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Spotify told Wall Street it is going to have a very good year in 2018

Spotify goes public next week. Today it is telling Wall Street how it expects to do for 2018.

Short version: Spotify thinks it is going to do very well this year, by generating a big increase in revenue and paid subscribers, while improving its margins. And it thinks its losses will shrink.

It would be surprising if Spotify didn’t have a good story to tell at this point. Its shares will start trading — via a “direct listing” instead of a traditional IPO, next Tuesday, April 3.

Any company wants a good story ahead of its IPO, but given the novelty of Spotify’s offering — it is mostly, but not entirely, doing it without the support of traditional investment banks — it needs a very good story to reassure nervous institutions.

Here is Spotify’s version:

  • Spotify thinks it will end 2018 with as many as 96 million paid subscribers, up from 71 million last year. That would be an increase of up to 36 percent.
  • Spotify thinks revenue could hit $6.6 billion, up 30 percent. (An earlier version of this story incorrectly reported the top end of Spotify’s revenue estimate).
  • Crucially, Spotify thinks gross margins could get to 25 percent, up from 21 percent. This is the core of Spotify’s pitch to investors: As it gets bigger, it can improve its leverage with the big music labels, so it can get better terms. It also thinks it will find ways of generating revenue that aren’t dependent on deals with the big music labels. More on that later.
  • And that’s why Spotify thinks operating losses will shrink from $500 million to $409 million. As much as $50 million of those losses will be a one-time charge, generated by costs associated with its IPO.

Encouraging. And again, it would be surprising if it wasn’t.

Since we’re here, a couple things that stood out about Spotify’s predictions for its first quarter, which ends in a few days:

  • Spotify thinks gross margins could climb to 24 percent in Q1 alone. Again, that’s up from 21 percent at the end of last year, and looks like quite a steep ramp. Investors will want to know more about what made things move so quickly.
  • Spotify isn’t sure whether it added two million paid subs this quarter or five million or something in between. Spotify predicts paid subs will hit somewhere between 73 million and 76 million this quarter. Again, the quarter ends at the end of March, which is in a few days. You would think Spotify would have a more precise estimate of its customer base at this point, but maybe I’m missing something.

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