Spotify(US:SPOT)2025-02-05 21:55PART I Key Information This section details significant risks to Spotify's business, covering competitive pressures, content licensing, intellectual property, operational dependencies, regulatory challenges, financial metrics, indebtedness, taxation, and share ownership Risks Related to Business Model, Strategy, and Performance Spotify's growth and profitability face risks from intense competition, challenges in user monetization, and the uncertain profitability of new content formats like podcasts and audiobooks - The company faces robust competition from well-funded competitors like Apple, Alphabet, and Amazon, who leverage broader ecosystems and offer services at little to no profit303234 - While achieving an operating income of €1,365 million in 2024, Spotify incurred significant operating losses of €446 million in 2023 and €659 million in 2022, with a cumulative deficit of €3,044 million as of December 31, 202448 - Expansion into audiobooks and video content carries risks, with no guarantee of sufficient revenue to offset costs, increased capital requirements, or new competition4455 - The value of the long-term investment in Tencent Music Entertainment (TME) is subject to risks from TME's business and potential changes in Chinese government regulations on foreign investments60 Risks Related to Content Licensing Spotify's reliance on third-party content licenses, particularly from major labels, creates risks of unfavorable terms, increased royalty rates, and significant financial commitments not tied to growth - Content from Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin accounted for approximately 71% of audio content streams from record labels for the year ended December 31, 202468 - As of December 31, 2024, estimated future financial commitments under license agreements total €4.4 billion, which are not always tied to revenue or user growth, posing a risk to margins75 - A lawsuit by the Mechanical Licensing Collective (MLC) alleging underpayment of royalties for the Premium Service bundle was dismissed with prejudice on January 29, 2025, but the MLC retains appeal rights64 Risks Related to Intellectual Property The company faces risks from third-party intellectual property infringement claims, which can lead to costly litigation, and challenges in protecting its own IP, including potential disclosure requirements from open-source software use - Third parties frequently assert intellectual property infringement claims, potentially leading to significant defense costs, damages, or unfavorable license agreements8081 - Protecting the company's own intellectual property is difficult and costly, with risks of unauthorized copying and varying legal enforcement across jurisdictions8386 Risks Related to Operations Operational risks include dependency on third-party platforms, vulnerability to cyberattacks, and compliance with complex global regulations on data privacy, content moderation, and AI, which can increase costs and liabilities - Reliance on competing platforms like Apple and Google creates competitive disadvantages through restricted access, unfavorable payment terms, and data limitations; the European Commission fined Apple €1.84 billion in March 2024 for anti-competitive conduct following a Spotify complaint8889 - Vulnerability to sophisticated cyberattacks poses risks of regulatory fines, litigation, and loss of user trust, compounded by heavy reliance on Google Cloud Platform (GCP) for critical infrastructure9399 - Complex global regulations like GDPR, UK GDPR, and CCPA impose stringent data privacy requirements with penalties up to 4% of global annual turnover, while the EU's Digital Services Act (DSA) adds content moderation compliance costs103110112 - Reliance on Adyen and PayPal for payment processing exposes the company to significant harm from disruptions or non-compliance with payment card network rules122 Risks Related to Metrics The accuracy of key metrics like Monthly Active Users (MAUs) is subject to measurement challenges and manipulation attempts, which can distort data, harm reputation, and negatively impact financial results - Key metrics like MAUs are internally calculated and not independently validated, with potential overstatements due to multiple accounts or shared usage133 - Third-party attempts to artificially manipulate stream counts can distort data, harm relationships with rights holders and advertisers, and negatively affect key performance indicators136 Risks Related to Indebtedness Spotify's $1.5 billion in 0% Exchangeable Senior Notes due 2026 poses risks of limiting cash flow, restricting financing, and causing significant variability in reported net income due to fair value accounting - The company holds $1.5 billion in principal amount of 0% Exchangeable