Spotify’s Growth Comes With Improved Gross Margins As It Approaches IPO

Morning Report: Spotify’s first profitability metric is improving, but, according to The Information, the streaming company’s operating losses persist as the company grows.

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Global music streaming service Spotify grew around 40 percent to earn revenue of $2.2 billion in the first half of 2017, losing “between 100 million and 200 million euros” during the same six month period, according to a new report in The Information. The same piece notes that the company’s gross margins improved to 22 percent in the first two quarters of 2017, up 7 percent from its H1’16 result of 15 percent.

We can compare the above to what we know about Spotify’s financial performance, which includes its 2016, 2015, and 2014 results. To remind ourselves, here are two sets of numbers that we reported back in June:

• Spotify 2014 revenue: €1.08 billion.
• Spotify 2015 revenue:  €1.93 billion (+77.9 percent).
• Spotify 2016 revenue: €2.93 billion (+52.1 percent).

And here’s Spotify’s gross margin:

• Spotify 2014 gross margin: 16.1 percent.
• Spotify 2015 gross margin: 13.7 percent.
• Spotify 2016 gross margin: 15.4 percent.

In case you wanted to do a more direct comparison, the company’s H1’17 result of $2.2 billion is, in fact, €1.9 billion.

What is notable however is how far Spotify — a private unicorn that has raised over $1 billion and is valued at more than $8 billion — managed to improve its gross profit  in just one year. The 22 percent figure, provided that The Information has a fully-loaded COGS number to riff from, is up more than 40 percent in a year’s time. That is a dramatic change, and, given that the firm has huge revenues, implies a huge change in how it generates margin to pay for its operations.

If the company can use its expanded gross profit to lower its net losses while avoiding expense creep, Spotify’s march to IPO might not be as long as we expected.

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