Spotify turns profit again despite US$10m 'lost' ad revenue

Spotify has posted a surprise operating profit of €54 million (US$60 million) for its third-quarter—only the second time in its history the streaming service has been in the green—despite underperforming in advertising revenue.

In its letter to shareholders the music service noted several reasons for meeting or exceeding expectations, including fast user growth in Southeast Asia and India and “exponential” growth in podcast engagement.

Overall Spotify posted total revenue of €1.7 billion (US$1.9 billion) in the quarter, growing 28% year-on-year. However, while its paid-for premium layer outperformed, its ad-supported business was weaker than forecast. Premium revenue was €1.56 billion ($1.7 billion), up 29% year-on-year, while ad-supported revenue was €170 million ($189 million), up 20%.

The company said that roughly 80% of the ad-supported revenue miss was related to self-inflicted implementation and integration issues experienced with migration from Google’s Doubleclick Sales Manager, which was sunset in July. This resulted in a combination of lost orders and under delivery of other orders totaling about €9 million ($10 million) of “lost” revenue, it said.

Co-founder and chief executive Daniel Ek said during a call with analysts that the lost revenue was not due to a loss in demand: “The core thing I would want you to know is that there was demand for that product; we were just simply unable to run it on the site. And the ad business today is performing strongly.”

“So, I own that miss. It’s embarrassing, but it’s not related to the strength of business,” he added.

Accordingly, the streaming service experienced a slowdown in programmatic growth from 65% year-on-year in Q2 to 48% in Q3, mostly related to a slowdown in video PMP revenue.

A bright spot was podcasting revenue, which outperformed expectations with strong year-on-year growth. But it is still a relatively small slice of the total ad-supported business at less than 10% of total ad revenues.

Podcast hours streamed grew 39% quarter-on-quarter, with podcast adoption reaching almost 14% of total monthly active users (MAUs). The US accounts for the largest share of podcast streams but share of listening is higher and growing faster in several European countries, the service said. It also said it is seeing increased conversion from music listeners who do engage in podcasts from ad-supported to premium. The service now offers more than 500,000 podcast titles, and launched 22 original and exclusive titles from Spotify Studios in the third quarter.

Chief financial officer Barry McCarthy (who is to step down in 2020, it was announced during the results) said on the call the business is likely to lean into podcast investment “more aggressively because of the success we’re having”.

Overall, total MAUs grew 30% year-on-year to 248 million, with developing regions including Latin America, Southeast Asia and India a “significant driver” of this outperformance.

The service said Southeast Asia remains its fastest growing region (excluding India), and year-on-year growth in Q3 accelerated 1400 bps (basis points, equivalent to 14%) versus Q3 2018.

India outperformed the service’s user forecast by 30% in the third quarter, which it said was driven by a number of factors including the launch of its first broad-based marketing campaign, ‘Sunte Ja’ (‘Listen On’), plus product innovations.

The service finished the third quarter with 113 million premium subscribers globally, up 31% year-on-year, which it said was led by strong performance in its ‘Family’ and ‘Student’ plans following a string of new products and promotions, including a 90-day free trial.

It said it is adding roughly twice as many subscribers per month as Apple, according to publicly available data, and has roughly twice as high monthly engagement and half the churn rate as the iPhone maker. It also estimates it is adding more users on an absolute basis than Amazon and has a higher proportion of premium subscribers, concluding it “continues to feel very good” about its competitive position in the market.