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Spotify Earnings Preview: Six Things to Watch for in This Week's Q2 Report

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When Spotify releases second-quarter earnings on Wednesday morning, the disclosure will arrive with the usual high expectations. The results could be surprising: while COVID-19 has led to greater-than-normal uncertainty, its revenue and subscription growth for 2020 were actually in line with pre-pandemic expectations.

Spotify’s guidance for Q2 of 2021 is as follows:

  • Revenue: €2.16 to €2.36 billion euros
  • MAUs: 366 to 373 million
  • Paid subscribers: 162 to 166 million

Here’s what to watch in the earnings report and webcast on Wednesday.

MAUs and Subscribers: Because Spotify prioritizes growth over profit, the two metrics to watch are monthly average users (MAUs) and subscribers. Spotify ended the first quarter of 2021 with 356 million MAUs (up 24% year over year) and 158 million (up 21% year over year). Its second-quarter guidance implies it forecasts MAUs will grow 2.8% to 4.8% and subscribers will climb 2.5% to 5% from the previous quarter. JP Morgan analysts expect 370 million MAUs and 164 million premium subscribers — the midpoints of Spotify’s guidance on the two metrics.

Revenue: In the first quarter, revenue and subscription revenue were 2.15 billion euros (up 22% year over year at constant currency). Spotify forecasts 2.16 to 2.36 billion euros of revenue in the quarter — a 200 million euro range of outcome that reflects "substantial uncertainty" due to COVID-19, the company stated in its first quarter earnings release.

ARPU: Subscription average revenue per user was 4.12 euros per month in the first quarter (down 7% year over year at constant currency). ARPU attracts heated attention because it reveals how Spotify prices its subscription product to attract new customers as it grows around the world. When ARPU falls, newer subscribers pay lower prices than older subscribers on average. That isn’t necessarily bad because family plans, the leading cause of ARPU erosion, reduce churn because they allow multiple people onto a single account. The financial benefit of retaining subscribers arguably outweighs the lower revenue — and lower royalties — associated with the average subscriber.

Margins: Spotify slightly raised prices in 40 markets — including the U.S. and U.K. — in the second quarter with "minimal impact" on subscription churn, CFO Paul Vogel said on the first-quarter earnings call on April 28. Throughout the industry, people have long believed Spotify could charge more for subscriptions. The company has implicitly acknowledged this by talking about its priority on subscriber acquisition, not profits or margins. But rights owners believe they can get both higher prices and more subscribers.

Podcast Progress: On June 15, Spotify announced an exclusive licensing deal with the "Call Her Daddy" podcast, currently ranked 2nd on the platform, for a reported $20 million. Executives could be asked about progress in the platform’s top-ranked podcast, the Joe Rogan Experience, an expensive licensing deal ($100 million) that could pay off by attracting or retaining fewer than 2 million subscribers. Morgan Stanley pointed to podcasts for helping margins in a July 23 report on "secular growth" stocks (that "can deliver leading growth from idiosyncratic strengths"). Spotify’s competitors are making moves, too. Apple debuted podcast subscriptions, Apple Podcast Subscriptions, in June.

Two-Sided Marketplace: Money goes out by licensing music; money comes in from selling advertising and uplifting spins. The latter is worth watching: Spotify’s program Discover, which boosts a track’s spins in exchange for a lower royalty rate, has attracted the unwanted attention of Rep. Jerry Nadler (D-NY), the chair of the House Judiciary Committee. The two-sided marketplace is relatively small but has the ability to improve margins — as noted in Morgan Stanley’s July 23 report — and that’s what investors want to see right now.