Shazam Earnings Fall -- But User Growth Is Strong

A company name that's used as both a verb and a noun might seem to have it made. But Shazam, an increasingly important source of consumer information for the music industry, racked up losses again last year. Fortunately, losing money isn't the worst thing a mobile app developer can do.

Its recently released filing with Companies House in the U.K. shows Shazam had revenue of £36.0 million ($55.3 million) with an operating loss of £13.8 million ($21.2 million) and a net loss of £14.8 million ($22.8 million). Revenue increased 113 percent, but total expenses grew 126 percent and net loss increased 158 percent. These results caused cash to fall to £11.1 million, from £19.3 million.

Some people might see these trends as proof the company's financial situation is imploding. But Shazam is taking a course made familiar by numerous tech companies where user growth trumps earnings. Last year, Shazam's users grew from about 86 million to nearly 120 million and daily searches jumped to 20 million from 17 million.

It can withstand more losses. The cash situation has already improved due to a $48.9 million investment at a $1 billion valuation just eight months ago. Previous investors include América Móvil, the mobile company owned by Mexican billionaire Carlos Slim, famed venture capital firm Kleiner Perkins Caufield & Byers (its investments have included Amazon, Google, Uber and Electronic Arts) and Institution Venture Partners (Netflix, Twitter, Snapchat). There's clearly some smart money in Shazam.

What investors likely see in Shazam helps explain why the company is losing money. The losses are likely coming from Shazam's effort to maintain its first-mover advantage, a characteristic always valued by investors. The more Shazam creates unique content, builds partnerships and expands its presence around the world, the more it will incur costs beyond development of the app itself. It will naturally need a larger staff -- which explains why salary expense grew 155 percent.

In addition, Shazam is building for the future by spending large sums to improve and expand the product. Shazam has also built visual recognition and beacon capabilities to complement its audio recognition technologies.

Why spend more now? The total available market for a versatile search app is far larger than Shazam's current 120 million users. Ericsson forecasts 6.1 billion smartphone subscriptions by 2020, up from 2.6 billion last year. Not only can Shazam drive higher penetration in existing markets like the U.S., it can reach billions of new users in developing markets. Lifting its foot from the throttle might mean Shazam cedes a share of this huge market to competitors.

The two most important metrics aren't revenue and profit. Number of users and daily interaction are more important. Shazam has the opportunity to become a much more popular, powerful app. Losing money is one way to get there.