "strong" in Q1. That engagement is measured as daily active users divided by monthly active users to find the percentage of listeners who listened each day). However, there was "a bit of a decline" in DAU/MAU over the last few weeks of March," Ek wrote in the shareholder letter.
Improved churn was a good signal in April. Spotify saw "some pickup" in the churn rate at the end of March but also saw "some pretty nice improvements" in the beginning of April. But, overall, churn does not account for much of an impact on guidance.
New user growth accelerated at the end of the first quarter. The current internal forecasts are "pretty consistent" with initial 2020 guidance.
Growth is still the main strategy. "Our primary strategy is growth rather than maximizing revenue," Ek said. 2020 guidance for operating loss is €150 million to €250 million, double to triple the €73 million operating loss in 2019.
Key markets for subscription services are not saturated. Spotify believes there is more growth to capture in mature and developing markets. The numbers show a healthy subscriber acquisition pace: 6 million subscribers in Q1 2020 compared to 11 million in Q4 2019 -- a seasonal spike -- and 5 million in Q3 2019. Falling within 2020 full-year guidance for subscribers -- 143 million to 153 million -- translates to an additional 19 million to 29 million. Given it added 24 million subscribers in 2019, and six million were added in Q1 2020, the bottom end of the guidance seems to be easily reachable.
Listening is shifting from linear to on-demand. Ek reiterated Spotify's focus on on-demand audio and said multiple times the audio trend for the last 20 years is away from options like broadcast radio that don't give control to the listener. "I think the big macro trend is linear to on-demand," he said. "Of course, live is a component of that, but it's still a relatively small component. So the investment that we're making is moving linear to on-demand. And that's been the big trend for the past 20 years."
Ek added that Spotify believes advertisers will shift from "pure reach," or radio's blanket audience targeting, to "measurable formats," or digital advertising that allows advertisers to track their ads' effectiveness.
Spotify's opportunity is the on-demand audio market, not on-demand video. Video is a complement to audio on Spotify, not a priority. Spotify flirted briefly with video about four years ago by hiring former VH1 exec Tom Calderone, creating original content and licensing video from ESPN, Vice and others. Calderone lasted a year and a half and Spotify has wisely left video to YouTube, the leader in music streaming, and audio-first competitors like Tidal. "A lot of other players are focused on video," said Ek. "Audio is about the same amount of engagement as video has, yet there's no one on a global scale focusing on audio. We think that's a massive opportunity to go after and that's what we're focusing on."