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It's Official: Spotify Files for Direct Listing

By Evan Niu, CFA - Updated Mar 1, 2018 at 1:17PM

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The largest music-streaming service in the world prepares to go public.

After years of speculation, dominant music-streaming service Spotify has just filed its F-1 Registration Statement with the SEC, taking a tangible step toward going public. An F-1 is essentially the same as an S-1 Registration Statement, just for foreign issuers. In line with rumors, the company is indeed pursuing a direct listing instead of an initial public offering (IPO). The offering is not being underwritten by any investment banks, Spotify confirms in the filing, which does have some important implications and distinctions (more on that later).

Spotify plans to go public with the symbol "SPOT." Revenue in 2017 jumped nearly 40% to 4.1 billion euros ($5 billion), which translated into a net loss of 1.2 billion euros ($1.5 billion), and the company finished the year with 477 million euros ($582 million) on the balance sheet. Here's what else prospective investors need to know.

Spotify application on different devices

Spotify is the largest music-streaming service in the world. Image source: Spotify.

The top dog in music streaming

The Swedish company had announced last month that it hit 70 million paid subscribers. We now have more granular detail regarding the user base. The company has 159 million monthly active users (MAUs), of which 71 million are premium subscribers. That's almost exactly twice the 36 million subscribers that Apple (AAPL 2.45%) has for Apple Music.

Ad-supported listeners are the largest source of premium subscribers, contributing over 60% of gross premium subscriber additions since early 2014. Here's how the user base has grown over the past three years.

User Metric

2015

2016

2017

Ad-supported MAUs

64 million

77 million

92 million

Premium subscribers

28 million

48 million

71 million

Total MAUs

91 million

123 million

159 million

Data source: F-1. Figures shown as of year-end and may not sum due to rounding.

In terms of monetization and engagement, premium average revenue per user (ARPU) has declined in part due to family plans and student plans that offer bundles and discounts, while hours streamed continues to soar.

Metric

2015

2016

2017

Premium ARPU

7.06 euros ($8.61)

6 euros ($7.32)

5.24 euros ($6.39)

Content hours

5.1 billion

7.7 billion

11.4 billion

Data source: F-1. Euros converted to U.S. dollars based on current exchange rates.

The Wall Street Journal reported earlier this month that Apple Music was growing faster in the U.S., threatening to overtake Spotify in the important market as early as this summer. Spotify does provide a geographical breakdown of its MAU base as of the end of 2017.

Geographical Market

Percentage of MAUs

MAUs

Growth (YOY)

Europe

37%

58 million

26%

North America

32%

51 million

23%

Latin America

21%

33 million

37%

Rest of world

10%

16 million

51%

Data source: F-1. YOY = year over year.

Note that this breakdown shows total MAUs and doesn't show how fast U.S. premium subscribers are growing. Apple doesn't disclose a geographical breakdown of Apple Music subscribers, so we don't have enough public data to determine for sure if Apple Music will indeed overtake Spotify in U.S. paid subscribers soon.

Don't call it an IPO

Since this is a direct listing, the process will be quite different. Shares will simply start trading on the NYSE. Spotify isn't issuing any new shares as part of the listing, and as such will receive no proceeds or raise any capital for the company itself. Instead, certain registered shareholders will be able to sell some of their own holdings. The two most notable registered shareholders are co-founders Daniel Ek and Martin Lorentzon, who hold 23.8% and 12.4% of shares outstanding, respectively.

Daniel Ek speaking on stage at a press conference

Co-founder and CEO Daniel Ek. Image source: Spotify.

It's important to note that these shareholders are not obligated to sell shares. It's entirely up to them. It's not clear yet how many shares may or may not be made available in total, which will inevitably impact market dynamics. Unlike an IPO, there won't be an official offering price either, as no investment banks are crunching valuation numbers for the listing. It's going to be entirely up to the market, for better or for worse. From the filing:

Moreover, prior to the opening trade, there will not be a price at which underwriters initially sold ordinary shares to the public as there would be in an underwritten initial public offering. This lack of an initial public offering price could impact the range of buy and sell orders collected by the NYSE from various broker-dealers. Consequently, the public price of our ordinary shares may be more volatile than in an underwritten initial public offering and could, upon listing on the NYSE, decline significantly and rapidly. 

It's a risky proposition for investors, who often rely on investment bankers for some professional guidance on valuation. "In connection with the process described above, unlike in an underwritten initial public offering, a [designated market maker] in a direct listing may have less information available to it to determine the opening public price of our ordinary shares than a [designated market maker] would in an underwritten initial public offering," Spotify warns.

Investors won't be flying completely blind though. Spotify provides some historical share prices from 2017 for references. These figures are private market valuations based on a complex valuation methodology that's not worth detailing here.

2017

Fair Market Value

February

$50.70

May

$65.50

June

$69.03

August

$78.25

September

$87.68

November

$90.65

December

$120.50

Data source: F-1.

It's going to be a wild ride.

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