Spotify Annual Report 2021

Spotify Annual Report 2021

HORIZONS

TABLE OF CONTENTS

LETTER TO SHAREHOLDERS

2021 was an eventful year for Spotify and the world in general. Throughout the pandemic, businesses have seen enormous disruption in consumer behavior causing demand curves to shift – and Spotify, of course, has been no exception. In our case, these shifts mostly played to our advantage. But we did see some headwinds in the first half of 2021. By the end of Q2 we saw a reversal back to positive momentum and this trend continued.

Historically, Q4 has been our biggest quarter and 2021 was no exception. In fact, Q4 was our largest quarter of MAU growth in Spotify’s history. A significant MAU driver was our 7th annual Wrapped campaign, which was our most successful to date. With 120 million users, we saw unprecedented engagement - up 29% YoY - with the highest levels coming from the Gen Z audience. On launch day, Wrapped was the #1 worldwide trending topic on

both Twitter and TikTok, proving that it’s more of a cultural phenomenon than ever before.

We are re-aligning our current guidance practice to better reflect how we run the business. Since the vast majority of our initiatives are multi-year in nature and measured as such, we no longer plan to issue annual guidance. However, we intend to utilize quarterly guidance as checkpoints against our progress and will provide additional thoughts and perspective around 2022 expectations on our earnings call.

As for quarterly guidance, going forward we will simplify our approach by providing a single estimate for each metric instead of a range of outcomes. Additionally, we plan to host an investor day later in 2022 to offer an update on the strength of our platform and our advancement towards our

long-term operating goals.

Looking back on not just this year, but the past few years, we are increasingly excited about the investments we have made and see meaningful progress within a number of our initiatives.

As we move into 2022 and beyond, the opportunities in front of us are large and we see a tremendous amount of greenfield on the horizon.

Daniel Ek

Founder, Chief Executive Officer, & Chairman of our Board of Directors

Martin Lorentzon at Spotify’s first-ever Investor Day this year. We shared details about how we’ll continue to innovate and grow over the short and long term.

NEW & NOW

In Q1, Spotify launched multiple upgrades, including a new Desktop App and Web Player redesign that makes the user experience and navigation easier than ever by combining a modern scalable web player together with a cohesive Spotify design.

During the fourth quarter, we introduced several enhancements to our service aimed at driving user engagement, retention, and conversion. These included the rollout of lyrics on mobile, desktop, and smart TV platforms and extensions to our

ubiquity strategy such as a partnership with Peloton to match users with an instructor based on their listening taste, an audio playback widget with Vivo, and an integration with Apple’s SharePlay product which allows Spotify Premium users to share their favorite content over FaceTime to enjoy a shared listening experience.

On July 27, we announced more than 10 new Spotify Open Access partners— with more to come—all of which will be able to activate their subscriber base on Spotify while retaining full control over their content.

In Q4, we accelerated our entry into the audiobook space through the announcement of the agreement to acquire Findaway, a global leader in digital audiobook distribution.

The closing of the transaction is subject to regulatory review and approval. On May 20, we partnered with Storytel, one of the world’s leading audiobook streaming services, to give subscribers the ability to enjoy their library of audiobooks on Spotify.

Renegades: Born in the USA, featuring former President Barack Obama and Bruce Springsteen, was the second largest podcast on Spotify in March (on an MAU basis) and has been our most international show to-date, with listenership extending across more than 150 countries.

PODCASTING

First-quarter strength in Ad-Supported revenue was led by our Podcast and Programmatic channels, with the former benefiting from the acquisitions of Megaphone and The Ringer along with our exclusive licensing of the Joe Rogan Experience. Spotify Ad Studio grew substantially, and we continued to expand the self-serve offering to more markets.

We are very pleased with the initial performance of the Spotify Audience Network which launched in the US in April. The rollout allowed

us to increase our monetizable podcast inventory in the US by nearly 3x. Additionally, for opted-in podcast publishers we’ve seen a double digit increase in fill rates, a meaningful increase in unique advertisers.

During Q3, the Spotify Audience Network continued to gain traction in the United States while expanding into the United Kingdom, Canada, and Australia. The Spotify Audience Network continued to outperform in the quarter, driven by higher available inventory and incremental revenue from international sales.

At the end of Q4, we had 3.6 million podcasts on the platform (up from 3.2 million at the end of Q3) and were pleased to see a double digit increase in the number of MAUs that engaged with podcast content relative to Q3. Among MAUs that engaged with podcasts in Q4, consumption trends remained strong (up 20% Y/Y on a per user basis) and podcast share of overall consumption hours on our platform reached another all-time high. We also expanded our paid podcast subscriptions to creators and listeners in 33 additional markets.

MUSIC STREAMING

Total MAUs grew 24% Y/Y to 356 million in the first quarter, finishing within our guidance range but modestly below our internal expectations. In Q1, we added 11 million MAUs, which drove healthy double digit Y/Y growth across all regions. We saw meaningful contributions from markets such as the US, Mexico, Russia, and India. However, growth was lower than plan in Latin America and Europe. Our average monthly Premium churn rate for the quarter was down modestly.

