Spotify (SPOT 133.17, -6.23, -4.47%) is trading lower after the company reported
strong fourth quarter results and announced increased initiatives in the
podcast space that will weigh on margins.
Spotify is already the second largest podcast platform, a distant second to Apple (AAPL), but the streaming music leader wants to become the world's number one audio platform.
The company this morning announced its agreements to acquire Gimlet Media, a highly successful producer of podcast content, and Anchor, a leading podcast marketplace.
Management noted that investing in original content will broaden the service's appeal and increase engagement, creating a virtuous cycle of growth. That model may sound familiar. Spotify's Chief Financial Officer Barry McCarthy held the same role at Netflix (NFLX) for eight years.
Spotify did not disclose the purchase price of the two cash acquisitions but did say that it plans to spend $400-500 mln total on multiple deals for exclusive content in 2019.
Coming back to Spotify's financial release, fourth quarter results were quite strong. Spotify reported adjusted fourth quarter operating income above guidance. Monthly active users also came in above the company's guidance, growing 29% to 207 mln versus its 199-206 mln user forecast. Premium subscribers grew 36% to 96 mln, at the high end of its 93-96 mln forecast. Average revenue per user fell 7% due to the continued mix shift toward emerging markets. Gross margin came in toward the high end of guidance.
However, the company's podcasting initiatives and plans to invest in original content are set to weigh to margins, which appears to be the primary concern among investors this morning.
Spotify guided first quarter and fiscal 2019 revenue in-line with estimates but operating losses and gross margins for both periods below estimates. The company's forecast for a 22-25% gross margin this year compares to a 25.7% mark for 2018.
Management said it is still targeting a 30-35% gross margin long term, but analysts on the conference call this morning appeared to be concerned about gross margins going the wrong way during the investment cycle.
Spotify's sales multiple of just over 3x this year's estimates already reflects the company's poor margin profile, as it pays hefty licenses for its music content, so producing more original content seems to make sense. This directive follows a lead set by streaming video pioneer Netflix.
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