2017 IPO Prospects: Spotify to go Public Soon

According to Goldman Sachs, the music industry will hit $41 billion in revenue by 2030 driven heavily by streaming revenue. Benefitting from this trend is Billion Dollar Unicorn Spotify, which is reportedly gearing up for a direct listing.

Spotify’s Journey

Stockholm, Sweden-based Spotify was founded in 2006 by serial entrepreneur Daniel Ek and Martin Lorentzon. The two developed and released the Spotify Swedish music streaming app in 2008.

Its app provides listeners with access to millions of digital music files from record labels and artists. Listeners can also use Spotify to create, share, and edit playlists with other users. It is also a music discovery site that provides music recommendations based on listening history and even creates a random playlist related to preferred artists. Besides mobile apps, Spotify has also expanded its market reach through tie-ups with companies like Sony to allow listeners to stream music through the PlayStation.

Since its release, the app has seen rapid adoption. Today, it has over 140 million regular listeners of which 60 million are paid subscribers around the world.

Last week, Spotify unveiled a new app called Spotify for Artists. It is a one-stop mobile version of its existing artist-centric dashboard client for tracking real-time statistics for new music, updating profiles, and gathering metrics about who is actually listening.

Spotify’s Acquisitions

This year, Spotify has acquired four companies for about 39 million euros ($42 million) in a combination of cash and stock.

In May, it acquired French AI startup Niland for its machine learning tools. The Niland team joined Spotify’s research and development (R&D) division in New York as part of the buyout.

In April, Spotify acquired blockchain firm Mediachain to move towards a more transparent and rewarding music industry for creators and rights owners.

In March, Spotify bought UK startup Sonalytic to both improve publishing data and reap the benefits of audio recognition technology. It also took over TV recommendation platform MightyTV to boost Spotify’s programmatic advertising abilities.

Spotify’s Financials

Spotify operates on an ad-based and a subscription-based model. The free subscription model is supported through advertising revenues. Subscribers can upgrade to a $9.99 per month rate plan to get an ad-free service that also allows them to download and listen to music offline.

Spotify has seen strong revenue growth. Revenues for fiscal 2016 grew by an impressive 52% to 2.93 billion euros ($3.5 billion) with paid subscriptions accounting for 90% of the revenue. However, profitability remains a concern, thanks to increasing licensing and operation costs. Royalty and distribution costs were about 85% of the revenue. Losses in 2016 grew 200% or doubled to 557 million euros ($660 million).

By region, US accounted for 40% of revenue and grew 58%, UK accounted for 12% and grew 27.5%, Sweden accounted for 7% and grew 11%, and the rest of the world grew 65%.

It recently reported that for the first half of 2017, it recorded revenue of $2.2 billion and is on track to grow 40% by the end of the year. Gross margins increased to 22% from 15% in 2016. Operating loss was between 100 million and 200 million euros ($118.4 million and $236.8 million), which suggests some improvement in profitability.

Spotify has raised $1.56 billion in venture funding from Asset Management Partners, Baillie Gifford, D.E. Shaw & Co., Discovery Capital, Goldman Sachs, GSV Capital, Halcyon Asset Management, Lansdowne Partners, Northzone, Rinkelberg Capital, Senvest Capital, Technology Crossover Ventures, TeliaSonera, Alexandre Mars, AFSquare, Fidelity Ventures, Lakestar, The Coca-Cola Company, 137 Ventures, Accel Partners, DST Global, Kleiner Perkins Caufield & Byers, Founders Fund, Sean Parker, Horizons Ventures, and Li Ka-shing. In March 2016, it raised $1 billion in convertible debt and was valued at over $8 billion. As of late September 2017, private trades in Spotify shares were valuing it at about $16 billion.

Spotify’s Direct Listing

Spotify has been thinking of going public for quite a while. However, the market has been harsh to companies like Snap that are struggling to show profits. To avoid the heartache of an IPO, Spotify has opted for a direct listing. According to the Wall Street Journal, a direct listing would allow Spotify to trade its shares publicly and there would be no restrictions on when insiders can sell their shares. However, it would not allow it to raise money as in a traditional IPO. It would primarily provide liquidity for its shareholders. Several analysts are skeptical about this move.

Last year, Spotify had taken loans of $1.5 billion that came with very strict covenants. The terms of the loan expect Spotify to pay big premiums in case an IPO is delayed over a year. This debt problem is probably forcing its hand to go public soon, even though the move poses risks due to its fundamental business model challenges.

This segment is a part in the series : 2017 IPO Prospects