Spotify:Quarterly Results/2024 Q3

Return to: Earnings Season:2024 Q3 | Spotify

See also: Sheet:Spotify Valuation Model | Spotify:Quarterly Results/2024 Q2 | Spotify:Quarterly Results/2023 Q4 | Spotify:Quarterly Results/2023 Q3 |Spotify:Quarterly Results/2023 Q2 | Spotify:Quarterly Results | Music Industry

Management Guidance and Analysts Estimate

Management Guidance

Key Items	Q3 2024	Y/Y Growth	Management notes
Revenue	€4.0 billion	19.15%
Gross Margin	30.2%
Total Premium Subscribers	251 million	11.06%
Total MAUs	639 million	11.32%	Driven by music, podcasting and other cost of revenue
Operating Income	€405 million	1,000%+	Includes €15 million in Social Charges based on share price of $313.79 at the close of Q2

Analysts Estimates

Marketscreener

Items	Q3 2024	Y/Y Growth	Q4 2024	Y/Y Growth	2024	Y/Y
Revenue	€4.03 billion	19.96%	€4.26 billion	16.02%	€15.76 billion	18.6%
Net income	€343.7 million		€380.2 million		€1.20 billion
NON-GAAP EPS	€1.67		€1.85		€5.69
Operating income	€386.6 million	1,000%+	€430 million		€1.298 billion

Seeking Alpha

Items	Q3 2024	Up Revisions in the last 3 months	Down Revisions in the last 3 months
Revenue	€4.01 billion	3	5
EPS	€1.66	0	11

Exchange rate: $1 equals to €0.92 euros

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Other KPIs estimates

KPI	Q3 2024	Y/Y
Monthly active users (MAUs)	639 million	11.32%
Premium subscribers	250 million	10.62%

Recent Analysts Opinions

Spotify to see further expansion in gross margin

• Buy, $430->$440: Deutsche Bank said they room for Spotify's further margin expansion. They expect the audiobooks price increase in U.S. to contribute an 80 basis points in the quarter-over-quarter growth in premium gross margins in Q3 after contributing a 120 basis points in Q2. The analyst expects Spotify to report 639 million MAUs and 251 million premium subscribers.
• Overweight, $420->$470: Wells Fargo expects Spotify's gross margin to expand further. "Our analysis of incremental gross margins indicates further expansion ahead of consensus. We think Spotify's strategy+ evolving industry dynamics support the flow-through."
• Buy, $425->$430: Goldman Sachs said Spotify is beginning to show signs of the gross and operating margin trajectory that the company guided dating back to 3 to 5 years. They added that Spotify remains a global audio platform leader which will support user growth, growing engagement and pricing power.
• Buy. Barclays expects Spotify's margins to improve sequentially into Q4. They see strong levers for growth such as new pricing tiers, label negotiations, and a possibility for global price increase next year. They expect recent price increase to impact revenue though they expect social charges tied to recent price movements to impact operating income.

Management is focused on financial discipline and profitability and the company has best-in-class product offering

• Overweight, $400->$430: Morgan Stanley said they are bullish on Spotify due to its best-in-class products, runway in user growth, pricing power and continued focus on financial discipline and profitability by the management.
• Buy, $460->$510:Pivotal Research said Spotify is the “clear winner of the global audio streaming battle” due to its “best-in-class” user-interface and content recommendation engine. They expect higher medium and long term average revenue per user (ARPU and subscriber forecasts.

Share price reset might present an opportunity

• Buy, $399->$438: Rosenblatt said Spotify has a lot of "good new tailwinds". However, they think that since the shares are up 98% year-to- date, a "near-term reset might present an opportunity".

Spotify Q3 results to meet expectations

• Overweight, $440->$490: Keybanc said there are few surprises on Q3 print, outside of social charges and FX. They pointed out that bundling adoption seems to be going on well. They also highlighted that consensus gross margin and operating margin for Q4 and through 2025 continue to look low. However, they think that the product cycle and moderating competitive landscape supports at least 15% annual growth revenue and operating margin of 15% by 2026.
• Buy, $430: BofA wrote on September 30 that they expect Spotify's third-quarter results to meet or exceed management's guidance. BofA estimates that revenue will come in at €4.04 billion, gross margin will be in line with the guidance at 30.2% while MAUs and premium subscribers will come in at 639 million and 251 million, respectively. However, they expect weakness in the U.S dollar to impact Spotify's ad revenue which is more susceptible to currency variations. BofA also lowered their estimate for operating income to $345 million, below management's guidance of $405 million to accommodate for social charges.

Spotify continues to increase prices

• Outperform, $400: Wolfe Research said that they believe Spotify secretly increased prices in Canada, New Zealand, and Ireland, effective October 2. They based their argument on pricing list at Spotify's website and a blog post in Canada. They expect this price increases to provide a tailwind in Q4 gross margin. The firm also expects Spotify's tiering strategy in these markets to be similar to that of U.S where cheaper “music-only” tiers are only available at the pre-price hike level.

Spotify's competitive position remains solid

• Outperform, $420->$460: On August 28, Evercore said their analysis of their 12th annual U.S. and 7th annual UK Online Music Surveys (each with 1,300 respondents) established that Spotify continues to lead the music streaming industry in the U.S and U.K and that this lead keeps growing. Evercore said user satisfaction remains robust even after the recent price increase. It added that Spotify's users have exhibited less price sensitivity compared to that of its competitors.
• Buy, $420->$445: Jefferies wrote on September 30 that Spotify's competitive position is underscored by its pricing, which is competitive when compared to that of YouTube. They pointed out that Spotify's pricing is significantly less than that of YouTube in 15 key markets. They also emphasized that Spotify remains an appealing destination for music streaming, podcasts and Audiobooks.

