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Spotify forecasts shrinking losses as it prepares for IPO

Spotify forecasts shrinking losses as it prepares for IPO

March 26
20:16 2018

Spotify forecast that losses would shrink and gross margins improve this year, even as its sales growth slowed, as the music streaming company disclosed the last financial information to potential investors before its unconventional initial public offering next week.

The company’s first ever guidance, revealed on Monday, said sales would rise to between €4.9bn and €5.3bn this year as the company expanded to more than 200m users. This would represent sales growth of 20 per cent to 30 per cent year on year — a slowdown from the 38 per cent jump Spotify posted in 2017. 

Spotify argues that its business model makes more sense the bigger it becomes. Monday’s guidance reiterated that the company anticipated its sharp margin improvement would continue, on the back of more favourable licensing deals with the big record labels that supply its songs. The company expects gross margins of 23 per cent to 25 per cent in 2018, almost double the 14 per cent margins it posted in 2016. 

Spotify’s guidance, along with regulatory filings last month, present a picture of a company growing at a torrid pace whilst grappling with an unforgiving cost structure that has prevented it from turning a profit. As it prepares for the public listing on April 3, the pioneer of music streaming is attempting to convince investors that it can translate its cultural clout into a sustainable business model.

The company warned in a prospectus to investors last month that “we have incurred significant operating losses in the past and we may not be able to generate sufficient revenue to be profitable”.

Spotify does not expect that to change this year: the company predicts an operating loss of €230m to €330m in 2018, after losing €378m last year. 

The company forecast it would have up to 96m paying subscribers by the end of this year — up about a third from a year ago. But this is a deceleration, after the company expanded its paying customer base 46 per cent in 2017. 

The company is sidestepping the traditional route to public ownership, which Daniel Ek, chief executive, said was “not good for us” — instead opting for a direct listing. The strategy will help save cash as it avoids many of the fees of the Wall Street underwriting process. Spotify said it was paying up to €40m for the direct listing, which it will expense in the second quarter. This is about half the price Snap paid for its traditional IPO last year. 

The growing popularity of music streaming has revived an industry that had been in long-term decline. US music sales increased 16.5 per cent to $8.7bn last year, the fastest pace in 23 years.

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