Spotify Q1 2020: Choppy Waters Ahead

Spotify’s first quarter earnings were a mixed bag, with a largely positive picture for Q1 but some warning signs for the remainder of the year:

• Subscribers: Spotify’s Q1 earnings may not have matched Netflix’s for over-performance but subscriptions did show over performance, reaching 130 million, one million above MIDiA’s pre-COVID forecasts. This represented six million net new subscribers in the quarter. Netflix expected seven million and reached 15.8 million. COVID-19 has been more of a boon for video than music, largely because key music listening slots (commute, the gym) have been wiped out by lockdown. Whereas video has seen the opening up of new viewing slots.
• Active users: With audio streams down across the board in early-to-mid March, active usage was always going to be at risk. Although monthly active users (MAUs) held up, daily active users (DAUs) were down in early lockdown markets Spain and Italy. MAU is in effect a reach measure rather than an engagement metric. Checking an app once a month is not active usage. So DAU and WAUs are where scrutiny needs applying. As Spotify does not regularly report these figures we have to interpret its narrative: “the ratio of daily active users relative to monthly active users was strong in the quarter. We did see a bit of a decline over the last few weeks of March…[and] higher than in Q1 of 2019.” Strong does not mean up, and the fact it was reported as higher than 12 months ago but no reference to last quarter, suggests ‘strong’ may not be that useful an adjective here. Also, the dip in the latter weeks of March is concerning as by this stage lockdown behaviours were normalising and streams as a whole were picking up. So, Spotify should have been seeing an uplift in the MAU/DAU ratio, not a dip. Something to keep an eye on for Q2.
• Advertising: A global recession is now more an inevitability rather than a possibility. Advertising spend is an early indicator and this is reflected in Spotify’s earnings. Ad revenue has been Spotify’s Achilles’ heel in recent quarters, with targets often missed and tech rollouts dragging. Spotify says it was on course to beat its targets for Q1 but then missed them, falling 20% below target in the latter months of March. So, the COVID-19 drop off was quick and dramatic. Do not expect this to recover anytime soon. Weakening digital ad spend is going to be a secular trend. Even Alphabet reported slowing Google ad revenue in Q1. 
• Revenues: Premium ARPU continued to slip, down €0.23 from Q4 2019 to €4,42. This was the single biggest quarterly decline since Q1 2018. Meanwhile in revenue terms, premium was higher than expected (due to the subscriber over performance) so even with the under-performance of advertising, total revenues (€1,848 million) were in line with expectations. Nonetheless, Spotify has downgraded its annual revenue forecast by 5.5% from an average of €8.48 billion to €8.05 billion, with the top end of its revised guidance now lower than the bottom end of its previous guidance. This largely reflects the weak outlook for digital advertising but if the coming recession persists for long then growing subscriber churn is a real risk. A fifth of consumers state that they would consider cancelling their music subscriptions if faced with having to reduce their entertainment spend in a recession.
• Podcasts: Whereas most media experienced a COVID-bounce, podcasts did not. Google searches for podcasts declined throughout the lockdown period, though there was a small uplift mid-April. Spotify stated that “the current environment has shifted listening patterns temporarily” which is likely code for consumption is down. Although Spotify added that “nothing we have seen changes our long-term view of the potential”. What is particularly interesting about the podcast impact at a market level is that COVID-19 hit mid-way through the format transition process. Radio has enjoyed a resurgence during lockdown, reversing, if even only temporarily, the format transition.