Spotify have been in the game a long time now, over 10 years, but the worldwide startup taking the world by storm with music streaming is still on it’s journey to profitability.
As Spotify approach the milestone of 200 million total users worldwide their revenues are slowly rising and whilst they are still yet to make a profit this year is their closest yet. In their report for their third quarter Spotify reported that their total revenue was €1,352 million, a significant 31% rise on the same period last year which would have been even higher if not for foreign exchange rate growth.
Q3 saw Spotify’s Gross Margin grow by 25.3%, an increase from 22.3% in Q3 2017. However their Gross Margin is slightly lower than the previous quarter, Q2 2018. Spotify are expectant of this saying: “Gross Margins are seasonally lower in Q1 and Q3 resulting from the costs of the major seasonal promotional campaigns we typically run in Q2 and Q4 each year. A majority of the expense of these promotional subscribers is absorbed following the quarter of intake onto the platform. As long as we maintain this promotional campaign cycle we would expect this seasonal pattern to continue.”
Spotify explain that whilst ad-supported Gross Margins are strong in their top 5 markets, it’s a much weaker tier in their 60 other markets. They reckon that their margins will grow as these markets, many of them still new to Spotify, grow in user-ship. Ad-supported Gross Margin’s however rose from Q2 by 2.3% as Spotify say these revenues are much less affected by seasonality.
For their third quarter overall Spotify reported that Operating Expenses cost €348 million with a total Operating Loss of €6 million. This means an Operating Margin of 0.5%, an improvement of over 650 bps year on year. Spotify expect less Operating Margin improvement as they look to invest more in Research and Development with many of their next hires planned to be utilised in R&D – which makes up over 40% of their 4,040 (as of September 30th) person strong team.