Spotify (SPOT) is trading modestly lower despite reporting better than expected first quarter results.
First quarter operating loss, premium subs, and gross margin came in better than the company's outlook monthly active users (MAUs) were near the midpoint of guidance.
Earnings per share missed estimates, but investors are better served focusing on the operating loss of EUR 47 mln, which was better than the EUR (120)-(50) mln guidance due to higher gross profit and lower marketing spend.
Revenue grew 33% toward the high end of its outlook. Premium subscribers grew 32% yr/yr to 100 mln, making it the first music streaming service to reach that milestone.
Spotify remains the global leader in music streaming despite increased competition from Apple and Amazon.
Upside came from successful promotions in the US and Canada, strength in family plans, and promotions with Google and Hulu. Marketing partnerships with Google, Samsung, and Hulu are helping to drive subscriber growth. At the same time, average revenue per user (ARPU) declines connected to product and geographic mix have moderated.
Ad-supported revenue grew 24% yr/yr. Monthly active users grew 26% to 217 mln vs. 215-220 mln guidance. Encouragingly, Spotify has already added more than 2 mln subs in India after launching there in February.
Gross margin was nearly flat yr/yr at 24.7%, above guidance for margins of 22.5-24.5%, driven by strength in premium subs and a slower launch of original podcast content.
Last quarter, the company said its new podcast initiatives would drive engagement but weigh on gross margins near-term.
Expensive music licenses result in poor gross margins and present a difficult path to profitability, but operating cash flow grew nearly 150% to EUR 209 mln.
Spotify guided for a smaller than expected second quarter operating loss on in-line revenue.
The company narrowed its fiscal 2019 operating loss guidance and reaffirmed its outlook for revenue, gross margin, MAUs, and premium subs. Spotify continues to demonstrate its leadership in music streaming, but investors appear to remain concerned about gross margins and increasing competition.
With a $25 bln market cap, Spotify trades at ~3x sales. What's more, the company has a $2.5 bln stake in Chinese music streaming giant Tencent Music (TME). Spotify is currently expected to become profitable in 2021.