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Spotify posts first ever operating profit, but cautious outlook for 2019

Stock MarketsFeb 06, 2019 10:17AM ET
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© Reuters. A smartphone and a headset are seen in front of a screen projection of Spotify logo, in this picture illustration

By Helena Soderpalm and Olof Swahnberg

(Reuters) - Spotify posted its first ever quarterly operating profit on Wednesday driven by a strong gross margin and slower-than-expected headcount growth, but it warned of a loss in 2019 and issued modest forecasts which disappointed investors.

The world's most popular paid music streaming service, which has said it prioritizes growth over profitability, posted fourth-quarter sales in line with expectations and said it had seen growth in most of its markets.

Despite surprising with its swing to profit, Spotify's shares fell 4 percent in early trade.

The company, which had a gross profit margin of 26.7 percent in the fourth quarter, said it expected this to deteriorate to 22.5-24.5 in the first quarter and to 22-25 percent in 2019, compared with analysts expectations of 26 percent for the year.

Its other guidance for 2019 was also cautious.

Spotify said it expected a loss of 200-360 million euros in 2019 and that sales would grow 21-29 percent.

Some analysts have highlighted Spotify's slowing rate of annual revenue growth after sales grew 29 percent in 2018, down from 39 percent in 2017 and 52 percent in 2016.

"Investors overall are worried about global growth and all companies which are growth-cases and give weak guidance tend to see falling share prices," said Tomas Otterbeck, an analyst at research firm Redeye

"[Forecast] Growth in users, revenue and loss were all on the weak side for 2019, which I think is behind the lower share price. I think investors are particularly worried about user growth," he added.

Operating in nearly 80 countries, Spotify said its total number of users, including of its ad-supported service, grew to 207 million in 2018, up from 191 million at the end of September.

The service, which launched in Sweden in 2008, has reached 96 million paying subscribers. That compares with around 50 million paying subscribers for its closest rival Apple (NASDAQ:AAPL) Inc's Apple Music, which launched in 2015.

It forecast 117-127 million premium subscribers by the end of 2019, compared with analysts' average forecast of 121 million.

"Growth in users is the main focus for Spotify at the moment, the potential market is in the billions," said Joakim Dal, fund manager and partner at GP Bullhound.

"I expect the company to continue to invest heavily to gain customers and to improve its product to attract new customers and keep current users," he said, adding it was reasonable for Spotify to forecast a full-year loss.

Spotify's fourth-quarter operating profit stood at 94 million euros ($107 million) compared with a mean forecast for a loss of 16 million euros in a Reuters poll of analysts. In the same period last year it posted a loss of 87 million euros. Sales rose by 30 percent in the fourth-quarter, in line with the 31 percent seen by analysts.

Nicholas Hyett, analyst at Hargreaves Lansdown (LON:HRGV), said Spotify's core business was looking "increasingly comfortable".

"While expansion into another 13 countries and development of advertising and artist tools is holding back the bottom line, it’s not a long term problem," he said in a note.

    Spotify is keen to develop new music services and additional content during 2019 with a "two-sided marketplace" that connects both artists and recording industry labels to consumers but in non-traditional ways.

Spotify said it would acquire podcast companies Gimlet Media Inc and Anchor for an undisclosed amount.

($1 = 0.8779 euros)

Spotify posts first ever operating profit, but cautious outlook for 2019

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