Much of the market’s reaction to a company’s earnings depends on what investors believe is coming ahead, not what has already happened. Following Spotify’s third quarter earnings report on Wednesday (Oct. 27), the company’s stock price rose as high as 10.11% and ended the day up 8.19% at $273.13 per share, the highest since July 1 — showing investors have even more optimism about what’s to come than the prior three months’ 26.6% revenue growth.
Indeed, the streaming giant performed very well in the period spanning July to September. That revenue growth was the highest rate in two years and subscription revenue — up 21.7% from the same period last year — had its best improvement since the first quarter of 2020. User growth was typically strong both sequentially and annually. Monthly listener growth, which disappointed in the first half of the year, picked up in the third quarter after Spotify resumed marketing campaigns in some key new markets such as India.
Spotify landed within prior guidance for the third quarter and reached the high end of expectations for revenue and monthly active users. In other words, the company met expectations and didn’t unveil the kinds of surprises investors hate. What’s more, the company raised its expectations for fourth quarter revenue and gross margin. That’s good news for both investors and anybody due to receive royalties.
The fourth quarter is peak season for subscription services and no time to disappoint. Spotify added 11 million subscribers in each of the last two fourth quarters, almost double its average for the first through third quarters of both years. Appropriately, CEO Daniel Ek said during Wednesday’s earnings call, “We’re all hands on deck to make sure the positive trend continues.”
What to Expect From Pricing and ARPU
Within the music business there’s constant consternation that Spotify is underpricing its product, often through family plans and other discounted offerings. The mood may improve, however, following a rise in average revenue per user (ARPU) for the second consecutive quarter, from 4.29 to 4.34 euros, after hitting an all-time low of 4.12 in 2021’s first quarter. That’s good news for artists, labels and publishers, and shows that benefits of modest price increases in select markets Spotify outweighed the negative effect to ARPU from family plans and other discounted subscriptions.
The churn rate, however, which measures the percentage of subscribers lost in a given quarter, did increase by an unspecified amount from the same period a year earlier (which was a historic low). There’s probably no cause for concern, though. Spotify shows no sign of changing direction on discounted plans that help the churn rate and increase a subscribers’ lifetime value. And, still, even with the uptick in churn, Spotify netted 9 million new subscribers that generated 122 million euros for rights holders and creators.
What to Expect From New Markets
Time will tell if new markets can provide the sort of growth people have come to expect. As Ek noted during the earnings call, credit cards are less prevalent in developing countries in Southeast Asia than in European and North American markets. Success will require “innovation models,” Ek said, such as the kind of daily and weekly plans that have been tried in some markets (music streaming services, such as TIM, created by U.S.-based Muve Music, took the same approach when they entered Brazil a decade ago).
“We will crack the code,” Ek said. “I’m 100% sure of it. I just can’t tell you exactly when.” Spotify has enough resources to spend years figuring out new markets. Investors and the music business may have less patience.
What to Expect From Podcasts
Aided by podcasts, advertising revenue grew 74.6% compared to the same period last year to 323 million euros and accounted for 12.9% of revenue — one of the highest proportions since Spotify began hosting podcasts original podcasts in 2019.
Expect that to keep growing. The Spotify of the future — an audio platform with all the world’s music and an ocean of podcast content — will lean more heavily on advertising than it does today. In fact, advertising could reach 20% of total revenues in the next five years and reach a 30 or 40% share further into the future, Ek said.
What to Expect From Q4 Streaming
U.S. streaming activity in the fourth quarter is off to a slow start, continuing a trend seen since June. In the third quarter, audio streams were up 9.3% year over year — a considerable decline from the 14.4% gain in the first half of the year, according to MRC Data. During first three weeks of October, the annual growth was just 7.7%.
Of course, some of this depends on having new music people get excited about. Adele’s record-setting release of “Easy On Me,” for example, shows people will turn out to streaming services for a major music event. Spotify will need to take advantage of the opportunity.
Subscription services constantly create features and tweak algorithms to increase engagement, which at Spotify “leads to better MAU [monthly active users] and better attention,” CFO Paul Vogel said during the second-quarter earnings call on July 28. If music attracts listeners to a platform, “sticky” features will keep them listening. In-store marketing worked the same way in the CD and LP eras: hot new releases brought people into stores; the stores’ job was to keep them shopping.
Adele will do her part getting fans to Spotify. New releases from Ed Sheeran, Taylor Swift and Silk Sonic should help, too. And then from there, Spotify’s banking on podcasts, playlists, recommendations and portability to keep people listening.
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