$spotify (spot.us)’s second quarter report was released before the U.S. stock market opened on July 23. What the market is most concerned about before the financial report is nothing more than the company's profit improvement. This is also the core logic behind Spotify’s stock price doubling since its first price increase last July.
Due to the hidden price increase of bundled packages in June, the market is paying attention to this second quarter report. In addition to the effect of price increases on gross profit margins, it is also looking forward to management 's users after the promotion of new bundled packages. Feedback, the actual optimization of content costs , and the mid- and long-term improvement goals of 's subsequent gross profit margin can give more descriptions and clear guidance.
Let’s look specifically at the core points of the financial report:
. Responding to expectations, gross profit margin gave positive guidance
q2 This financial report responded to some of the market’s expectations for the most concerning profitability issue: q2’s current profit slightly exceeded expectations, while the guidance for q3 was significant. Exceeded expectations.
Since operating expenses generally do not change much, spotify's profit elasticity mainly comes from gross profit margin, and the variable factor of gross profit margin mainly comes from content cost.
Dolphin split the estimated content costs through cost items. After adding the additional cost of audiobooks, the q2 content cost accounted for a small proportion of subscription revenue but dropped by 1pct. However, the implementation of "bundled packages" has not yet been fully implemented in the second quarter, indicating that even without bundled packages, spotify has been secretly weakening the influence of the three major labels through algorithm tilt and support for independent musicians..
The company's positive guidance for q3 actually implies management's high confidence in user feedback and cost optimization of the bundled package. For more description of the outlook, you can wait to hear the relevant answers from management on the conference call.
. Is your customer acquisition performance mediocre? Some expected a net increase of 11 million mau in the second quarter, which was lower than the original guidance of 16 million, and the outlook for the third quarter was also lower than expected.
Unlike netflix, spotify has not only paid users but also free advertising users, so the overall traffic pool mau is 626 million. Excluding the Chinese market, Spotify actually has a very high overall market share, and there are some plateaus in terms of customer acquisition. From a regional perspective, more user growth space comes from emerging regions, but this requires more investment in marketing and promotion. cost to stimulate user demand.
However, starting from the second half of last year, Spotify's sales expenses have declined year-on-year, which may have affected customer acquisition in emerging markets, causing the overall MAU to fall short of guidance for two consecutive quarters.
However, the third-party data platform of mau has been gradually publicly disclosed in the past three months, so some of the negative effects of this part have been reflected in the stock price.
. Subscriptions are strong, but advertising is a drag on
. The direct impact of mediocre customer acquisition, especially in emerging regions, is a drag on advertising revenue. In the second quarter, both advertising users and advertising revenue were lower than expected, and the growth rate slowed down significantly.
However, the number of subscribers, mainly in Europe and the United States, has grown steadily. Therefore, under the influence of price increases, the overall subscription revenue has basically reached the target.
. Profitability will lead to improvement in cash flow.
The improvement in main business profitability will naturally lead to a simultaneous improvement in cash flow. Spotify’s free cash flow reached a record high of 490 million euros in the second quarter. Free cash flow as a proportion of revenue also increased to 13%, an increase of more than 6 points from the previous quarter.
. Performance overview
Dolphin Investment Research View
In two in-depth reports more than a month ago, Dolphin actually mainly mentioned a logical point:
Due to the extremely high market share and competitive threats, the industry environment is not small. (less exclusive content advantage), if Spotify’s valuation wants to reach a higher level, wielding the sword against the copyright owners is the key. When will the share ratio of , which has been indestructible for many years, be permanently reduced? Then according to the current costs of Netflix and tme and future optimization expectations, there is still considerable room for Spotify's valuation.
In the same way, if it cannot be shaken in the short term, for example, the final solution for the bundled package is for Spotify to restore its original pricing system, then the short-term stimulation of performance and stock price brought by price increases alone will not be achieved when competitors do not follow up on price increases. If it goes down, it may face backlash from users, which means it is not safe in terms of valuation.
However, as the copyright association filed a lawsuit, Spotify launched a basic plan at the original price to block the issue (in fact, from the perspective of user habits and cost-effectiveness, we estimate that more than half of the users will still renew the original bundled plan by default). This situation It may be difficult to reach a conclusion in the short term. This may give Spotify a critical window period to lower its content sharing ratio, and the platform’s traffic hegemony will be fully demonstrated.
Therefore, although this financial report has flaws in user growth, on the core issues that the market is most concerned about, Spotify has basically responded to the market's expectations by relying on profit performance that slightly exceeded expectations for the current period and guidance that significantly exceeded expectations. In the next conference call, analysts will probably try different methods to ask management to share more user feedback on bundled packages. If you are interested, you can pay attention.
In terms of valuation, Spotify’s valuation is not low compared to similar technology stocks. Although there have been adjustments recently, it is still higher than our previous conservative expectations and slightly lower than the neutral expectations. However, due to the faster-than-expected profit improvement this time and the fact that this is the key turning point for spotify's cost optimization logic to be realized, the short-term stock price is expected to remain relatively strong.
