Spotify Q2 User Adds Fell Short From COVID-19, Sign-Up Glitch

MAU performance was slower than expected due to lighter user intake during the first half of the quarter as COVID-19 continued to weigh on performance, especially in new markets including India and Southeast Asia where the company paused advertising campaigns due to the severity of the pandemic, said Ek. Of total MAUs, 34% are in Europe, 24% in North America and 22% in Latin America. Premium subscribers grew 20% year on year to 165 million.

Also dragging down MAU growth was a “user sign-up issue” with email verification on a third-party platform that created “unexpected intake friction,” management said. Chief Financial Officer Paul Vogel said the issue “was on our end” due to a change “not caught soon enough” that had a 1 million-2 million impact on MAU growth. The issue was corrected and shouldn’t be a factor in Q3, he said. The company’s Q3 outlook calls for total MAUs of 377 million-382 million, with 170 million-174 million of those paying subscribers.

Q2 revenue exceeded expectations at $2.7 billion, up from $2.5 billion in Q1 and $2.2 billion year on year, said the company shareholder letter. Q3 revenue guidance is $2.7 billion-$2.9 billion. The stock closed 5.7% lower Wednesday at $223.32.

On measurable impact from COVID-19 factors such as lockdowns, reopenings and economic stress, Vogel said engagement leads to better MAU and retention, but in markets with COVID-19 lockdowns or spread, it's seeing less mobility, which affects engagement. COVID-19 affected listening cycles, with fewer people commuting, he noted. In markets that have re-opened, “weekdays are starting to get back to the way they normally are,” he said. In markets that are still shut down, weekday listening patterns are playing out like weekend days, he said.

Ad-supported revenue outperformed the company’s forecast, growing 110% year on year, driven by strong demand and “favorable comps” over last year’s COVID-19 lows, said management. Ek said advertising was an area where “I previously didn’t spend much time, but it’s becoming impossible to ignore.” It’s the second-biggest revenue driver for the company with “significant potential,” he said: “The days of our ad business accounting for less than 10% of our total revenue are behind us.”

Strength in ad-supported revenue was led by direct and podcast sales channels, which were up over 200% year on year, Ek said. He highlighted early performance of the Spotify Audience Network marketplace that launched in April, allowing advertisers to connect directly with listeners. The company expanded the network to Australia, Canada and the U.K. in July.

Ek encouraged analysts to focus on “the shift of Spotify as a premium subscription music service to an audio platform.” That means Spotify’s business model is “very different from in the past.” Now, that shift is playing out in ads, but in the future the streaming service will add more tools and services that will affect financial results in different ways, he said.

During Q2, the company rolled out new partnerships as part of its Spotify Open Access platform strategy with the goal of becoming “the world’s leading audio browser,” said Ek. It announced Tuesday the first 13 partners for Open Access, which allows creators with existing paid content businesses to activate their customers on Spotify and allows Spotify users to listen to content they paid for via third-party services, such as publications with pay-walled content or licensed audiobook providers, the company said. New partners are Acast, Der Spiegel, Glow.fm powered by Libsyn, Malcolm Gladwell’s The Bomber Mafia audiobook, Mamamia, Mediapart, Memberful, Slate, Storytel, Supporting Cast, Supercast, The Motley Fool and Vox Media.

For Q4, Spotify projects revenue of $2.9 billion-$3.2 billion with 400 million-407 million active users. Premium subscriber count is projected at 177 million-181 million.