Spotify Technology S.A. – Profitability around the corner October 26, 2023 200

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 190.00
  • 3Q23 results were within expectations. 9M23 revenue was at 70% of our FY23e forecasts, with net loss ~EUR50mn less than our FY23e forecasts. We expect earnings to breakeven for 4Q23e.
  • 23mn/6mn new MAUs/Premium Subscribers both outperformed its own guidance by 2mn. 2nd largest Q3 MAU addition ever. Premium Subscriber-to-MAU ratio remains ~0.4x.
  • Gross margins improved across both Premium and Ad-supported, driven by efficiencies due to scale and lowered cost structure of its podcasts. SPOT is expecting positive operating income moving forward.
  • As a result of improving profitability and lower OPEX spend, we raise our FY24e EBITDA by 42% (or EUR161mn). We maintain ACCUMULATE with a raised DCF target price of US$190.00 (prev. US$162.00) to reflect a faster rate of margin expansion. Our WACC/growth rate assumptions of 7.5%/4% remain unchanged.



The Positives

+ User metrics continue to outperform even after price hikes.  SPOT’s outperformance in subscribers was the main driver for its slight revenue beat. The company added 6mn new premium subscribers (16% YoY) even after it raised prices during the quarter, and 23mn MAUs (26% YoY), both ahead of guidance by 2mn – indicating low levels of churn. The 23mn new MAUs was also SPOT’s 2nd largest Q3 addition ever. SPOT guided to 601mn MAUs (23% YoY) and 235mn Premium Subscribers (15% YoY) by the end of FY23e. We view user and subscriber growth as key, given that the company is still in its scaling up phase and has not yet begun to efficiently monetise its users.

+ Margins improving across both premium and ad-supported. Overall gross margins saw a 166bps YoY improvement to 26.4%, with margin expansion across both Premium and Ad-Supported businesses. Premium gross margin was 29.1%, the highest for any Q3, driven by efficiencies from scale, while ad-supported gross margin was 8.3%, a 646bps increase YoY as podcast margins improved. Overall margin expansion reflected improvements in both music profitability and podcast trends. Gross margin beat guidance by 40bps, with expectations for sequential expansion in 4Q23e.

+ Profitabilty seems to have reached an inflection point. With the increase in gross margins, operating profits returned, with SPOT posting EUR32mn in operating income – beating its own guidance by EUR77mn, on lower marketing and personnel costs. Operating leverage seems to have returned, signaling a potential inflection point for profits moving forward as revenue growth (11% YoY) outpaces OPEX (-13% YoY). As a result, we forecast a EUR162mn improvement in PATMI for FY24e.



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

ARPU (Average Revenue per User): premium revenue for period divided by average number of premium subscribers for same period.



The Negative

– Nil.

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Jonathan Woo
Research Analyst

Jonathan covers the US technology sector focusing on internet companies. Formerly a national and professional athlete, he graduated from the University of Oregon with a Bachelor’s Degree in Social Sciences.

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