Spotify

The Spotify logo displayed on a smartphone on Dec. 17, 2018.

Thomas Trutschel/Photothek via Getty Images

Spotify is all about accentuating the positives in its latest quarterly financial results. The Sweden-based streaming service announced on Wednesday that it ended 2018 with double-digit revenue growth and 96 million paid subscribers, as well as a major, previously elusive milestone: the company's first operating profit to date.

Total revenue for the quarter ended Dec. 31 was €1.495 billion ($1.7 billion, an increase of 30 percent year-over-year and 11 percent compared to last quarter. Of that revenue tally, the vast majority (€1.32 billion / $1.5 billion) came from premium subscribers, an increase of 11 percent quarterly; ad-supported revenue totaled €175 million ($199 million), an increase of 34 percent y/y and 23 percent since Q3. The company noted that both audio and video format ads grew by more than 40 percent in Q4, aided by new cost-per-completed-view pricing for video inventory.

Operating expenses totaled €305 million ($347 million) in Q3, down from €348 in Q4, resulting in an operating profit of €94 million ($107 million). That amounts to Spotify's first-ever quarterly profit (last quarter's losses were only €6 million). During the quarter, the company generated €150 million ($170) in net cash flows from operating activities and €84 million ($95 million) in free cash flow, up 12 percent y/y. It is reporting €1.8 billion ($2 billion) in cash and cash equivalents, restricted cash, and short term investments, the same figure as the previous quarter.

Following the December IPO of Tencent Music, in which Spotify had a stake, the company saw its quarterly net profit skyrocket to €442 million ($503 million), up from 43 million in the previous quarter and considerably more positive than the $596 million ($678 million) loss in the year-ago quarter ended Dec. 31, 2017.

As of Sept. 30, Spotify says it had 4,165 full-time employees and contractors globally, an increase of 125 hires since last quarter.

Spotify's premium user growth picked up steam in the fourth quarter with the company now clocking 96 million paid subscribers, an 11 percent increase since the previous quarter's 87 million. That 3 million new subs/month rate more than doubled the 1.3 million subs/month rate of the previous three-month period, an improvement it largely attributed to its holiday conversion promotion and a successful Google Home tie-in, which offered every family plan account holder a free Google Home Mini speaker.

Ad-supported monthly active users now total 116 million, an increase of 6 percent on the quarter and 24 percent year over year. Overall, total monthly active users rose to 207 million in Q4, up 8 percent from the previous quarter and 29 percent year over year. Those listeners streamed more than 15 billion hours of content during the quarter, Spotify said.

"This outperformance was broad based, with growth in most markets exceeding our expectations, primarily as a result of improved retention relative to our forecast," the company said. "Latin America and other emerging regions continue to see especially strong growth."

Spotify also launched in the Middle East and North Africa in mid-November, expanding its global footprint to 78 countries from 65. It said the new territories have "exceeded our initial expectations" so far. The company is expected to launch in India during the current quarter, another major expansion that will test the service's viability emerging markets.

Hovering over all the positive news coming from the quarter, however, is the further erosion of Spotify's average revenue per user (ARPU), which dropped 7 percent year over year to €4.89 ($5.50) in the latest quarter. The company said the downward pressure on ARPU was driven by the success of its discount family and student plans, "and is increasingly driven by market mix as growth in our relatively lower ARPU markets is outpacing geographies with higher ARPU."

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