UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
T ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
For the fiscal year ended December 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-38438
Spotify Technology S.A.
(Exact name of Registrant as specified in its charter)
Grand Duchy of Luxembourg
(Jurisdiction of incorporation)
42-44, avenue de la Gare
L- 1610 Luxembourg
Grand Duchy of Luxembourg
(address of principal executive offices)
Horacio Gutierrez
Head of Global Affairs and Chief Legal Officer
150 Greenwich Street, 63rd Floor
New York, New York 10007
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered, pursuant to Section 12(b) of the Act
Title of Each Class
Ordinary Shares (par value of €0.000625 per share)
Trading Symbol(s)
SPOT
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report: 184,325,957 Ordinary Shares, par value €0.000625 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes T No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No T
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes T No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer T
Accelerated filer o
Non-accelerated filer
o
Emerging growth company o
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o
International Financial Reporting Standards as issued
by the International Accounting Standards Board T
Other o
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant
has elected to follow. Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No T
TABLE OF CONTENTS
Certain Defined Terms...............................................................................................................................................................
Note on Presentation ..................................................................................................................................................................
Forward-looking Statements ......................................................................................................................................................
PART I......................................................................................................................................................................................
Item 1. Identity of Directors, Senior Management and Advisers ........................................................................................
Item 2. Offer Statistics and Expected Timetable ................................................................................................................
Item 3. Key Information ...................................................................................................................................................
Item 4. Information on the Company ................................................................................................................................
Item 4A. Unresolved Staff Comments ...............................................................................................................................
Item 5. Operating and Financial Review and Prospects......................................................................................................
Item 6. Directors, Senior Management and Employees ......................................................................................................
Item 7. Major Shareholders and Related Party Transactions ..............................................................................................
Item 8. Financial Information ...........................................................................................................................................
Item 9. The Offer and Listing ...........................................................................................................................................
Item 10. Additional Information .......................................................................................................................................
Item 11. Quantitative and Qualitative Disclosures About Market Risk ...............................................................................
Item 12. Description of Securities Other than Equity Securities .........................................................................................
PART II ....................................................................................................................................................................................
Item 13. Defaults, Dividend Arrearages and Delinquencies ...............................................................................................
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds .....................................................
Item 15. Controls and Procedures .....................................................................................................................................
Item 16A. Audit Committee Financial Expert ...................................................................................................................
Item 16B. Code of Ethics..................................................................................................................................................
Item 16C. Principal Accountant Fees and Services ............................................................................................................
Item 16D. Exemptions from the Listing Standards for Audit Committees ..........................................................................
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers ..............................................................
Item 16F. Change in Registrant’s Certifying Accountant ...................................................................................................
Item 16G. Corporate Governance .....................................................................................................................................
Item 16H. Mine Safety Disclosure ....................................................................................................................................
PART III ...................................................................................................................................................................................
Item 17. Financial Statements ...........................................................................................................................................
Item 18. Financial Statements ...........................................................................................................................................
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Item 19. Exhibits ..............................................................................................................................................................
Signatures ........................................................................................................................................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................................................................................
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F-1
i
In this report, unless the context otherwise requires, references to “Company,” “we,” “us,” “our,” and “Spotify” refer to
Spotify Technology S.A. and its direct and indirect subsidiaries on a consolidated basis.
Certain Defined Terms
Note on Presentation
Currency
All references in this report to (i) “Euro,” “EUR,” or “€” are to the currency of the member states participating in the European
Monetary Union, and (ii) “U.S. dollar,” “USD,” or “$” are to the currency of the United States. Our reporting currency is the Euro.
Presentation of Financial Information
In accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”), we prepare our consolidated financial statements on a historical cost basis, except for our securities, long term
investments, Convertible Notes (as defined herein), derivative financial instruments, and contingent consideration, which have been
measured at fair value, and our lease liabilities, which are measured at present value.
Non-IFRS Financial Measures
In this report, we present certain financial measures that are not recognized by IFRS and that may not be permitted to appear on
the face of IFRS-compliant financial statements or notes thereto.
The non-IFRS financial measures used in this report are EBITDA and Free Cash Flow. For a discussion of EBITDA and Free
Cash Flow and a reconciliation of each to their most closely comparable IFRS measures, see “Item 3.A. Selected Financial Data.”
Rounding
Certain monetary amounts, percentages, and other figures included in this report have been subject to rounding adjustments.
Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and
figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic
aggregation of the percentages that precede them.
