Spotify touts growth over profits in listing pitch to retail investors

LONDON/SAN FRANCISCO (Reuters) - Streaming music leader Spotify used its cultural cool factor to appeal to mom-and-pop investors in an unconventional presentation ahead of its April 3 stock market listing.

Led by 35-year-old Chief Executive Daniel Ek, wearing jeans, white t-shirt and a dark blazer, executives said Spotify would prioritize growth over profits to fend off big rivals Apple Inc (AAPL.O) and Amazon.com Inc (AMZN.O), while also seeing a clear path to making money.

Ek’s team made a direct case to individual investors in a public webcast instead 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. It 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.”

The direct listing is critical to alleviating Spotify’s losses, which are driven by financing costs, and will enable all late-stage investors to convert debt holdings into equity.

Spotify’s 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.

Chief Financial Officer Barry McCarthy, the former long-serving CFO of streaming video giant Netflix Inc (NFLX.O), said Spotify’s strategy was to prioritize growth before short-term profitability, and that greater scale would enable profit margins to swell.

With 71 million subscribers at the end of 2017, Spotify is the leader in streaming music. It also has 92 million users of its free, advertising-supported service, which it says delivers a constant stream of converts to its paid offering. That will keep it ahead of Apple, the company believes.

Tomas Otterbeck, an equities analyst with Swedish research firm Redeye, said he was impressed by McCarthy repeating the idea that “We are playing a market share game” and that Spotify could reach 100 million paying subscribers by early next year.

The independent service is jockeying against efforts from Apple, which has 38 million paid listeners and eschews advertising-supported services.

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, describing a strategy to be a ubiquitous music service available across phones, computers, smart speakers and car entertainment systems.

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

McCarthy spelled out Spotify’s long-term operating targets for generating sustained free cash flow, with annual revenue growth between 25 and 35 percent and gross margin between 30 and35 percent - ambitious for a loss-making company.

Helping listeners find new bands and songs is an “infinitely larger” opportunity in music than so-called discovery was for video, McCarthy said, comparing Netflix’s rapid rise from mail-order DVD distribution into a streaming media service to Spotify’s audio streaming business.

Spotify could devour the $28 billion, advertising-driven radio market, he said. Advertising makes up only about 10 percent of Spotify’s current revenue, and McCarthy said he would be “thrilled” if Spotify could pull in 20 percent of its revenue from ads, although he expressed some doubt about whether the company could hit that mark.

“There is an enormous pay-off for whoever wins. Now it remains to be seen whether we will win, but that’s the game we are playing,” he said.