Despite our underperformance, we added 9 million MAUs in Q2, which drove double digit Y/Y growth in all regions. MAU performance was slower than expected due primarily to lighter user intake during the first half of the quarter. Our average monthly Premium churn rate for the quarter was down 23 bps Y/Y and down modestly Q/Q.

We experienced double digit Y/Y growth in all regions with particular strength in Rest of World where performance was aided by the resumption of marketing activity. On December 1, 2021, we successfully

launched the 7th annual year-end Spotify Wrapped campaign to users in 103 markets. Collectively, 120 million MAUs engaged with Wrapped content in Q4 (up 29% Y/Y) and there was strong Y/Y growth in engagement across all regions and demographics. The campaign trended worldwide with nearly 60 million shares of Wrapped stories and cards, triggering significant levels of consumption across our two personalized playlists (Your Top Songs and Your Artists Revealed) which were responsible for almost 8% of total onplatform consumption hours.

In Q2, Olivia Rodrigo’s album, SOUR, set the record for biggest streaming debut for any album on Spotify this year with over 63 million global first day streams. Other major releases in the quarter include BTS single, Butter, Griff’s Album, One Foot In Front Of The Other, and Doja Cat’s album, Planet Her.

FINANCIALS

Currently available to eligible users in the U.S., Car Thing enables you to play your favorite audio faster, so you’re already listening to that hit song or the latest podcast episode before you’ve even pulled out of the driveway.

Financial Growth Across 4 Quarters

NET SALES & PROFITS

We are re-aligning our current guidance practice to better reflect how we run the business. Since the vast majority of our initiatives are multi-year in nature and measured as such, we no longer plan to issue annual guidance. However, we intend to utilize quarterly guidance as checkpoints against our progress and will provide additional thoughts and

perspective around 2022 expectations on our earnings call. As for quarterly guidance, going forward we will simplify our approach by providing a single estimate for each metric instead of a range of outcomes.

Additionally, we plan to host an investor day later in 2022 to offer an update on the strength of our platform

and our advancement towards our long-term operating goals.

Given the extraordinary operating circumstances we currently face with respect to the impact of COVID-19, there is a greater likelihood of variances with respect to such point estimates than in typical quarters.

Shareholder Equity

Shareholder Capital Total Shares % Ownership

Daniel Ek 40,633,000 32,300,000 16.7%

Baillie Gifford & Co. 27,588,500 22,000,000 11.5%

Martin Lorentzon 26,116,400 21,000,000 10.9%

Morgan Stanley 21,591,000 17,300,000 9%

Tencent Holdings Ltd. 20,871,300 16,600,000 8.7%

T. Rowe Price Associates Inc. 17,752,600 14,300,000 7.4%

Institutional investors hold the majority of Spotify’s shares at about 55-57% of total shares outstanding. Each of these shareholders is considered an institutional investor even though the first two are names of individuals. The term “institutional” does not necessarily refer to a financial institution. It is used in this context to designate an investor with

significant holdings of a security and who must therefore file specific documents with the Securities and Exchange Commission (SEC). Mr. Ek is the co-founder and chief executive officer (CEO) of Spotify. He founded the company in 2006 with his business partner, Martin Lorentzon. Spotify has since grown into a leading musicstreaming service.

Mr. Ek oversaw the company’s initial public offering (IPO) in 2018. To supplement our financial information presented in accordance with IFRS, we use the following non-IFRS financial measures: Revenue excluding foreign exchange effect, Premium revenue excluding foreign exchange effect, AdSupported revenue excluding foreign exchange effect, and Free Cash Flow.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited) (In € millions, except share and per share data)

Three Months Ended

Twelve Months Ended

December 31, 2021 September 30, 2021 December 31, 2020 December 31, 2021 December 31, 2020

Revenue 2,689 2,501 2,168 9,668 7,880

Cost of revenue 1,977 1,833 1,593 7,077 5,865 Gross profit 712 668 575 2,591 2,015

Research and development 253 208 232 912 837 Sales and marketing 340 280 294 1,135 1,029 General and administrative 126 105 118 450 442 719 593 644 2,497 2,308

Operating (loss)/income (7) 75 (69) 94 (293) Finance income 20 101 4 246 94 Finance costs (21) (14) (114) (91) (510) Finance income/(costs) - net (1) 87 (110) 155 (416) (Loss)/income before tax (8) 162 ((179) 249 (709) Income tax expense/(benefit) 31 160 (54) 283 (128) Net (loss)/income attributable to owners of the parent (39) 2 (125) (34) (581)

(Loss)/earnings per share attributable to owners of the parent

Basic (0.20) 0.01 (0.66) (0.18) (3.10) Diluted (0.21) (0.41) (0.66) (1.03) (3.10)

Weighted-average ordinary shares outstanding

Basic 191,952,473 191,485,473 189,852,424 191,298,397 187,583,307 Diluted 192,144,654 194,551,862 189,852,424 193,943,455 187,583,307