Senior Notes due 2026, increasing vulnerability to adverse economic conditions and limiting financial flexibility138 - Exchangeable Notes are accounted for at fair value through profit and loss, causing significant variability in reported net income due to fair value changes143 Risks Related to Tax Spotify faces complex tax risks including limitations on net operating loss carry-forwards, volatility from share price impact on social costs, and potential adverse consequences from international tax reforms or Passive Foreign Investment Company (PFIC) classification - Significant net operating loss carry-forwards, including €870 million in Sweden and €238 million in the U.S., may have limited utilization due to ownership change regulations145146147 - Social costs on share-based compensation fluctuate significantly with share price, impacting quarterly performance; 2024 expense was €291 million, compared to €71 million in 2023148149 - Evolving international tax reforms, including OECD's Pillar One and Pillar Two, could increase tax liability, with Luxembourg enacting Pillar Two legislation effective January 1, 2024153154 - Risk of Passive Foreign Investment Company (PFIC) classification could result in adverse U.S. federal income tax consequences for U.S. shareholders, though the company does not believe it was a PFIC for 2024157 Risks Related to Share Ownership Spotify's ordinary share price is volatile, and founders Daniel Ek and Martin Lorentzon maintain significant voting control, which may deter acquisitions and impact share price, with no expected dividends in the foreseeable future - The trading price of ordinary shares has been volatile, with a closing price range of $187.94 to $502.38 in 2024160 - As of December 31, 2024, founders Daniel Ek and Martin Lorentzon controlled a combined voting power of 70.7%, enabling control over substantially all shareholder matters167168 - The company has never paid cash dividends and does not intend to in the foreseeable future, meaning investor returns depend on share price appreciation164 Risks Related to Luxembourg Incorporation and Foreign Private Issuer Status As a foreign private issuer, Spotify is exempt from certain U.S. securities laws, potentially providing less information to investors, while enforcing U.S. judgments in Luxembourg is difficult due to differing shareholder rights and lack of reciprocal treaties - As a foreign private issuer, Spotify is exempt from certain SEC rules, including proxy and Section 16 'short-swing' profit recovery provisions, potentially leading to less available shareholder information171172 - Enforcing U.S. court judgments in Luxembourg is difficult due to the absence of a reciprocal recognition treaty, potentially hindering investors' ability to enforce U.S. federal securities law claims175176 Company Information This section details Spotify's business operations, dual revenue model, content offerings, global user base, licensing agreements, competitive landscape, human capital management, and physical properties Business Overview Spotify, the world's largest audio streaming service, operates a two-sided marketplace with 675 million MAUs and 263 million Premium Subscribers as of year-end 2024, offering diverse content and experiencing rapid growth in Latin America and Rest of World regions User Metrics as of December 31, 2024 | Metric | Value | Year-over-Year Growth | | :--- | :--- | :--- | | Monthly Active Users (MAUs) | 675 million | 12% | | Premium Subscribers | 263 million | 11% | - The content library includes over 100 million music tracks, 6.5 million podcast titles, and over 350,000 audiobooks available for purchase, with a subset for Premium subscribers183 MAU Growth by Region (2023 to 2024) | Region | % of Total MAUs | YoY Growth | | :--- | :--- | :--- | | Europe | 27% | 7% | | North America | 17% | 4% | | Latin America | 22% | 14% | | Rest of World | 34% | 20% | Licensing Agreements Spotify relies on complex licensing agreements with rights holders, including major music companies and Merlin, accounting for 71% of label-delivered audio streams, and obtains mechanical and public performance rights through compulsory licenses, direct deals, and collecting societies - Licenses with Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin accounted for approximately 71% of audio content streams from record labels for the year ended December 31, 2024206 - In the U.S., mechanical rights for musical compositions are obtained via a blanket compulsory license administered by the Mechanical Licensing Collective (MLC), with rates set by the Copyright Royalty Board210 Competition Spotify faces intense competition across music streaming, podcasts, audiobooks, and online advertising from major players like Apple Music, YouTube Music, Amazon Music, Audible, Alphabet, and