Spotify’s premium subscriber growth trails estimates

Spotify Technology SA reported slightly slower subscriber growth than investors had hoped for its fiscal second quarter, overshadowing revenue gains and a narrower loss.

The music-streaming company ended the most recent quarter with 108 million subscribers to its premium service, a shade below the 108.5 million forecast by analysts and below the midline of Spotify’s internal forecast.

“We missed on subs. That’s on us,” chief executive officer Daniel Ek said on a conference call. He said the shortfall was related to execution, in particular the failure to market a plan for students, and the streaming giant plans to make up the lost ground by year-end.The shares fell as much as 6.1% in New York trading before paring declines, closing down 0.2% to $154.94.

The stock has gained 37% this year.Investors have high expectations for Spotify, the world’s largest paid online music service, and have sent shares down after almost all of its earnings reports as a public company. Spotify came in at the higher end of forecasts for most of its financial metrics, including sales and profit.

“This company is owned for subscriber beats and while management is likely to sound positive on the call, the subscriber miss is unlikely to be forgiven,” Lynx Equity Strategies analyst Jahanara Nissar wrote in a note.

Competition Worries

Investors have worried competition from Apple Inc., Inc. and Alphabet Inc’s YouTube would slow Spotify’s growth. But Spotify said its subscribers grew 31% compared with a year ago, about double the rate of Apple Music, its closest competitor.

Spotify’s overall user base grew to 232 million, above Wall Street projections of about 227 million and the company’s guidance for a range of 222 million to 228 million. Most of those people use the free, advertising-supported version of the service.

Barry McCarthy, Spotify’s chief financial officer, at first dismissed the brief downturn before saying investors may have expected a higher number.

“There could have been a baked-in whisper number we don’t know about,” McCarthy said. “There are times when investors are looking south instead of north and miss the forest through the trees.”

Spotify said it has reached agreement with two of four major record labels regarding licenses. Getting to long-term profitability from the current losses will hinge in a big way on the new royalty arrangements the company is negotiating with major music labels. Music companies collect the majority of Spotify’s monthly sales.

Deals restructured

Spotify restructured the deals such that it can create new tools and services – new sources of revenue – that are free from labels’ guaranteed cut of sales. McCarthy described it as an important win.

The Stockholm-based company reported a second-quarter loss of 42 cents a share, narrower than the year-earlier loss of $2.20 a share. Analysts expect quarterly losses at least through the third quarter of 2020.

Podcasts may help Spotify’s push for profitability. Spotify has redesigned its app to boost listenership of non-music programming, and spent about $400 million to acquire podcasting companies this year. The company has backed the production of original podcasts such as “Jemele Hill Is Unbothered” and “The Two Princes.”

Though Apple is the dominant podcasting platform in the US, Spotify has increased its share and staked out a leading position in some international territories.

Growth outside the US will be key if Spotify is to keep investors happy. The company still relies on North America and Europe for more than half of its customers, while those regions account for less than one-quarter of the global population. “Overall we are still in the growth phase of the business,” Ek said.

Read: Spotify Lite launches in South Africa

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Spotify’s premium subscriber growth trails estimates