Spotify Earnings Preview: Three Signals Point to Good Results

Spotify logo
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Spotify logo is displayed on the screen of a smart phone on Jan. 1, 2020.

Here's why you can expect the streaming giant to show some excitement over its third quarter earnings, even in a pandemic.

Continued subscription growth and a revived advertising market should show Spotify’s resilience when its third-quarter earnings are released on Thursday morning (Oct. 29). Unlike most other publicly-traded companies involved with music, Spotify appears to be skating through the pandemic relatively unscathed.

Earnings releases by Universal Music Group owner Vivendi (Oct. 22), SiriusXM (Oct. 24) and Sony Music (Oct. 28) provide three signals that point to strong third-quarter results for Spotify.

First, the subscription business model has shown to be pandemic-resistant if not pandemic-proof. SiriusXM raised its guidance for self-pay subscribers from 700,000 to 800,000 its third quarter earnings on Oct. 22 -- “90% of what we originally projected,” said incoming CEO Jennifer Witz; when it announced second quarter earnings on July 29, SiriusXM told investors it would gain only 500,000 new subscribers.

Of course, Spotify and SiriusXM aren’t interchangeable. SiriusXM only covers the U.S. and Canada while Spotify operates globally, with each territory having its own economic trends. But both companies show the advantage of recurring billing; when CD sales were interrupted and falling ad spending devalued free audio and video streaming, the subscription model remained sturdy. From April through June, when unemployment skyrocketed around the world, Spotify added 8 million subscribers and raised the lower end of its guidance for year-end subs from 143 million to 146 million; the upper end of the range was unchanged at 153 million.

Second, the major labels had strong streaming revenue growth in the third quarter: 18.5% at UMG and 18% at Sony. Given past trends, Spotify’s revenue growth should be within a couple percentage points of that. Except for the second quarter, when Universal posted only 9.2% growth and Spotify improved 17.7%, the two companies’ streaming revenues have grown at nearly the same rate. In fact, since 2019, their respective growth rates have diverged no more than 9%: In the first quarter of 2019, Spotify’s revenue outpaced Universal 33% to 30.1%.

Vivendi explained away UMG’s second quarter drop on the pandemic’s effect on advertising. Since declines in March and April, brands have quickly increased their ad spending at Spotify, Pandora and broadcast radio company iHeartMedia, among others. SiriusXM’s third quarter earnings revealed Pandora advertising grew 43% from $211 million to $306 million. On that note, Morgan Stanley analyst Ben Swinburne’s Oct. 27 investor note cited the “potential if not likely outperformance in the pace of global advertising recovery benefitting Spotify” after the 20% decline in the second quarter.

Spotify’s guidance for the third quarter is €1.85 billion to €2.05 billion ($2.19 billion to $2.420 billion), compared to €1.89 billion ($2.23 billion) and €1.85 billion ($2.19 billion) in the first and second quarters, respectively. Much is riding on Spotify’s ability to deliver gains; it is the music industry’s largest single source of revenue and a devout follower of the growth-over-profit approach. If Spotify can’t grow in 2020, what company can?