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Spotify Highlights Growth, Profitability, and Podcasts in Q2

By Stephen Lovely – Updated Aug 21, 2019 at 8:19AM

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The company still isn't making money, but it's making progress.

Spotify (SPOT) announced its quarterly earnings at the end of July. Despite a mixed market reaction to the report, there was plenty of good news to be found in the results.

Most importantly, management offered hints that the company's strategy is evolving with podcasts and original content in the spotlight. Here are three of the biggest takeaways for investors.

Subscribership is growing, despite disappointments

Spotify's subscriber growth numbers were a mixed bag. The headline is undoubtedly the overall growth of premium subscribers, which didn't quite meet expectations. Spotify had 108 million premium subscribers at the end of the quarter, which was within the projected range of 107 million to 110 million but below the midpoint for that range.

Still, a 31% increase in premium subscribers year over year is hardly a disaster for the company. And in monthly active users (MAUs), Spotify saw growth that exceeded expectations. A 29% year-over-year gain gave Spotify 232 million MAUs at the close of the period, higher than the upper bound of the guidance range of 222 million to 228 million.

MAUs are important, of course. Active users are the sorts of customers that Spotify can reasonably expect to stick with the service, and users that listen to a lot of music and (especially) podcasts give Spotify information about their habits that can be valuable to advertisers. The data side of Spotify's business has increasingly been a priority for the company.

Spotify is (still) not making profits

Like some other tech companies, Spotify does not appear overly concerned about its short-term bottom line. The audio streamer made headlines by turning a profit earlier this year precisely because it virtually never makes a profit. I've written at length before about why Spotify isn't profitable, but the bottom line is that this quarter was typical in that regard. Spotify posted a loss of 0.42 euros per share, which was a little bit more than the projected loss of 0.36 euros per share.

And Spotify doesn't expect this to change much next quarter. The company's third quarter guidance projects an operating profit/loss of between 2 million euros in profits and 78 million euros in losses.

The investment in podcasts is taking off

Spotify's mildly disappointing premium subscriber growth was offset a bit by the company's better-than-expected increase in MAUs. But nearly as important as the existence of those active users is what they're listening to on the service.

As discussed above, Spotify is very interested in monetizing the data that it has on its subscribers. The more Spotify knows about its users, the more tools for targeting ads the company can provide to advertisers. As it turns out, not all content is created equal when it comes to building a user's profile. Tastes in podcasts are much more revealing than tastes in music.

And that's why Spotify has made some big investments in the podcasting space lately -- including an impressive $500 million pledged to buying up podcasting companies. Spotify wants its users devouring podcasts, and Spotify-owned exclusives in particular.

And Spotify's latest earnings report had some very good news on that front. Per the report, podcast listeners grew by nearly 50% quarter over quarter. More impressive still, podcast listeners have doubled since the beginning of this year.

Of course, before this year, the podcast audience was pretty small, and Spotify's shareholder letter concedes that the company's podcasting business is "still relatively small." Still, the company says "tens of millions" of streamers are in its podcast audience, and it's clear that things are moving in the right direction. Podcasts will be very important to Spotify's future.

Stephen Lovely has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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