In a quarterly update to investors, Spotify announced Wednesday that its total monthly active users grew 29% during the second quarter to 232 million worldwide. The company said it finished the quarter with 108 million subscribers to its premium ad-free service, a 31% year-to-year increase. And its total revenue increased 31% in Q2 compared to a year earlier, led by a 34% jump in advertising revenue which it said was “primarily due to strength in the U.S.” It also noted that programmatic ad sales increased 50% in the quarter. “Overall we’re still in the growth phase of the business,” CEO Daniel Ek said in a conference call with analysts on Wednesday.
Here are some of the other highlights from Spotify’s quarterly letter to shareholders:
Premium subscriber numbers totaled 108 million worldwide. It credited that to the success of its biannual campaign, which kicked off in mid-May and ran through the end of June, offering three months of Spotify Premium for $0.99. But the addition was slightly smaller than what it had predicted. “We missed on subs,” it told shareholders. On the upside Spotify reported that its monthly churn rates fell to a record low of 4.6% with a “reaccelerated” effort to bring back those who’d canceled. What came up short was the take rate on its student plan. “The good news is that the shortfall was execution related, rather than softness in the business, and we expect to make up the lost ground before year-end,” it said.
Spotify’s second quarter global revenue grew 31% over a year ago to $1.85 billion. Spotify Premium revenue increased 31% to $1.67 billion. Advertising revenue totaled $184 million, a 34% jump from Q2 a year ago. The shareholder letter noted that growth in advertising revenue was an “acceleration of growth from Q1” when advertising grew by 24%. It also reported audio ads were the fastest-growing product for a third consecutive quarter.
Spotify’s podcast audience grew more than 50% between first and second quarters and it says that its podcast audience has nearly doubled since the start of the year as a redesign of its app and increased promotion of podcasts has exposed the medium to more listeners of its streaming music service. “Our content team continues to find and support engaging material across a wide range of genres and geographies,” it told shareholders.
Demand for podcast advertising is growing, according to Spotify which has spent more than $400 million since the start of the year to carve out a position in the on-demand spoken word segment. “While still relatively small, we continue to expect fast revenue growth from podcasts through the remainder of 2019 and into 2020,” it said in the shareholder latter. “Over time, our ambition is to reinvent the podcasting ad experience by building a new tech stack to enable targeting, measurement, and reporting capabilities like we have for our core ad-supported offering.”
Spotify reached agreement with two of the four major record labels for global sound recording licenses. It said it’s in “active discussions” with the other two. “We are making good progress on the development of a set of marketplace services and are actively building and testing prototype products with some label partners,” it said. Spotify expects that to launch in early 2020.
Spotify said its gross margin rate was 26% in second quarter, beating its forecast. It said that was largely drive by better than expected streaming delivery costs as a result of efficiencies driven by usage optimization work, slower than anticipated release of original podcast content, and a better than expected royalty margin, resulting from slight differences in product and geographic mix.
Spotify forecasts it will add between 8 and 13 million monthly active users worldwide during third quarter and grow its global subscriber base by 2 to 6 million. “Our year-over-year growth rate will come down slightly,” CFO Barry McCarthy told analysts on a conference call. “I don’t think we can sustain 34% year over year on the ad business, particularly if you recall we had exceptionally strong Q3 and Q4 a year ago.”
Spotify’s stock price was lower in trading in New York on Wednesday, following its quarterly earnings release as some investors worry about a lower than expected increase in Spotify Premium subscribers.