1
Forward-looking Statements
This report contains estimates and forward-looking statements. All statements other than statements of historical fact are
forward-looking statements. The words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,”
“seek,” “believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,” “possible,” and similar words are intended to identify
estimates and forward-looking statements.
Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and
trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking
statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties and are made in light of
information currently available to us. Many important factors may adversely affect our results as indicated in forward-looking
statements. These factors include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to attract prospective users and to retain existing users;
competition for users and user listening time;
our dependence upon third-party licenses for most of the content we stream;
our lack of control over the providers of our content and their effect on our access to music and other content;
our ability to comply with the many complex license agreements to which we are a party;
our ability to accurately estimate the amounts payable under our license agreements;
the limitations on our operating flexibility due to the minimum guarantees required under certain of our license
agreements;
our ability to obtain accurate and comprehensive information about music compositions in order to obtain necessary
licenses or perform obligations under our existing license agreements;
new copyright legislation that may increase the cost and/or difficulty of music licensing;
risks associated with our international expansion, including difficulties obtaining rights to stream content on favorable
terms;
our ability to generate sufficient revenue to be profitable or to generate positive cash flow on a sustained basis;
our ability to expand our operations to deliver content beyond music, including podcasts;
potential breaches of our security systems;
assertions by third parties of infringement or other violations by us of their intellectual property rights;
our ability to accurately estimate our user metrics and other estimates;
risks associated with manipulation of stream counts and user accounts and unauthorized access to our services;
changes in legislation or governmental regulations affecting us;
risks relating to privacy and protection of user data;
our ability to maintain, protect, and enhance our brand;
ability to hire and retain key personnel;
risks relating to the acquisition, investment, and disposition of companies or technologies;
tax-related risks;
the concentration of voting power among our founders who have and will continue to have substantial control over our
business;
risks related to our status as a foreign private issuer;
international, national or local economic, social or political conditions; and
risks associated with accounting estimates, currency fluctuations and foreign exchange controls.
Other sections of this report describe additional risk factors that could adversely impact our business and financial performance.
Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible
2
for our management to predict all risk factors and uncertainties, nor are we able to assess the impact of all of these risk factors on our
business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. See “Item 3.D. Risk Factors.”
You should read this report and the documents that we have filed as exhibits to this report completely and with the
understanding that our actual future results may be materially different from our expectations.
3
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable
PART I
Item 2. Offer Statistics and Expected Timetable
Not applicable
Item 3. Key Information
A. Selected Financial Data
Summary of Consolidated Financial and Other Data
The following consolidated financial and other data should be read in conjunction with, and is qualified in its entirety by
reference to, the section of this report entitled “Item 5. Operating and Financial Review and Prospects” and our consolidated financial
statements and the notes thereto included elsewhere in this report.
The consolidated financial and other data for the years ended December 31, 2019, 2018, and 2017 and as of December 31, 2019
and 2018 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this report.
We prepared our consolidated financial statements for the years ended December 31, 2019, 2018, and 2017 in accordance with IFRS
as issued by the IASB. Please read Note 2 to the consolidated financial statements included elsewhere in this report. Our consolidated
financial statements and the notes thereto and other data for the years ended December 31, 2016 and 2015 and as of December 31,
2017, 2016, and 2015 are not included elsewhere in this report.
4
Our historical results for any prior period are not necessarily indicative of results expected in any future period.
