Ahead of Spotify's direct listing on the New York Stock Exchange next week, investors have been mulling over the information provided in the company's F-1 filing with the SEC. It revealed a rapidly growing company with improving finances. Though Spotify's net loss widened recently, its losses as a percentage of revenue have been decreasing. In addition, Spotify was free-cash-flow positive in 2017. With this performance in the rearview mirror, investors interested in Spotify are likely wondering if the company can keep up its strong momentum.
Now that Spotify's issued full-year guidance, investors can glean insight about what to expect from the company in 2018. An overview of the provided figures reveals an optimistic outlook from management.
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Strong but decelerating growth
Investors looking at Spotify's F-1 filing will notice that the company is growing very rapidly. Spotify's 2017 revenue, for instance, was about 4.1 billion euros, or about $5.08 billion, up from 1.9 billion euros in 2015. This works out to a compound average growth rate of 45% over this two-year period.
But another trend has stood out just as clearly as Spotify's robust growth: Its growth rates are quickly decelerating. Revenue in 2017, for instance, increased 39% year over year, down from 52% growth in 2016. As it turns out, management expects this trend to persist into 2018, as Spotify guided for revenue to increase about 20% to 30% year over year.
Spotify similarly expects slower user growth in 2018. Management guided for total monthly active users (MAUs) to rise to between 198 million and 208 million, up 26% to 32% year over year. MAUs increased 29% and 36% year over year in 2017 and 2016, respectively. For its paying premium subscribers, the company expects to end 2018 with between 92 million and 96 million paid subscribers, up 30% to 36% year over year. This compares to 46% year-over-year growth in premium subscribers in 2017.
For some context, Apple's (NASDAQ: AAPL) Apple Music currently has 38 million paying subscribers and another 8 million using Apple Music's free three-month trial period. But unlike Spotify, Apple Music's growth recently appears to be seeing a modest acceleration: It added 2 million paid subscribers in about five weeks as of management's most recent update on the service's growth.
Importantly, Spotify expects its trend of widening annual operating losses to reverse in 2018. Management said it expected its full-year operating loss to be between 230 million and 330 million euros, an improvement from an operating loss of 378 euros in 2017. Impressively, this guidance for Spotify's operating loss includes the estimated costs associated with its direct listing of 35 million to 40 million euros.
These net losses will be helped by a growing gross margin, which management says it expects to increase to somewhere between 23% and 25%, up from 21% in 2017.
Expectations for Spotify's first quarter
In its March 26 SEC filing highlighting its guidance before its direct listing, Spotify also provided its outlook for its first quarter.
For its first quarter, Spotify expects:
- 168 to 171 million MAUs, up 28% to 31% year over year.
- 73 million to 76 million premium subscribers, up 41% to 46% year over year.
- Revenue between 1.1 billion and 1.15 billion euros, up 22% to 27% year over year.
- Gross margin between 23% and 24%, including a one-time 60-basis-point benefit from an accrual adjustment associated with prior periods.
- An operating loss between 50 million and 80 million euros.
Spotify is scheduled to begin trading on the New York Stock Exchange on Tuesday, April 3.
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