Meta - Key competitors in music streaming include Apple Music, YouTube Music, and Amazon Music219 - In the podcast space, Spotify competes with Apple Podcasts, YouTube, and Audible219 - For advertising revenue, Spotify competes with large online platforms such as Alphabet, Meta, and Amazon219 Organizational Structure Spotify Technology S.A. is the parent company of a global group, with principal operating subsidiaries including Spotify AB in Sweden and Spotify USA Inc., alongside other entities for sales, marketing, and support services worldwide - The main operating company is Spotify AB in Sweden, with Spotify USA Inc. serving as the primary U.S. operating company233 Property, Plant and Equipment Spotify's principal offices are in Stockholm and New York; an Office Space Optimization Initiative in 2023 led to €43 million and €123 million in non-cash real estate impairment charges in 2024 and 2023, respectively - The company's main offices are located in Stockholm (approximately 485,000 sq ft) and New York (approximately 594,000 sq ft)234 - An Office Space Optimization Initiative resulted in non-cash impairment charges on real estate assets of €43 million in 2024 and €123 million in 2023235241 Operating and Financial Review and Prospects This section analyzes Spotify's financial performance, highlighting 18% total revenue growth to €15.7 billion in 2024, a significant turnaround to €1,365 million operating income, and continued user growth with 675 million MAUs and 263 million Premium Subscribers Key Performance Indicators Spotify's key user metrics showed solid growth in 2024, with MAUs increasing 12% to 675 million, Premium Subscribers growing 11% to 263 million, and Premium ARPU rising 7% to €4.69 due to price increases Key Performance Indicators (as of Dec 31, 2024) | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | MAUs (millions) | 675 | 602 | 12% | | Premium Subscribers (millions) | 263 | 236 | 11% | | Ad-Supported MAUs (millions) | 425 | 379 | 12% | | Premium ARPU (annual avg.) | €4.69 | €4.39 | 7% | Operating Results In 2024, total revenue grew 18% to €15,673 million, driven by 19% Premium revenue growth and 10% Ad-Supported revenue growth, leading to a significant gross margin improvement to 30% and an operating income of €1,365 million due to reduced operating expenses Revenue by Segment (in € millions) | Segment | 2024 (€ millions) | 2023 (€ millions) | % Change | | :--- | :--- | :--- | :--- | | Premium | 13,819 | 11,566 | 19% | | Ad-Supported | 1,854 | 1,681 | 10% | | Total | 15,673 | 13,247 | 18% | Gross Profit and Margin by Segment | Segment | Gross Profit 2024 (€ millions) | Gross Margin 2024 | Gross Profit 2023 (€ millions) | Gross Margin 2023 | | :--- | :--- | :--- | :--- | :--- | | Premium | 4,495 | 33% | 3,335 | 29% | | Ad-Supported | 229 | 12% | 62 | 4% | | Consolidated | 4,724 | 30% | 3,397 | 26% | Operating Expenses (in € millions) | Expense Category | 2024 (€ millions) | 2023 (€ millions) | % Change | | :--- | :--- | :--- | :--- | | Research and development | 1,486 | 1,725 | (14)% | | Sales and marketing | 1,392 | 1,533 | (9)% | | General and administrative | 481 | 585 | (18)% | Liquidity and Capital Resources Spotify's liquidity significantly strengthened in 2024, with cash and investments rising to €7,448 million, driven by €2,301 million in operating cash flow, while managing $1.5 billion in Exchangeable Notes and €8.3 billion in total contractual obligations - Cash, cash equivalents, and short-term investments increased by €3,234 million to €7,448 million as of December 31, 2024301 Cash Flow Summary (in € millions) | Cash Flow Activity | 2024 (€ millions) | 2023 (€ millions) | | :--- | :--- | :--- | | Net cash flows from operating activities | 2,301 | 680 | | Net cash flows used in investing activities | (1,486) | (217) | | Net cash flows from/(used in) financing activities | 729 | 234 | - Free Cash Flow for 2024 was €2,285 million, a significant increase from €678 million in 2023, primarily due to higher net cash from operating activities309311 Contractual Obligations as of Dec 31, 2024 (in € millions) | Obligation Type | Total (€ millions) | Less than 1 year (€ millions) | 1-3 years (€ millions) | | :--- | :--- | :--- | :--- | | Minimum guarantees | 4,420 | 3,021 | 1,395 | | Exchangeable Notes | 1,449 | — | 1,449 | | Lease obligations | 745 | 114 | 205 | | Purchase obligations | 1,687 | 598 | 991 | | Total | 8,316 | 3,748 | 4,040 | Critical Accounting Estimates Critical accounting estimates involve revenue recognition, share-based compensation valuation, complex royalty accruals, deferred tax asset assessment, legal contingencies, and fair value measurement of financial instruments like Exchangeable Notes - Estimating royalty costs is highly complex, involving judgments on rates for