Spotify stock falls 7% on dismal outlook, after first earnings report

Continuing the trend that began nearly a decade ago, Spotify (SPOT) reported a loss for the first quarter despite higher revenues. Announcing the first quarterly results after last month’s IPO, the music streaming service guided second quarter revenues below expectations, sending the stock down more than 6% in the after-hours.

The Swedish firm posted a loss of EUR 1.01 per share in the first three months of 2018, compared to an EUR 1.15 per share loss last year. The improvement is attributable to a 26% growth in revenues to EUR 1.1 billion, which matched the Street view. However, the top line came in slightly below expectations, which is typical for companies reporting their first post-IPO results.

The total number of Monthly Active Users at the end of the quarter was 170 million, up 30% compared to last year. There were more than 75 million premium subscribers and 99 million ad-supported users, up 45% and 21% respectively.

The company sees a modest increase in its user base in the second quarter when revenue is expected to be in the range of EUR 1.1 billion to EUR 1.3 billion. Second-quarter operating loss is estimated to be between EUR 60 million and EUR 140 million. Full-year revenue is forecasted between EUR 4.9 billion and EUR 5.3 billion, and operating loss in the range of EUR 230 million and EUR 330 million.

Spotify became a publically traded company on April 3, 2018, when its shares started trading on the New York stock exchange. Despite being the world’s largest music streaming service, the company has been registering losses continuously since its inception ten years ago.

The company’s excessive reliance on record labels, which makes revenue generation difficult, has cast doubts on the feasibility of its business model. Spotify pays huge amounts as royalties on the music content it provides, while negative cash flow and mounting losses continue to squeeze its finances.

The number of Monthly Active Users was 170 million at the end of the quarter, up 30% compared to last year

For a turnaround, the company will have to improve margins by exploring sources of ancillary revenues independent of record labels, such as advertisement. Interestingly, Spotify is ruling the roost in the music streaming sphere with its impressive subscriber base that is more than double that of the closest rival Apple Music.

Shares of Spotify, which climbed more than 10% since the IPO, gained nearly 4% in Wednesday’s regular session. However, following the earnings announcement, the stock reversed the trend and dropped sharply in the extended trading hours.