Spotify shuns traditional IPO, pitches growth to retail investors

LONDON/SAN FRANCISCO (Reuters) - Streaming music leader Spotify said on Thursday it has a clear path to profit as it spelled out to retail investors its growth plans and how it aims to fend off big rivals Apple Inc (AAPL.O) and Amazon.com Inc (AMZN.O) ahead of an unusual April 3 listing.

Chief Executive Daniel Ek made a direct pitch to individual investors during a public webcast that stood in place of a traditional closed-door “road show” typically used to woo institutional investors in initial public offerings (IPOs).

The Stockholm-based company’s stock will hit the public markets in a direct listing without traditional underwriters. Spotify must convince investors that its business is sound and that investors who buy shares in the public market debut will not be hurt by unexpected volatility.

“You won’t see us ringing any bells or throwing any parties,” Ek said. “Since Spotify isn’t selling any stock in the listing, we’re really entirely focused on the long-term performance of the business.”

With 71 million subscribers at the end of 2017, Spotify is the leader in streaming music, which is fast becoming the dominant form of paid music consumption. It also has 92 million users of its free, advertising-supported service, which acts to recruit new users to its premium, paid offering.

The independent service is jockeying against efforts from Apple, which has 38 million paid listeners and eschews advertising-supported services. Spotify says free users often become subscribers, giving the company a growth path that can help it keep ahead of Apple.

Apple, Spotify, Google and other services charge around $9.99 a month for music subscriptions. Amazon Prime service subscribers can get the music service for $7.99 a month.

Ek portrayed Spotify as an underdog not tied to a major technology company, and that its strategy is to be an ubiquitous music service across phones, smart speakers and desktops from various makers.

Because the company will not issue any new shares, it did not specify a listing price. Based on private transactions, it is valued at roughly $19 billion, according to Reuters calculations.

It has hired brokerage Morgan Stanley to match buy and sell orders to set its opening trading price and said it will provide financial guidance to investors on March 26.

STAYING AHEAD

Spotify executives also outlined its efforts to stay ahead of larger rivals.

Spotify research chief Gustav Soderstrom said the company is investing heavily to work with automakers to integrate Spotify into car audio systems, where listeners consume nearly a third of their music. These include Tesla Inc (TSLA.O) in Europe and infotainment platforms Apple CarPlay and Google Android Auto.

Marketing chief Seth Farbman cited the attention attracted by a whimsical offer to make former U.S. President Barack Obama “president of playlists” as an example of how Spotify could compete against Apple’s expensive billboard campaigns by garnering news stories and word of mouth.

Spotify also warned investors it faces a variety of risks.

It says the royalty costs it pays to artists and publishers are so difficult to calculate that in the past it has been unsure how much it owed, prompting what are known as “material weaknesses in internal controls” for each of the past three years with the danger of more in the future.

In addition, its music services are primarily delivered over devices such as Apple’s iPhone and Amazon.com’s Echo series of speakers, which could emphasize their own services over Spotify’s.

“Operating losses have grown with revenue, but the trend towards profitability is clear when you look at operating losses as a percentage of revenue,” the company said in the presentation in New York.

Revenue grew 39 percent to 4.09 billion euros ($5.04 billion) in 2017 from 2.95 billion euros in 2016, it said in a securities filing. At the same time, net financing costs of 855 million euros pushed up operating losses to 378 million euros from 349 million euros.