Three issues we realized from Daniel Ek on Spotify’s Q2 investor name

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Spotify delivered good news to investors last week in the form of year-over-year growth in premium subscribers: subscribers to the platform rose 7 million at the end of the second quarter of 2021 (through June) from the 158 million they had at the end of the previous quarter counted quarter.

However, SPOT’s global monthly active users (MAU) performance fell short of the forecast published at the end of the first quarter.

Spotify’s global MAU count reached 365 million in the second quarter of 2021, an increase of only 3% – or 9 million – from the previous quarter (Q1 2021) when the platform counted 356 million MAUs.

Spotify blamed COVID-19 for this slow MAU growth in part, telling investors that the impact of the coronavirus “continues to weigh on our performance in multiple markets” and that in some cases the platform has recently “paused marketing campaigns due to the severity of” the pandemic ”.

Second, Spotify cites a now resolved “user login problem” related to an unnamed global third-party platform as the reason for slower MAU growth in the second quarter.

“While I’m disappointed that our MAU growth was weaker in the latter half of the first quarter and the first half of the second quarter, the good news is that we have seen a trend reversal and all the leading indicators I see show that we’re back on track “.

Daniel Ek, Spotify

During his opening address for the company’s conference call, SPOT CEO Daniel Ek stated: “While I’m disappointed that our MAU growth was weaker in the latter half of the first quarter and the first half of the second quarter, the good news is that we have seen a turnaround and all the leading indicators I see are showing that we are are back on the track. “

He also stated that “Markets like India, Brazil and parts of Southeast Asia have lagged behind our expectations and we have also seen a slightly slower adoption rate in some of our newly introduced markets.”

Ek noted: “All of these regions have been badly hit by COVID”.

CEO Daniel Ek and CFO Paul Vogel were interviewed on the company’s conference call last week. Here’s what we found out:

1) SPOT’s missed MAU tutorial is just a “bump in the road” and has nothing to do with price hikes or competition …

Ek and Vogel were asked by an analyst at the beginning of the Q2 earnings conference call to explain the third-party platform issue that was affecting MAUs

They were also asked how confident they are that the missed forecast was not related to competition or a slower takeover due to price increases implemented in multiple markets including the US, Europe and the UK.

In answering the first question, Vogel revealed that the problem with the third-party platform was “an issue with email checks between.” [SPOT] And the third”. He did not reveal who the third was.

“We made a change that wasn’t entirely consistent enough, and we believe it may have had an impact on growth,” he said. “The current estimate is that approximately 1 to 2 million MAU growth was affected by the friction caused by this email confirmation change. It has since been corrected and should not have any effect in the third quarter. “

In terms of competition, saturation, and price increases, Ek noted that “The below average performance we’ve seen [was] in emerging countries and not in western markets ”.

“On the question of saturation,” he said, “these are also markets in which we are in much earlier stages of growth, and not the kind of larger markets like the US and most of Europe.”

“If I’m disappointed in anything, it’s probably just that we should have seen it more in the forecasts.”

Daniel Ek

Ek added, “We feel really good about where we are from a competitive standpoint. We’re seeing strong demand for Spotify around the world, but as mentioned earlier, there will obviously be a higher level of variability in 2021, and especially for a global company like Spotify, where we have so many regions, all of which are at different levels of maturity.

“This is what you are seeing here, and to contextualize it even further, it really played out over a quarter, so I consider it more of a bump on the road than anything else and because we had such a strong 2020.” If I’m disappointed in anything, it’s probably just that we should have seen it more in the forecasts, but these things are obviously very difficult to predict, but I really feel very good about our long-term growth prospects, and it has not changed.”

Later in the call, Vogel stated that Spotify’s average monthly revenue per subscriber (aka ARPU) will increase in the “later half of the year,” with price increases cited as a role in this projected increase.

SPOT’s ARPU landed at € 4.29 in the second quarter, 3% less than in the previous year, but unchanged after adjusting for currency effects.

2) Daniel Ek claims that the days of the Spotify advertising business, which “represent less than 10% of our total sales, are behind us …”

Daniel Ek may have been “disappointed” with Spotify’s MAU growth in the second quarter, but he was optimistic about the company’s advertising business, and for good reason.

SPOT’s ad-supported revenue exceeded its forecast, reaching $ 275 million in the second quarter. That was up 110% year over year and a 28% increase over the previous quarter (Q1 2021) when the company generated $ 216 million in ad revenue.

Ek made some interesting comments about the company’s advertising business during the company’s investor call.

In his opening speech, he said of SPOT’s advertising business: “Granted, this is an area I haven’t spent much time in before, but it’s becoming impossible to ignore.”

However, he added that “it is now sure to become a second major sales driver for Spotify”.

So what is driving Spotify’s healthy ad business?

The company’s ad-supported MAUs grew by just 2 million in the second quarter – from 208 million in the previous quarter (Q1 2021) to 210 million. According to SPOT, the focus of this growth is the podcasting strategy.

“Granted, this is an area I haven’t spent much time in before, but it’s becoming impossible to ignore.”

Daniel Ek

According to Ek, “Podcast sales are up more than 627% year over year, or nearly 200% on an organic basis, and ongoing outperformance is currently only limited by the availability of our inventory, which we are actively remedying on Pro”.

Spotify doesn’t provide a breakdown of how much revenue its podcast business is actually generating, but according to the company’s letter to shareholders, “The strength in ad revenue was led by our direct and podcast sales channels … along with contributions from the megaphone acquisition.” Podcast advertising technology platform Megaphone was purchased by Spotify for $ 235 million in November 2020.

Ek is now so convinced of the potential of the company’s advertising business that he told investors and analysts that “the days of our advertising business, which account for less than 10% of our total sales, are behind us”.

He added, “I expect ads will be a significant part of our revenue mix going forward.”

3) Daniel Ek says: “The opportunity before [spotify] is to reach more than 50 million creators “…

Speaking at Spotify’s Stream On event in February, Daniel Ek stated that by 2025, Spotify could have “up to 50 million creators on our platform, whose art will be enjoyed by a billion users around the world”.

He reiterated that goal last week, stating that the platform Spotify is trying to build is “all about going from 8 million to 50 million”. Creator and from 400 million to over a billion user on our platform “.

During the company’s earnings discussion, he was asked about this “billion-dollar user opportunity” and, in particular, what “key investments” SPOT would have to make in order to make this dream come true.

Ek has not specified a value of the investment required or a specific investment area to achieve this goal and explains this Spotify has “grown from around one million creators to over eight million creators in the past few years”.

“The chance before us is to reach more than 50 million creators.”

Daniel Ek

“But the chance ahead of us is to reach more than 50 million YouTubers,” he added. “And as part of that, it’s really about getting the audience of those 50 million potential YouTubers to listen to this content, become super fans, and create more and more tools for the YouTubers and fans to connect with each other and turn around this commitment to monetization opportunities and so on. “

Ek added, “So that’s really the type of main strategy, and a lot of it depends on a combination of platform improvements, discoverability, just presentations, and seeing new content.

“And then of course the content team and onboarding new creators and finding compelling ways to make creators feel like Spotify is the number one platform.

“When that happens, it’s a flywheel that becomes more creators, from more users to more creators, and so on and so on.”Music business worldwide

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