Spotify has released its numbers for the first quarter of this year, and despite best efforts by CEO Daniel Ek to put a positive spin on things during the company’s earning call, if you move beyond the top line they make pretty grim reading. Growth has stalled, total revenue is down, ad-supported revenue has fallen off a cliff, and monthly active users in North America have dropped. But Spotify made €168 million in profit - so everyone, please, focus on that.

Key highlights picked out by the company in its deck were strong year-on-year growth in monthly active users - presented as being up 19% to hit 615 million. However, on a quarter-on-quarter basis, MAU growth was just 2.16% the lowest quarterly gain seen in years. Over the last four years - or sixteen quarters - Q-on-Q growth has averaged 5.13%.

This is all explained by the fact - said Ek during the earnings call - that “the MAU and subscription growth we achieved in 2023 not only surpassed our most ambitious forecast, but also set a record for the most significant user growth in Spotify history. While we anticipate robust growth going forward 2023 was a truly standout year and should not be based on expectation for every subsequent year”.

Remember that: 2023 was exceptional, but it was so exceptional that no one should be thinking that Spotify will see that kind of growth going forward.

In fact, 2023 wasn’t all that exceptional - Spotify grew from 489 million users at the end of 2022 to 602 million by the end of 2023, growth of 23%, and average quarterly growth of 5.34%. In 2022 the company added 83 million new users over the course of the year, going from 406 million in Q4 2021 to 489 million in Q4 2022. That’s 20.4% growth, and an average of 4.78% quarterly growth. 

That makes the most recent quarter’s 2.16% quarterly growth look pretty poor. 

But don’t worry! This can all be explained because firing a bunch of people and putting the squeeze on marketing spend had - inexplicably to Ek, it seems - major impacts on growth. “Another significant challenge was the impact of our December workforce reduction, although there's no question that it was the right strategic decision. It did disrupt our day to day operations more than we anticipated”. 

Given that the company went from 9248 employees at the end of Q4 to just 7721 at the end of Q1 you bet it had some impact. Basically, everyone at Spotify needs to do 20% more work as a result, which means cramming an entire additional working day into each week. Weekends be damned! But - relentlessly positive Daniel has some good news on that front… “Although it took us some time to find our footing, more than four months into this transition I think we're back on track”. Let’s hope he’s also putting in the extra hours.

In 2023 Spotify splurged €1533 million on sales and marketing - 8.64% of its revenue - versus €1572 million sales and marketing spend in 2022, which represented 13.4% of revenue.

Dropping the spend that much, says Ek, was maybe a mistake. “In hindsight, we probably pulled back too significantly throughout 2023 and as such, we're already correcting this as we move into Q2. To be clear, we're not going to go back to what we were doing before we still continue to expect improving profitability over the course of this year and into the next. Any new funds are being directed towards acquiring and reactivating high value users who enhance our base with their deeper engagement and loyalty”.

That probably explains why premium user acquisition has also pretty much stalled, increasing by only 1.27% between Q4 2023 and Q1 2024 - versus 5.32% over the same period for 2022/2023 and 3.94% for 2021/2022.

Spotify’s costs are now the lowest they’ve been since Q1 2022, and represent a much lower percentage of overall revenue than the excessive spending of 2023.

Top line revenue fell from €3671 million last quarter to €3636 million in Q1 - just shy of a 1% drop. Given that Spotify has increased prices in many territories, and certainly in North America and Europe, where around 155 million of its 239 million premium users are based - it seems strange that despite adding 3 million new premium users revenue has not seen more of a bump. 

With roughly 2 million of those new premium users coming from North America and Europe, that perhaps suggests Spotify has perhaps seen higher than expected churn. If new users - replacing churned users - have been brought in on extended trials or through family plan additions would explain why there has not been a more significant revenue bump. Of course, much of the impact of that revenue increase was felt earlier in 2023, but nonetheless it warrants further scrutiny as Spotify continues through 2024.

Ad-supported revenue has dropped sharply, from €501 million in Q4 to just €389 million in Q1 - a 22.4% decline. That said, Q4 is also an ad-heavy quarter and an even steeper drop was recorded between Q4 22 and Q1 23, which saw a 26.7% fall-off for ad revenue.

Forget about all these tedious granular numbers though - focus on the prize! Spotify made €168 million profit this quarter - and given it saved €219 million in costs, you’d hope so. 

Ek remained resolutely perky throughout the call, focusing on value, value, value. 

“We're constantly trying to improve the value we offer to consumers”, said Ek. “Every now and then, we look at that sort of value to price ratio, and try to capture some of that value through price increases and when we do not only Spotify benefits, but the entire creative ecosystem benefits to and that's obviously you know, everything from artists and songwriters to authors and podcasters now that are part of this strength or this bundle, so to speak, where everyone sort of… the rising tide helps all boats, so to speak”.

“So, long term you should definitely say that the better the product is, of course, the less reliant we will be on marketing because the more viral the product will be. Over the course of the last two years, we've added a tremendous amount of value. We're adding a tremendous value over the course of the last two years on the service and more and more product features like AI, DJ day lists and so on. So we're adding more value across the base and we're focused on capturing some of that value we've been adding over the past two years by increasing the price”.

So to speak indeed.

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