unidentified rights holders and potential duplicate claims; approximately €351 million of royalty liabilities as of December 31, 2024, were incurred more than 12 months prior331335 - The fair value of stock options is estimated using the Black-Scholes model, requiring subjective assumptions about volatility, expected term, and risk-free rates327 - The fair value of Exchangeable Notes is a critical estimate, determined using a binomial option pricing model and market prices, with the company's share price as a primary valuation driver339 - If the dismissed MLC lawsuit appeal were successful, additional royalties for March 1 to December 31, 2024, would be approximately €150 million, plus potential penalties and interest333 Directors, Senior Management, and Employees This section details Spotify's leadership, board structure, and employee base, including executive compensation programs and the average full-time employee count of 7,691 in 2024, reflecting recent reorganizations Directors and Senior Management Spotify's leadership includes founder and CEO Daniel Ek, co-founder Martin Lorentzon, and key executives, supported by a ten-member board of directors with diverse industry experience - The senior management team is led by Daniel Ek (Founder, CEO, Chairman), with key roles held by Christian Luiga (CFO), Alex Norström (Co-President, Chief Business Officer), and Gustav Söderström (Co-President, Chief Product & Technology Officer)351 Compensation Spotify's executive compensation program emphasizes equity and long-term shareholder value, with CEO Daniel Ek receiving no salary since 2017, and other named executive officers participating in a flexible incentive mix program - CEO Daniel Ek has not received a base salary since July 1, 2017391393 - The company offers an incentive mix program allowing employees to allocate awards among cash, RSUs, at-the-money options, and out-of-the-money options400 2024 Summary Compensation for Named Executive Officers | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | Daniel Ek | CEO | 667,308 | | Christian Luiga | CFO | 6,048,634 | | Dustee Jenkins | Chief Public Affairs Officer | 6,314,662 | | Alex Norström | Co-President, CBO | 16,607,071 | | Gustav Söderström | Co-President, CPTO | 18,733,869 | Employees In 2024, Spotify's average full-time employee count decreased to 7,691, with Research and Development being the largest department and the United States the largest geographical location Average Number of Employees by Department | Department | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Research and Development | 3,944 | 4,719 | (16)% | | Sales and Marketing | 2,177 | 2,403 | (9)% | | General and Administrative | 1,068 | 1,338 | (20)% | | Content Production and Customer Service | 502 | 663 | (24)% | | Total | 7,691 | 9,123 | (16)% | Major Shareholders and Related Party Transactions This section details Spotify's ownership structure, highlighting founders Daniel Ek and Martin Lorentzon's significant voting control of 29.1% and 41.6%, respectively, and the company's related party transaction policy Major Shareholder Voting Power (as of Dec 31, 2024) | Shareholder | % of Ordinary Shares | % of Beneficiary Certificates | % of Total Voting Power | | :--- | :--- | :--- | :--- | | Daniel Ek | 14.3% | 38.4% | 29.1% | | Martin Lorentzon | 9.8% | 61.6% | 41.6% | | Baillie Gifford & Co | 7.6% | — | 2.9% | | Tencent | 8.2% | — | — | - Beneficiary certificates carry no economic rights but provide one vote per certificate, significantly concentrating voting power with the founders475477 Financial Information This section covers Spotify's legal proceedings, including a dismissed MLC lawsuit subject to appeal, and its dividend policy, noting no cash dividends have been paid or are anticipated in the foreseeable future - The company has never declared or paid cash dividends and does not expect to in the foreseeable future, retaining earnings for working capital and general corporate purposes487 - A lawsuit by the Mechanical Licensing Collective (MLC) alleging underpayment of royalties was dismissed with prejudice in January 2025, but the MLC is entitled to appeal844901 Additional Information This section outlines material contracts, including an Investor Agreement with Tencent granting Daniel Ek's entity voting power, and key tax considerations for shareholders, covering Luxembourg withholding tax, potential PFIC classification for U.S. holders, and FATCA compliance - A material Investor Agreement with Tencent grants an entity controlled by CEO Daniel Ek the sole and exclusive right to vote Spotify securities beneficially owned by Tencent500 - For U.S. Holders, dividends are generally ordinary income, with a risk of Passive Foreign Investment Company (PFIC) classification leading to adverse tax consequences, though