Spotify turns profit again in Q3 despite €9m of 'lost' ad revenue

Migrating from Google's ad stack led to about €9m in lost revenue, company said.

Spotify: total revenue grew 28% in the quarter
Spotify: total revenue grew 28% in the quarter

Spotify has posted a surprise operating profit of €54m for its third quarter – only the second time in its history the streaming service has not made a loss – despite underperforming in advertising revenue.

In its letter to shareholders, the brand noted several reasons for meeting or exceeding expectations, including fast user growth in south-east Asia and India, and "exponential" growth in podcast engagement.

Spotify posted total revenue of €1.7bn in the quarter, an increase of 28% year on year. However, while its paid-for premium segment outperformed, its ad-supported business was weaker than forecast. Premium revenue reached €1.56bn, up 29%, while ad-supported revenue was €170m, up 20%.

The company said that roughly 80% of the ad-supported revenue miss was related to self-inflicted implementation and integration issues experienced with migration from Google’s DoubleClick Sales Manager, which was retired in July. This resulted in a combination of lost orders and under-delivery of other orders totalling about €9m of "lost" revenue, Spotify said.

Co-founder and chief executive Daniel Ek said during a call with analysts that the lost revenue was not due to a loss in demand: "The core thing I would want you to know is that there was demand for that product; we were just simply unable to run it on the site. And the ad business today is performing strongly.

"So, I own that miss. It’s embarrassing, but it’s not related to the strength of business."

Accordingly, the streaming service experienced a slowdown in programmatic growth from 65% year on year in the second quarter to 48% in the third quarter, mostly related to a slowdown in video PMP revenue.

A bright spot was podcasting revenue, which outperformed expectations with strong year-on-year growth. But it is still a relatively small slice of the total ad-supported business at less than 10% of total ad revenues.

Podcast hours streamed grew 39% quarter on quarter, with podcast adoption reaching almost 14% of total monthly active users. The US accounts for the largest share of podcast streams, but share of listening is higher and growing faster in several European countries, Spotify said. It also said it is seeing increased conversion from music listeners who do engage in podcasts from ad-supported to premium. The service now offers more than 500,000 podcast titles and launched 22 original and exclusive titles from Spotify Studios in the third quarter.

Chief financial officer Barry McCarthy (who is to step down in 2020, it was announced during the results) said on the call that the business is likely to lean in to podcast investment "more aggressively because of the success we’re having".

Overall, total MAUs grew 30% year on year to 248 million, with developing regions including Latin America, south-east Asia and India a "significant driver" of this outperformance.

The service said south-east Asia remains its fastest-growing region (excluding India) and year-on-year growth in the third quarter accelerated by 1400 basis points versus the same period in 2018.

Spotify finished the third quarter with 113 million premium subscribers globally, up 31% year on year, which it said was led by strong performance in its family and student plans after a string of new products and promotions, including a 90-day free trial.

It said it is adding roughly twice as many subscribers per month as Apple, according to publicly available data, and has roughly twice as high monthly engagement and half the churn rate as its rival. Spotify also estimated that it is adding more users on an absolute basis than Amazon and has a higher proportion of premium subscribers, concluding that it "continues to feel very good" about its competitive position in the market.

A version of this story first appeared on Campaign Asia-Pacific

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