Spotify Just Reached 300 Million Paying Subscribers. No Audio Streaming Service Has Ever Done That.
Key Points
Spotify ended the second quarter with 300 million Premium subscribers, up 9% year over year.
Gross margin hit 33.4%, an all-time record for the company.
Guidance calls for 305 million subscribers next quarter at a slightly lower gross margin.
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Spotify (NYSE: SPOT) ended the second quarter with 300 million Premium subscribers -- a level the company says no audio streaming service has ever reached. The milestone came in Tuesday's report, which showed the streaming giant added 7 million paying subscribers during the period, for year-over-year growth of 9%.
The rest of the report was strong, too. Monthly active users grew 12% year over year to 777 million. Revenue rose 14% to 4.8 billion euros. And gross margin (the share of each euro left after paying music rights holders and other direct costs) hit 33.4%, an all-time record for the company.
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Scale is showing up in the profit lines
For investors, the economics underneath the milestone arguably matter more than the round number. Operating income climbed 61% year over year to 655 million euros. And Spotify generated 545 million euros of net income, swinging from a loss in the same quarter last year.
The subscription business is doing the pulling. Premium revenue made up 4.3 billion euros of the quarter's 4.8 billion total, growing 16% year over year on a constant-currency basis. Ad-supported revenue, a slice worth less than a tenth of the total, grew just 3% on the same basis.
On top of that, the average Premium subscriber is paying about 7% more than a year ago -- evidence the company could keep raising prices without stalling subscriber growth.
Guidance is where the report gets more complicated. For the third quarter, Spotify projects 305 million Premium subscribers, 788 million monthly active users (11 million more listeners in a single quarter), and revenue of 5.0 billion euros. But it also guided for gross margin of 32.9%, a step down from the second quarter's record, with operating income of 670 million euros as the company reinvests in the business.
So does crossing 300 million change the economics? The scale already has. A record gross margin, operating income up 61%, and pricing power across a subscriber base no rival has matched mostly come from the same source, and the milestone confirms how durable that source is.
Ultimately, the number to watch from here isn't the subscriber count. It's gross margin. If the line resumes climbing after the guided dip, scale is still paying investors. If the dip lingers, direct costs are eating more of each euro than growth is adding.
Shares slipped Tuesday to around $476 as of this writing, well below the $748.30 they reached within the past year. For a business compounding subscribers, revenue, and margin at the same time, that gap could be worth investors' attention.
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Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
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