the company does not believe it was a PFIC in 2024544549 - Dividends are generally subject to a 15% withholding tax in Luxembourg, potentially reduced by double tax treaties, such as to 5% for a U.S. corporate holder owning at least 10% of voting stock510511 Market Risk Disclosures Spotify is exposed to currency, interest rate, share price, and investment risks, with significant sensitivity to exchange rate fluctuations, impacts on Exchangeable Notes and social costs from share price changes, and concentrated investment risk in Tencent Music Entertainment (TME) shares - Currency Risk: A 10% strengthening of the USD against the Euro would increase income before tax by €70 million, while a 10% strengthening of the SEK would decrease it by €16 million, as of December 31, 2024569570 - Interest Rate Risk: A hypothetical 100 basis point change in interest rates would have impacted interest income by €54 million for the year ended December 31, 2024572 - Share Price Risk: A 10% change in Spotify's share price would change the fair value of its Exchangeable Notes by approximately €30-36 million and change the accrual for social costs by €33 million as of December 31, 2024574 - Investment Risk: A 10% change in TME's share price would change the fair value of Spotify's investment by approximately €155-156 million as of December 31, 2024575 PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with Ernst & Young AB issuing an unqualified opinion on the latter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024584 - Management concluded that internal control over financial reporting was effective as of December 31, 2024, based on the COSO framework, with an audit by Ernst & Young AB confirming this assessment586 Corporate Governance & Cybersecurity This section details Spotify's corporate governance, including its Code of Conduct, adherence to Luxembourg governance practices as a foreign private issuer, and its cybersecurity risk management program overseen by the Audit Committee - As a foreign private issuer, Spotify is exempt from certain NYSE corporate governance requirements, including independent compensation committees and shareholder approval for all equity compensation plans600601 - The company's cybersecurity risk management program is integrated into enterprise risk management and overseen by the Audit Committee, which receives quarterly updates606609 - The company's Head of Security, with over 20 years of experience, is responsible for managing material cybersecurity risks612 PART III Financial Statements This section presents Spotify's audited consolidated financial statements for 2022-2024, prepared under IFRS, with Ernst & Young AB providing an unqualified opinion on both the financial statements and internal control over financial reporting Report of Independent Registered Public Accounting Firm Ernst & Young AB issued an unqualified opinion on Spotify's consolidated financial statements and internal control over financial reporting, identifying Music Royalty Costs as a Critical Audit Matter due to its complexity and judgment requirements - The auditor, Ernst & Young AB, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting633643 - The audit identified Music Royalty Costs as a Critical Audit Matter due to the complexity of proprietary systems, significant data volume, and judgment required for royalty calculations637639 Consolidated Financial Statements The consolidated financial statements show significant improvement in 2024, with net income of €1,138 million, total assets growing to €12,005 million, total equity more than doubling to €5,525 million, and operating cash flow increasing to €2,301 million Consolidated Statement of Operations (in € millions) | Line Item | 2024 (€ millions) | 2023 (€ millions) | 2022 (€ millions) | | :--- | :--- | :--- | :--- | | Revenue | 15,673 | 13,247 | 11,727 | | Gross profit | 4,724 | 3,397 | 2,926 | | Operating income/(loss) | 1,365 | (446) | (659) | | Net income/(loss) | 1,138 | (532) | (430) | | Diluted EPS (€) | 5.50 | (2.73) | (2.93) | Consolidated Statement of Financial Position (in € millions) | Line Item | Dec 31, 2024 (€ millions) | Dec 31, 2023 (€ millions) | | :--- | :--- | :--- | | Cash and cash equivalents | 4,781 | 3,114 | | Short term investments | 2,667 | 1,100 | | Total Assets | 12,005 | 8,346 | | Exchangeable Notes | 1,539 | 1,203 | | Total Liabilities | 6,480 | 5,823 | | Total Equity | 5,525 | 2,523 | Consolidated Statement of Cash Flows (in € millions) | Line Item | 2024 (€ millions) | 2023 (€ millions) | 2022 (€ millions) | | :--- | :--- | :--- | :--- | | Net cash flows from operating activities | 2,301 | 680 | 46 | | Net cash flows used in investing activities | (1,486) | (217) | (423) | | Net cash flows from/(used in) financing activities | 729 | 234 | (40) |