Investors On Spotify Growth: That Don’t Impress Me Much

(Bloomberg) Spotify Technology SA gained more subscribers than expected thanks to customers in Latin America and emerging markets, easing investor concerns that competition from Apple Inc. and Amazon.com Inc. will stunt its growth.

Spotify boosted its customer base to 180 million in the second quarter, more than the average 178.5 million forecast from analysts. Paid subscribers reached 83 million, more than any other music service.

“The business is performing to the higher end of expectations,” Chief Financial Officer Barry McCarthy said during a call with analysts Thursday. “We’re seeing faster growth in the paid business than we were expecting.”

Investors weren’t quite sure what to make of Spotify’s results at first. The stock tanked by as much as 5.6 percent in premarket trading, due in part to slowing growth of the free service. Spotify reported fewer users of the advertising-supported tier than a quarter ago.

But on the call, McCarthy indicated that the drop stemmed from those users being converted into paying subscribers, and the stock quickly rebounded. As of 10:48 a.m. in New York, shares traded up 1.5 percent to $190.88. Paid subscribers, which account for about 90 percent of the company’s sales, are more profitable for Spotify than free users.

Attracting Customers

The advertising-supported free service is still vital for bringing in new customers and fueling overall growth. Spotify introduced a new version in April to make it more attractive to potential customers.

“If the slowdown continues, we’d miss our guidance expectations and that would be a cause for concern,” McCarthy said in a call with reporters.

Spotify shares have climbed steadily since the Stockholm-based company’s debut on the New York Stock Exchange in April, pushing its market capitalization to almost $35 billion.

The streaming service went public using a direct listing, a deviation from the traditional initial public offering. The direct listing has gone more smoothly than anticipated, McCarthy said.

Investors have been willing to forgive Spotify’s financial losses so long as the company keeps adding customers -- the kind of approach that worked for Amazon.com Inc. and Netflix Inc. The music-streaming service reported an operating loss of 2.20 euros a share, it said in a statement Thursday. But sales in the quarter grew 26 percent from a year earlier to 1.27 billion euros ($1.49 billion).

Music Payments

Spotify has attempted to pare its losses by reducing the share of sales that go to record labels and music publishers. Collectively, they take more than 70 percent of every dollar that Spotify makes.

Spotify has invested in nonmusic programming, such as podcasts, and has developed tools to help artists operate independently. Chief Executive Officer Daniel Ek began a call with analysts by addressing recent reports about Spotify’s efforts to sign artists directly. Spotify has no interest in owning music or operating a record label, Ek said, but it does want to help artists cut out the label.

Spotify faces a counterattack from established technology giants, including Amazon, YouTube and most notably Apple, whose music service is expected to surpass Spotify in U.S. subscribers in the coming weeks. While Apple is growing well, Spotify is still twice as big as its closest competitor if you consider both free and paid users, Ek said.