Spotify Q1 2025 earnings
A good quarter with a weird market reaction
I'm always reminded that even if I knew a company's earnings in advance I'd have no idea how the market would react. Case in point: SPOT 0.00%↑ . Spotify reported Q1 earnings on Tuesday, I read over the release before looking at the market. A few things jumped out:
MAU growth at 10% is good.
Premium subscriber growth at 12% is great.
Spotify is now entering its maturity stage where user growth isn't the most important thing and segmentation is. Getting MAUs to convert into subscribers is critical to company success. The fact that they're doing it successfuly is impressive. Despite Ad supported user growth slowing a lot over the past 2 years, subscriber growth hasn't. Even off of a larger base.
What was disappointing? Sequential growth rates and guidance. Guidance for Q2 implies slowest sequential growth rate basically, ever. For Q1 Sequential growth was 1.9% for Premium and 0.4% for Total MAU. Q1 is usually the weakest for subscriber growth, but Q2 guidance of +1.6% and 1.8% for MAU and subscribers is the weakest growth sequentially in the past few years.
The main story here is simply that Spotify is a maturing company with slowing growth rates, increased monetization and the beginning of proper segmentation. This is exactly the journey that Netflix has been on with ads? After a decade of only one customer segment they added a new one. Expect the same from Spotify: Slower user growth but increased segmentation, customer tiers and thus ARPU.
The immediate stock reaction of -8% didn't surprise me - I've been expecting growth to slow and assumed the stock had priced in fantastic growth. What did surprise me was the strong bounce back yesterday. Who understands the market? Definitely not me!
I'm leaving this quarter very comfortable. Everything is still on track according to my Spotify deep dive (thereservist.substack.com/p/deep-dive-spotify-and-musics-long). Company keeps on delivering, innovating and growing. FCF remains strong, GM remains growing and even ad supported growth accelerated from 7% to 8%, and this is a key product focus for the company and management. Getting ad supported ARPU up could be the biggest growth lever that I’m not pricing in all that much.
Another notable result this quarter is the addition of a $252 finance cost to the companies earnings, significantly hitting EPS. What is this loss?
To keep it simple: In 2021 Spotify issued debt ‘Exchangeable notes’ that mature in March of 2026. They had a conversion price of $515.2 per share, meaning that the further the stock price moves above, the more cash the company has to pay to buy back the debt. Even though at the current stock price this doesn’t quite yet match the condition of 130% of the conversion price of $669, the accounting rules Spotify uses require them to mark to market their additional financing cost required that they might have to pay up. This isn’t an insignificant cost, and if the stock continues to rise, it will further increase (or the opposite if the stock price drops). In any event, paying back their debt is something Spotify is preparing for and has ample cash to deliver.
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