Spotify Kicks Off an Earnings Season Like No Other: What to Watch for as Music Biz Lays Out Pandemic's Impact

Spotify
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The Spotify banner hangs from the New York Stock Exchange (NYSE) on the morning that the music streaming service begins trading shares at the NYSE on April 3, 2018 in New York City.  

Whatever harm the pandemic caused to digital music services is a slap on the wrist compared to the damage inflicted on the live events business.

Starting with Spotify on Wednesday (July 29) and ending August 20, the second-quarter financials of 13 publicly traded music-related companies will lay bare the damage done by the coronavirus pandemic. On one end of the spectrum are digital services such as Spotify that likely escaped unscathed; concert promoters, with touring suspended through the entire quarter, suffered unprecedented losses and have prepared for blank slates the rest of the year.

Music industry professionals, particularly record labels and publishers, who want to build their expectations for streaming royalties, should take note of Spotify's earnings release and conference call discussion (Billboard will thoroughly cover both). In particular, the key metric is actual subscriber growth compared to the company's earlier forecasts of 133 million to 138 million. An uptick in churn and a slowdown in first-time subscribers could put Spotify at the low end of the range. Another metric to watch is full-year guidance of 143 million to 153 million subscribers: a fall in the forecast indicates that Spotify believes the pandemic's effects will last longer than it predicted three months ago.

When Spotify released first-quarter earnings on May 1, Europe was more than two months into the pandemic and the United States economy had been in a tailspin for six weeks. Some metrics went south at the end of the first quarter, Spotify saw "some pickup" in the churn rate and a dip in the ratio of daily to monthly listeners. But the downturn was short-lived: by April, the churn rate saw "some pretty nice improvements" and new user growth accelerated, the company said.


Key Takeaways:

1) Labels and publishers should look to Spotify's sequential and annual growth rates to gauge the pandemic's effect on subscription royalties.

2) The publicly traded promoters' second-quarter earnings will reveal the coronavirus's impact. With enough liquidity to survive 2020, promoters' bigger challenge is 2021.

3) Warner Music Group's earnings will reveal how well the major labels have navigated brick-and-mortar closures that hurt physical sales. Look for comments on digital royalties and WMG's outlook on subscription services for insight into the second half of the year.


After a torrential rally, Spotify's share price closed Monday at $272.82, up 82.4% for the year but 9.0% below the high of $299.67 reached on July 22. Investors' ringing enthusiasm stems from a string of podcast deals with the likes of Joe Rogan, arguably the biggest name in American podcasting, and newcomer Michelle Obama. The run-up was mostly anticipation for future benefits of an aggressive push into podcasting. While nobody can say if Spotify made the right moves -- wait until 2022 or so -- the company is likely to give an update on its progress of turning a music service into a broader audio platform.

Podcasting works better as a subscriber acquisition tool than an advertising generator. Rogan could become a Howard Stern-like cornerstone to Spotify's podcasting stable and draw loyal listeners away from other services. But Rogan will provide little direct advertising benefit -- a Spotify spokesperson previously told Billboard it will work with Rogan's existing marketing agency but not take over his ad sales (estimated by Berstein's Todd Juenger to be $30 million annually). Instead, Rogan and other podcast content is most valuable when it reduces churn and attracts new subscribers. As for advertising, regularly 10% of Spotify's revenue, the second quarter was a challenge even for fast-growing global publishers. A comparable company's performance was Snap's second-quarter revenue: up 17% year-over-year but, more importantly, down sequentially from $462 million to $454 million in the first quarter.

To investors, Spotify's podcast business and continued rapid growth justify its $50 billion-plus market capitalization. J.P. Morgan's Doug Anmuth set a $305 price target on Spotify shares while RBC Capital Markets' Mark Maheney has a $320 price target. Having set a $172 price target, Bernstein's Juenger is less impressed by Spotify's ability to convert podcast listening into subscribers and ward off Apple's and Amazon's push into non-music content.

Whatever harm the coronavirus caused to digital music is a flesh wound compared to the damage inflicted on the live music business. Save for the occasional drive-in event, the concert business has been suspended since mid-March, leaving the entire second quarter without any revenue outside of ticket sales for future events, although even that should be negligible. As for Tuesday (July 28), German concert promoter CTS Eventim was the sole live music company to announce an earnings release date, August 20. The two U.S. publicly traded promoters, Live Nation and MSG Entertainment, should release earnings by the first week of August if they hold to typical timings.

With little revenue in the quarter, promoters' balance sheets are far more important than their income statements. In particular, Live Nation has girded for deep losses by bolstering its liquidity through a $1.2 billion notes sale and a $130 million increase in its credit facility. As of May 1, MSG Entertainment had roughly $1.4 billion in cash and cash equivalents and short-term investments, plus approximately $220 million in advance cash proceeds from the $400 million sale of the Forum on March 24, according to its previous earnings release.

Warner Music Group's earnings -- set for Aug. 4 -- will show how major labels performed in a quarter with brick-and-mortar retail closures hurting CD and vinyl sales. After most countries issued shelter-in-place orders in March, WMG's first-quarter revenues fell 12% from $335 million to $294 million. Even though digital royalties will have increased, Warner prepared for a bumpy 2020, adding $120 million to its credit facility and getting lenders to ease its debt covenants. During a virtual roadshow leading up to its June 3 IPO, the company didn't project its performance in 2020 and instead told investors to expect $1 billion in EBITDA in 2021, sources told Billboard.

After Spotify, the four remaining major players in digital music all release earnings on a busy Thursday (all times EDT): SiriusXM (5 am), Google's parent company Alphabet (4:30 pm), Apple (5 pm) and Amazon (5:30 pm). While Amazon has benefited greatly from shelter in place orders and employees working from home, SiriusXM stood to suffer a small setback. The satellite radio company -- it also owns streaming radio service Pandora and podcast app Stitcher -- pulled its 2020 guidance on April 28, citing an "uncertain" but "material" effects of macroeconomic forces beyond its control. Two factors were apparent months ago. SiriusXM's source of new customers, new and used auto sales, have nose-dived: -34% in March, -48% in April, -30% in May and -23% in June (all figures are year-over-year changes), according to TrueCar. Plus, Pandora couldn't have avoided the sharp downturn in digital advertising that turned eMarketer's full-year forecast from a 17% gain to a mere 1.7% improvement from 2019.

 

Earnings to Watch:
July 29: Spotify
July 30: SiriusXM, Amazon, Apple, Alphabet
August 4: Warner Music Group, Ryman Hospitality
August 6: iHeartMedia
August 7: Entercom
August 10: Liberty Media, Cumulus, Tencent Music Entertainment
August 20: CTS Eventim
Not yet announced: Live Nation, Madison Square Garden Entertainment, Vivendi, Sony, LiveXLive

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