Spotify (SPOT 4.71%), the leader of the audio streaming market, reports its fourth quarter and full-year results before the market opens next Wednesday, Feb. 3. The company is making major investments in music as well as podcasts and audiobooks. Here's what investors should pay attention to in the report.
The core of Spotify's business is its music streaming subscription. Users pay monthly for unlimited access to tens of millions of songs. Right now, 90% of the company's revenue comes from this part of the business, driving the majority of its growth.
Investors should track average revenue per user (ARPU), a metric Spotify typically releases each quarter. This metric assesses the average monthly revenue generated by a single premium subscriber, and it has steadily fallen over the last few years, actually declining 10% year over year last quarter to 4.19 euros ($5.07). The company says this decrease was mainly due to growth in affordable family plans that can have up to six users. A decreasing ARPU is fine in the short run as the company wants to attract as many customers as it can from around the world, but over time, investors should expect this trend to reverse. If not, Spotify may have trouble growing its business and profits at maturity.
The top of the marketing funnel, and what makes up Spotify's "freemium" offering, is its ad-supported business. Last quarter, monthly active users (MAUs) for its ad-supported segment jumped 31% year over year to 185 million. The company currently generates minimal revenue from these users, but Spotify has shown it can convert over 40% of free users to paid subscribers over time, meaning that current ad-supported growth is an important precursor to future paid subscriber growth.
Ad-supported users are also important for Spotify's podcast initiatives. It is building what it calls Streaming Ad Insertion (SAI), a YouTube-like advertising network to help creators monetize their shows. If SAI is going to succeed, it will need millions of users listening to podcasts on Spotify. As more ad-supported users join the platform, more and more will likely choose to listen to podcasts through the service as well.
Since it went public, Spotify management has constantly been asked about expanding its gross margin. Right now, it has to pay around 70% to 75% of its revenue to music labels and artists (its cost of goods sold), making its gross margin a measly 25%. Its goal is to grow its gross margin over the next few years, but so far, it has had trouble doing so. In this earnings release, investors will get an update on what progress, if any, Spotify has made on that front.
Spotify has also invested heavily in podcasts over the last two years. It now owns multiple production studios, has made exclusive deals with popular showrunners like Joe Rogan and Michelle Obama, and owns two creation platforms (Anchor and Megaphone). Spotify will hopefully update investors on how many of its users listen to podcasts and the progress it is making with exclusive and original content and SAI. The company has spent close to $1 billion or more investing in podcasts, so shareholders should expect some return on that investment to happen eventually.
One quarter does not define a company, but this end-of-year update from Spotify will give investors another important glimpse into how the business is doing. If the company continues to grow users at a double-digit rate, expand gross margins, and showcase payoffs from its podcast-related acquisitions, investors can chalk it up as another quality quarter from the Swedish audio streamer.