Spotify's (SPOT -0.48%) quarterly reports are a great example of why investors should dig deeper into companies' full releases rather than just focusing on the drastic headlines. Indeed, this company is one for which I intentionally stay away from the news on earnings days so I can look at the results and make my own assessment before reading what the rest of the market thinks.
In 2022's first quarter, I was looking for continued steady growth in Spotify's music and subscription business, larger growth in its podcasting business, strong revenue growth, and improving margins in the advertising business. Long term, I think the company's upside potential will come from pairing creators with listeners and serving relevant ads or attractive subscription deals, which is why I chose these metrics. Here's what I saw from Spotify's earnings report.
Image source: Getty Images.
Advertising is the key for Spotify
Spotify is still relatively new in the advertising market, and it's key for the company to start growing and expanding margins. It's also critical to consider the backdrop of weak advertising spending and user-tracking transparency changes from Apple (AAPL 0.22%) that will hurt its monetization short term, just like every other ad-based streaming company.
It's encouraging that Spotify's ad-supported monthly active users were up 21% year over year to 252 million and ad revenue jumped 31% to 282 million euros. Revenue per customer was just 1.12 euros in the quarter compared to 13.07 euros per premium customer.
| Plan Category | Revenue Per User in Q1 2022 | Growth Rate YOY |
|---|---|---|
| Premium | 13.07 euros | 7% |
| Ad supported | 1.12 euros | 7.8% |
Source: Spotify Q1 2022 earnings report.
Right now, advertising spending overall is under pressure, so it's a positive sign that Spotify is growing advertising revenue per user while also growing its user base.
On margins, the news wasn't as encouraging. After trending positive for most of the last year, the gross margin for Spotify's ad-supported service was negative 1.5%, a decline of 584 basis points from a year earlier. Management said this was partially due to seasonality and added costs from podcasting, which are all rolled into the ad business, but this was a disappointing result nonetheless.
Premium and Russia
The two other notable trends in Q1 were that the streamer's premium user base grew by 15% to 182 million, including 1.5 million lost customers in Russia. Management expects to end the second quarter with 187 million premium subscribers, even when factoring in another 600,000 who will be disconnected in Russia.
That 15% growth in Q1 is a great growth number and it looks like management expects more customers to choose premium next quarter. As long as Spotify can keep pushing up the revenue channel, it will continue growing.
The bottom line for Spotify
There are certainly headwinds for Spotify -- the negative impact of exiting Russia, a slowdown of advertising spending, a challenging economy, and fierce competition in music and podcasts. Naturally, customers are assessing how many streaming subscriptions they are willing to pay for.
But even with that backdrop, the company reported:
- Monthly active users were up 19%, including 15% growth in premium subscribers.
- Revenue was up 24%, including a 31% jump in ad revenue.
- Gross profit margin was down slightly to 25.2%, in part because of heavy investments in podcast content and infrastructure.
- Net income of 131 million euros, or 0.21 euros per share.
- Free cash flow of 22 million euros in the quarter.
Spotify is growing by double-digit percentages, it's profitable, and it's investing in a podcasting business that could be a huge part of its future financial success. I like where the company is going and its earnings trends, even if the market wasn't happy with its results this week and sent its stock tumbling.
Sometimes it helps to take a step back and review companies' results with fresh eyes rather than starting with analysts' opinions as a benchmark. Taking a clear look at things now, Shopify's Q1 results look pretty solid in today's market.