The following is a detailed comment on the financial report
1. Customer acquisition was mediocre, perhaps due to reduced promotion
In the second quarter, spotify acquired 11 million customers, with an average monthly activity of 626 million. The increase mainly came from Europe and other regions, from third-party data Judging from the above, other regions are mainly Indonesia, Colombia and other places. This is related to the company’s growth strategy in the past two years. Asia and South America are markets where Spotify focuses on total traffic pool user penetration.
’s customer acquisition has fallen short of guidance for two consecutive quarters. Dolphin believes that it may be due to the reduction in promotional expenditures for one consecutive year. However, the surprise of increased gross profit margin outweighs the surprise of user growth. The market may default to the fact that the music streaming market has entered a steady state, so it is obviously more concerned about Spotify's profitability.
On the contrary, the payment situation is relatively stable. and from the perspective of paid subscription user groups, Europe and the United States are still the main force, which is not only reflected in the growth in the number of paying users brought about by high payment conversions, but also in the overall growth in subscription revenue due to the absolutely high per capita payment amount ARPU. effective support.
Therefore, the way the Spotify growth story is told is to make profits through the European and American markets, and at the same time use free advertising to attract users from emerging developing countries with low paying capacity, and circle the overall traffic pool of more than 600 million, waiting for future payment catalysis. Among the 626 million users of
as of Q2, there are 246 million paying users. The payment rate has trended downward in the past three years, and the current payment rate remains at 39.3%. Although users from emerging markets, which have been mainly added in the past two years, are more difficult to convert to payment than European and American users, which has lowered the payment rate, there is the possibility of conversion to payment in the future.
Regarding the guidance for the third quarter, the company expects MAU to increase by 13 million to 639 million, which is lower than the market expectation of a net increase of 19 million. However, the company's guidance for quarter-end subscribers of 251 million was basically in line with market expectations.
This actually reflects the situation that although the market is becoming saturated (emerging markets need to invest in user education), because of the early horse racing and encircling a user traffic pool of 630 million, Spotify can also convert it internally. To maintain the growth of subscribers and ensure the stability of performance.
2. Strong subscriptions, advertising drags down
In terms of revenue performance, the growth difference between free advertising users and paid users has brought about differences in different business growth trends. Coupled with the boost from price increases, subscription revenue growth remained stable at 20.8% in the second quarter, but advertising revenue slowed quickly to 13%.
Since subscription revenue accounts for 88% of Spotify’s revenue structure, the slowdown in advertising has not hindered it too much. The overall revenue growth rate still changes with changes in subscription revenue.
Looking forward to the third quarter, the company guided revenue of 4 billion euros, with an implied year-on-year growth rate of 19.2%, which is still mainly due to price increases (the United Kingdom and Australia also increased prices in the second quarter, following the United States), which is in line with market expectations and also It basically revolves around the short- and medium-term guidance previously given by management to "try our best to maintain a 20% revenue growth rate."
3. Gross profit margin exceeded expectations, and in addition to price increases, cost reduction is also on the way.
The most eye-catching aspect of the second quarter report is the profit side. In fact, the key is the performance of gross profit margin, which has increased by 1.6pct overall compared to Q1. Although operating expenses are also being compressed, compared with costs that account for nearly 70%, the impact on profits after optimization is not so obvious.
Among the costs, the cost of copyright content with an almost rigid sharing ratio is the most troublesome and accounts for the largest proportion. The actual amortization cost of own content is very small. Therefore, whether there is room for compression here depends on commercial negotiations between spotify and upstream content providers.
in "The price increase is more expensive than Apple Music, where is Spotify's confidence?" 》, Mr. Dolphin discussed the development of the music industry and the changes in the profit sharing ratio of the industry chain. Historically, the sharing ratio has not been absolutely rigid, and Spotify has twice lowered the sharing ratio for the three major labels.
As Spotify’s traffic grows step by step, the number of excellent works by small and medium-sized labels and independent musicians increases, and as a platform, Spotify has the ability to control the distribution of traffic through algorithms. In the past few years, the playback share of the three major labels on Spotify has been gradually reduced. Therefore, when the balance of power in the industry chain tilts towards Spotify, the rigid sharing ratio may no longer be rigid.
In fact, by splitting the cost items in the second quarter, Dolphin estimates that the proportion of content copyright costs in total revenue has dropped by approximately 1.3pct. After increasing the cost of audiobooks, the cost ratio can still decrease, which can explain certain problems:
On the one hand, it is the effect of price increase, on the other hand, the content cost also exists at a low base, and the growth rate is trending to further slow down. Explain the looseness divided into proportions.
In addition to natural content cost optimization, the bundled package launched by spotify in June also actively promoted the optimization rhythm. For details, you can review Dolphin Jun’s analysis of "Spotify: How much is Tencent Music worth?" ", final conclusion:
Through the bundled package, the cost shared by copyright owners has been reduced by 16%, and Spotify's gross profit margin is expected to increase by 1.5-3pct (corresponding to 50%-100% accepting +1 USD bundled package of music and audiobooks)
Finally, the increase in profits from the main business has also brought about a simultaneous improvement in cash flow. Spotify’s free cash flow reached a record high of 490 million euros in the second quarter. Free cash flow as a proportion of revenue also increased to 13%, an increase of more than 6 points from the previous quarter.
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