• 4Q23 results were within expectations. FY23 revenue was at 97% of our FY23e forecasts, with a net loss of ~EUR30mn more than our FY23e forecasts. SPOT added 113mn/31mn MAU/Premium Subs in FY23.
• MAU/Premium Subs outperformance keeping SPOT’s growth story intact; revenue growth of 16% YoY (20% FX neutral) accelerating into FY24e.
• Margins and profitability at an inflection point due to SPOT reaching scale; we expect a ~250bps increase in FY24e gross margin due to better monetisation.
• Due to increasing scale and operating leverage, we raise our FY24e PATMI by ~4x to EUR593mn. Our revenue forecast remains unchanged. We roll over an additional year of valuations and maintain our ACCUMULATE recommendation with a raised DCF target price of US$270 (prev. US$190) to reflect our assumptions. Our WACC/growth rate of 7.5%/4% remains unchanged.

The Positives

+ Revenue growth accelerating into FY24e with 28mn new MAUs, 10mn new premium subscribers. SPOT again exceeded its user growth expectations with 23%/15% YoY growth in MAU/Premium Subs. It ended FY23 adding 113mn monthly users, and 31mn new premium subscribers (Figure 1). MAU growth is extremely important for SPOT as it is the main channel used to convert free-to-listen users into premium subscribers. The outperformance in users, together with price increases mid-4Q23, drove an acceleration in revenue growth (4Q23: 16% YoY vs 3Q23: 11% YoY) – with SPOT also expecting growth to accelerate in FY24e.

+ Positive commentary on margins, focusing on monetisation for FY24e. Management was positive on its expanding margins, with 4Q23 gross margin of 26.7% 10bps above guidance. SPOT spent much of FY23 working on being more efficient in terms of investments and costs,  from laying off employees to cutting non-performing content. Moving into FY24e, we expect gross margins to expand by ~250bps with sequential increases QoQ, driven by: 1) price increases; 2) improving efficiencies of scale; 3) better monetisation of Podcasts and advertising; and 4) improved deals with record labels/agencies.

+ Remaining focused on prudent spending moving forward. SPOT provided some near-term clarity for spending, saying that it would raise investment hurdle rates, and remain prudent on future spending – as it looks to balance growth and profitability. We forecast FY24e OPEX to decline -5% YoY due to the lumpiness of spend in FY22 and FY23, but to remain in line with its long-term linear trend. Long-term growth remains a key focus for SPOT, but we expect FY24e to be a year of monetising its ever-growing user base given its latest commentary.

The Negative

– Nil.

MAU (Monthly Active User): average number of active users during a month.