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Spotify Had a Stellar Second Quarter with One Exception

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Spotify’s revenue surged 26%, but losses doubled

Music streaming giant Spotify (SPOT) announced its second-quarter results on Thursday, July 26. It was the company’s second earnings release since it became a public company.

It generated 1.27 billion euros (or $1.49 billion) in revenue for the quarter, up 26% from Q2 2017. Revenue rose 34% YoY (year-over-year) after adjusting for fluctuations in foreign exchange rates.

The company depends heavily on subscriber revenue, which came in at 1.15 billion euros (or $1.35 billion) in the second quarter, rising 27% YoY. About 90.6% of Spotify’s second-quarter revenue came from subscriber revenue. Its ad-based tier saw revenue growth of 20% to 123 million euros (or $144 million).

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Spotify’s gross margins expanded in the second quarter

Spotify’s net loss widened, however, in the second quarter. It more than doubled to 394 million euros ($461 million) compared to 188 million euros (or $220 million) in Q2 2017. Its expenditures surged since it used capital for music services. Its financial expenses increased as well.

Given the size of music labels such as Sony (SNE) Music, Universal Music Group, and Warner Music, Spotify doesn’t enjoy a decent bargaining power for royalty payments, which is a squeeze on its profitability.

But it looks like Spotify’s position is gradually improving. It reported a gross margin of 25.8% in the second quarter compared to 24.9% in the first quarter. The number has been increasing gradually over the years.

Despite Spotify’s widening losses, Wall Street liked its earnings report, and the stock rose 4.4% on July 26. In the next part, we’ll see how Spotify’s subscriber growth fared.

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