Spotify Q1 Ad-Backed Revenue Jumped 46%, Paid ARPU 7% Lower

Spotify shares closed 12.3% lower Wednesday at $256.84 after the company’s Q1 earnings report showed monthly average user growth “modestly below” internal expectations. Total monthly average users grew 24% year on year in Q1 to 356 million, said the Q1 shareholder letter. Average revenue per user for paid subscribers was 7% lower year on year to $4.98. Spotify had “meaningful contributions” in the U.S., Mexico, Russia and India, but lower than projected MAU growth in Latin America and Europe. Per-user consumption grew in developed regions including North America and Europe, but developing regions were below pre-COVID-19 levels.

Revenue grew 16% vs. Q1 2020 to $2.6 billion for the quarter ended March 31; but sequential revenue slipped 1%. Premium subscription revenue was up 14% year on year, 2% higher than the December quarter; ad-supported revenue grew 46% year on year but fell 23% sequentially, said the company.

Commenting on Spotify initiatives announced in April -- the Facebook partnership (see 2104260038) and Car Thing -- CEO Daniel Ek said both fall under Spotify’s strategy of “ubiquity,” on a Wednesday earnings call. Large numbers of Spotify users already shared their tracks on Facebook, Instagram and other social platforms, said Ek: The integration with Facebook is a way to “reduce friction” toward a better user experience. “When you reduce the friction for consumers, you tend to see great results.”

Car Thing is a device for use in vehicles where Spotify users “were missing out on a seamless and personalized" listening experience, said Ek. The executive has long targeted the car space as a “major use case” for audio where “most offline listening happens.” Audio doesn’t have entertainment competition in the car, Ek noted. Car Thing, rolled out to a limited number of users two weeks ago, is Spotify's way of "reimagining" what the next-gen car entertainment system should look like.

Ek highlighted Tesla as one carmaker that's shifting to streaming audio as the “de facto” in-car entertainment option. “Car Thing is our attempt at speeding up that progress" to a future where "you will have just as great an experience as you have on your mobile in your car, and you can now use that as your in-car entertainment system instead of these antiquated radio systems that most people have.”

Early feedback from Car Thing indicates “we really struck a chord with what consumers want,” said Ek. Based on how people use it, Spotify will determine the appropriate go-to-market strategy and how to "effectively roll it out." When the company makes Car Thing more broadly available, it will likely have a consumer price point and not be a free offering as it is in the “early innings,” Ek said.

Spotify will continue to introduce new capabilities across “all facets of audio,” Ek said, highlighting its recent acquisition of live audio app Locker Room as a way for artists to create, engage and monetize their art and fan base. It will share more details about Locker Room in coming weeks. The company’s live audio efforts are a way to connect its 8 million creators with its 350 million users, said Ek. Over time, he sees “very big” revenue potential. Spotify is moving from being a “music service to an audio platform,” Ek said. It’s investing “massively” to help creators create, distribute their content, grow their fan base through user engagement and monetize their content, through streaming ad insertion and podcast subscriptions.

The company's strategy to “go all in on audio” has given Spotify a decade head start in a still nascent overall audio market pegged at $200 billion by 2030, said Ek. Spotify believes it has 5x-7x growth left in the music, podcasting and paid audio businesses, he said. “When we see opportunities that we believe will strengthen our capabilities for creators or consumers, you should expect us to prioritize the long term over the short term,” he said. Commenting on the number of music services competing in the live audio space, Ek expects it to be a feature that most major platforms will have, comparing live audio to stories on platforms such as Instagram and Snap. It’s a "compelling feature set," that he believes artists will tap into.

The U.S. joined other markets Monday where Spotify has announced subscription price increases. The family plan is moving to $16 a month from $15 Friday. Chief Financial Officer Paul Vogel said the company has had minimal churn in the 30 markets where price increases happened, while maintaining gross additions. He said churn tends to be high when a service enters a new market, but the company expects churn rates to come down over time in mature markets. Spotify launched in 86 new markets in Q1.

For Q2, Spotify forecasts 366 million-373 million MAUs, including 162 million-166 million paid subscribers, and total revenue of $2.6 billion-$2.9 billion. Full-year guidance is for 402 million-422 million MAUs and revenue of $11 billion-$11.5 billion.