Developments during the quarter

Pricing, costs and competition developments

Audiobook launch in more European regions

• On October 24, Spotify announced the launch of audiobooks in premium in France, Belgium, the Netherlands, and Luxembourg.
• This comes one year after Spotify introduced audiobooks in premium in the U.S., Canada, U.K., Ireland, Australia, and New Zealand.
• Audiobooks in premium is where Spotify offers free 200,000 audiobooks to premium subscribers.

YouTube Music increased prices in Europe and other regions outside U.S.

• At the end of September, Reddit users reported that they had received a notification from YouTube saying that prices will increase by up to 40% in Europe, Middle East, South America, and Southeast Asia, effective November 4.
• The Reddit users were disappointed with this price increase. Some wrote that they will cancel their subcriptions.

Spotify introduced basic plan tier

• On June 24 2024, Spotify introduced a basic plan tier in U.S. priced at $10.99. The tier doesn't not include audiobook listening time.
• The basic plan tier came three months after Spotify launched an exclusive audiobook tier in U.S. priced at $9.99.

Spotify increased prices in U.S.

• On June 3 2024, Spotify announced that it was increasing prices again in U.S. The individual plan will see an increase from $10.99 to $11.99 while the premium plan will increase from $16.99 to $19.99 per month. On the other hand, the Duo plan rose from $14.99 to $16.99. The student plan stayed unchanged at $5.99 per month.

Legal action by MLC against Spotify for underpaying songwriters

• On May 2024, the Mechanical Licensing Collective (The MLC) filed a lawsuit against Spotify for deciding in March to reclassify its U.S. Premium Individual, Duo, and Family subscription plans as Bundled Subscription Offerings because they now have audiobooks.
• A 2022 legal settlement established that bundled services in the United States are permitted to pay a lower royalty to publishers and songwriters compared to standalone subscription services.
• According to MLC, the action by Spotify on March will reduce the Service Provider Revenue reported to the MLC for Premium by around 50%. “The financial consequences of Spotify’s failure to meet its statutory obligations are enormous for Songwriters and Music Publishers," National Music Publishers Association (NMPA) boss David Israelite said on April 30.
• “The lawsuit concerns terms that publishers and streaming services agreed to and celebrated years ago under the Phono IV agreement,” a Spotify spokesperson commented.
• On August, Spotify filed a motion asking the court to dismiss the suit. Spotify estimates that if the MLC was to win the case, it will have to pay them 46 million euros. 35 million euros relates to Q2 while the rest is penalty.
• Billboard estimates that the bundling of subscription in U.S. will cost songwriters up to $150 million in the first 12 months. As Spotify bundles the subscription in other regions, the cost-savings increases.

TikTok to shut down its music streaming business

• TikTok recently said it will shut down TikTok Music streaming business at the end of November 2024.
• Deutsche Bank expects Spotify to absorb TikTok's 2-2.5 million subscribers.
• In Q4, they expect 1.3M paid subscriber net add due to the shutdown.

Product developments

Spotify launched a new integration that enables music sharing to TikTok and Instagram

• On November, Spotify announced that it was launching a new feature that enables users to share their favorite music, podcasts, and audiobooks in their TikTok and Instagram accounts.

Spotify expanded music videos in betas

• Earlier this year, Spotify launched music betas 12 markets other than the U.S such as the U.K, Germany, Italy, the Netherlands, Poland, Sweden.
• In October 2024, it announced that it was bringing music videos in betas in 85 more markets.
• Music videos in betas enable premium users to turn their beloved songs into visual experiences.

Spotify expanded AI playlist beta in other regions

• On September 2024, Spotify expanded its AI playlist beta to premium users in the U.S, Canada, Ireland and New Zealand.
• The feature was first launched in the U.K. and Australia on April 2024.
• AI playlist combines Spotify's personalization technology with generative AI so that users can create personalized playlists using text prompts such as “upbeat pop music for my European summer vacation”.
• Spotify said between April and September, users have created millions of playlists.

Spotify expanded Spotify Daylist into 65 more markets

• On September, Spotify announced that it was launching Spotify Daylist into 65 additional markets.
• Spotify said that since launching Daylist a year ago, it has erupted as a fan-favorite feature. It pointed out that 70% of Spotify Daylist users tune in week after week and that millions of users stream it every day.
• Spotify Daylist is available to both premium and free users.
• Daylist is a curated music playlist that is based on user's tastes and music they listen to.

Insights

Industry insights

Universal media group (UMG) research

• According to a recent UMG statement, there are around 220 million consumers who are interested in music subscription at the current price (75 million from developed markets and 145 million in high-potential markets).
• The research established that even with recent price increases, music-streaming remains heavily under-monetized, especially the ad-supported models.
• UMG pointed out that 20% of current subscribers are willing to join the super-premium tier.

Netflix earnings

• Netflix Q3 2024 revenue came in at $9.83 billion (+15% y/y), above the $9.77 expected by analysts. It reported 282.7 million paid memberships, in line with analysts estimate of 282.15 million. This could suggest that consumer spending on entertainment is healthy.
• The company guided for Q4 2024 revenue of $10.13 billion (+14.7%), above analysts estimate.
• Netflix said it doesn't expected its ad tier to be a primary growth driver until 2026 but the expect ads revenue to almost double year-over-year.