OVERVIEW

23% growth in gross profit during Q4 Y/Y

95% growth in income before tax during Q4 Y/Y

68% growth in net income attributable to owners of the parent during Q4 Y/Y

OVERVIEW

120% loss in finance income during Q4 Y/Y

25% loss in deferred revenue during Q4 Y/Y

49% loss in trade and other liabilities during Q4 Y/Y

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited) (In € millions)

Three Months Ended Twelve Months Ended

December 31, 2021 September 30, 2021 December 31, 2020 December 31, 2021 December 31, 2020

Net (loss)/income (39) 2 (125) (34) (581)

Adjustments to reconcile net (loss)/income to net cash flows:

Depreciation of property and equipment and lease right-ofuse assets 25 24 21 94 86

Amortization of intangible assets 8 9 8 33 25

Share-based compensation expense 50 57 43 223 176

Finance income (20) (101) (4) (246) (94) Finance costs 21 14 114 91 510

Income tax expense/(benefit) 31 160 (54) 283 (128) Other 3 (2) 4 6 7

Changes in working capital: Increase in trade receivables and other assets (63) (102) (94) (245) (187)

Increase in trade and other liabilities 92 82 182 137 425

Increase/(decrease) in deferred revenue 17 (4) 23 67 73

Increase/(decrease) in provisions 8 (2) - 5 6

Interest paid on lease liabilities (13) (13) (12) (50) (55) Interest received - 1 1 3 4

Income tax paid (1) (2) - (6) (8)

KEY PLAYERS

Daniel Ek

Founder, Chief Executive Officer & Chairman of our Board of Directors

Daniel Ek is our founder, Chief Executive Officer, and Chairman of our board of directors. As our Chief Executive Officer and Chairman, Mr. Ek is responsible for guiding the vision and strategy of the Company and leading the management team. He has been a member of our board

of directors since July 21, 2008. Prior to founding Spotify in 2006, Mr. Ek founded Advertigo, an online advertising company acquired by Tradedoubler, held various senior roles at the Nordic auction company Tradera, and served as Chief Technology Officer at Stardoll.

Martin Lorentzon

Co-Founder & Director

Martin Lorentzon is our co-founder and a member of our board of directors. He has been a member of our board of directors since July 21, 2008. In addition to his role on our board of directors, Mr. Lorentzon served as a member of the board of directors of Telia Company AB,

Sweden’s main telecom operator, from 2013 to 2018. In 1999, Mr. Lorentzon founded Tradedoubler, an internet marketing company based in Stockholm, Sweden, and served as a member of its board of directors.

Christopher Marshall

Lead Independent Director

Christopher (Woody) Marshall is a member of our board of directors. He has been a member of our board of directors since June 16, 2015, and his term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2021. In addition to his role on

our board of directors, Mr. Marshall currently serves on the boards of directors of Payoneer Global, Inc. and Nerdy, Inc., as well as a number of private companies. Since 2008, he also has served as a general partner of Technology Crossover Ventures, a private equity firm.

Heart & Soul: We strive to offer flexibility and we believe it’s not just important, but essential, to create a safe environment for our employees. That means making time for both self and professional care.

Heart & Soul: Group photo of our mental health ambassadors. The ambassadors have been selected to be part of the team because they are passionate about mental health and believe they can make a difference and contribute.

Heart & Soul: In November last year, after a traumatic 18 months, we closed our offices for a week so each and every one of our employees had the opportunity to put some extra focus on their own wellness.

WHAT’S

Taylor Swift broke streaming records this year with several new releases. She is slated to release new recordings of previously released albums, as well as completely new music, in 2022. Swift has been the top performing artist on the platform each quarter since her return to the platform during Q1 2019.

LOOKING FORWARD

When we entered into the podcast space in 2019 with the intent to help modernize and grow the space for all types of creators, we assumed it would challenge our teams in new ways. There’s no doubt that the last several weeks have presented a number of learning opportunities. hope that you had a chance to read our response that addressed many of the questions we’ve received from creators, partners, employees and the medical and scientific communities. There is still work to be done but we are pleased that Spotify is implementing several first of its kind measures to help combat misinformation and provide greater transparency.

On August 20, 2021, Spotify announced a program to repurchase up to $1.0 billion of its ordinary shares. The repurchase program will expire on April 21, 2026. In Q4, the company repurchased 300,724 ordinary shares for €59 million under the Share Repurchase program at a weighted average cost of $222.42 per share. In 2021 the company repurchased a total of 458,234 ordinary shares for €89 million at a weighted average cost of $222.57 per share.

We believe we have a critical role to play in supporting creator expression while balancing it with the safety of our users. We will continue to partner with experts and invest heavily in

our platform functionality, teams and product capabilities to meet this evolving need head on.

We hope you are as excited about the business as we are. We are just getting started and will continue to accelerate our work and the pace of innovation as we pursue our view of the creator economy and the role we want to play in opening it up for more creators.

Looking back on not just this quarter, but the past few years, we are increasingly excited about the investments we have made and see meaningful progress within a number of our initiatives.

“For all the millions of artists and creators that have leveraged Spotify to date, I think we have only scratched the surface of the creative potential in audio.”