Consolidated Statement of Operations Data(2):
Revenue
Cost of revenue
Gross profit
Research and development
Sales and marketing
General and administrative
Operating loss
Finance income
Finance costs
Share in (losses)/earnings of associate
Finance income/(costs) - net
Loss before tax
Income tax expense/(benefit)
Net loss attributable to owners of the parent
Net loss per share attributable to owners of the parent(1)
Basic
Diluted
Weighted-average ordinary shares outstanding(1)
Basic
Diluted
Consolidated Statement of Cash Flows Data(2):
Net cash flows from/(used in) operating activities
Net cash flows used in investing activities
Net cash flows (used in)/from financing activities
Net increase/(decrease) in cash and cash equivalents
Selected Other Data (unaudited):
EBITDA(3)
Free Cash Flow(3)
Consolidated Statement of Financial Position Data(2):
Cash and cash equivalents
Short term investments
Working capital
Total assets
Convertible Notes
Total equity/(deficit) attributable to owners of the parent
2019
6,764
5,042
1,722
615
826
354
1,795
(73 )
275
(333 )
—
(58 )
(131 )
55
(186 )
(1.03 )
(1.03 )
Year ended December 31,
2017
(in € millions, except share and per share data)
2016
2018
5,259
3,906
1,353
493
620
283
1,396
(43 )
455
(584 )
(1 )
(130 )
(173 )
(95 )
(78 )
(0.44 )
(0.51 )
4,090
3,241
849
396
567
264
1,227
(378 )
118
(974 )
1
(855 )
(1,233 )
2
(1,235 )
(8.14 )
(8.14 )
2,952
2,551
401
207
368
175
750
(349 )
152
(336 )
(2 )
(186 )
(535 )
4
(539 )
(3.63 )
(3.63 )
2015
1,940
1,714
226
136
219
106
461
(235 )
36
(26 )
—
10
(225 )
5
(230 )
(1.62 )
(1.62 )
180,960,579 177,154,405 151,668,769 148,368,720 141,946,600
180,960,579 181,210,292 151,668,769 148,368,720 141,946,600
573
(218 )
(203 )
152
14
440
344
(22 )
92
414
(11 )
209
179
(435 )
34
(222 )
(324 )
109
101
(827 )
916
190
(311 )
73
(38 )
(67 )
476
371
(205 )
(92 )
2019
2018
As of December 31,
2017
(in € millions)
2016
2015
1,065
692
(208 )
5,122
—
2,037
891
915
97
4,336
—
2,094
477
1,032
38
3,107
944
238
755
830
689
2,100
1,106
(240 )
597
—
73
1,051
—
229
(1)
See Note 11 to our consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share attributable to owners of the
parent as well as our basic and diluted weighted-average ordinary shares outstanding.
5
(2)
The 2018 – 2015 results have not been restated for the impact of IFRS 16, Leases, which was adopted on January 1, 2019 using the modified retrospective
approach. See Notes 2 and 12 to the consolidated financial statements for further information.
(3) We define EBITDA as net income/(loss) attributable to owners of the parent before finance income/(costs)—net, income tax (benefit)/expense, and depreciation
and amortization. We believe EBITDA is useful to our management and investors as a measure of comparative operating performance from period to period and
among companies as it is reflective of changes in pricing decisions, cost controls, and other factors that affect operating performance, and it removes the effect of
items not directly resulting from our core operations. We believe that EBITDA also is useful to investors because this metric is frequently used by securities
analysts, investors, and other interested parties in their evaluation of the operating performance of companies in the technology industry and other industries
similar to ours. EBITDA has limitations as an analytical tool. EBITDA should not be construed as an inference that our future results will be unaffected by
unusual or non-recurring items. Additionally, EBITDA is not intended to be a measure of discretionary cash to invest in the growth of our business, as it does not
reflect tax payments, debt service requirements, capital expenditures, and certain other cash costs that may recur in the future. Management compensates for these
limitations by relying on our results reported under IFRS as issued by IASB in addition to using EBITDA as a supplemental financial measure.
We define “Free Cash Flow” as net cash flows from/(used in) operating activities less capital expenditures and change in restricted cash. We believe Free Cash
Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our
debt. Free Cash Flow is not a measure of our liquidity under IFRS and should not be considered as an alternative to net cash flows from/(used in) operating
activities.
EBITDA and Free Cash Flow are non-IFRS measures and are not a substitute for IFRS measures in assessing our overall financial performance. Because EBITDA
and Free Cash Flow are not measurements determined in accordance with IFRS, and are susceptible to varying calculations, it may not be comparable to other
similarly titled measures presented by other companies. You should not consider EBITDA and Free Cash Flow in isolation, or as a substitute for an analysis of our
results as reported on our consolidated financial statements appearing elsewhere in this report.
Set forth below is a reconciliation of EBITDA to net loss attributable to owners of the parent and a reconciliation of Free Cash
Flow to net cash flows (used in)/from operating activities, in each case, for the periods presented:
EBITDA:
2019
2018
Year ended December 31,
2017
(in € millions)
2016
2015
Net loss attributable to owners of the parent
Finance (income)/costs—net
Income tax expense/(benefit)
Depreciation and amortization
EBITDA
(186 )
58
55
87
14
(78 )
130
(95 )
32
(11 )
(1,235 )
855
2
54
(324 )
(539 )
186
4
38
(311 )
(230 )
(10 )
5
30
(205 )
Free Cash Flow:
2019
2018
Year ended December 31,
2017
(in € millions)
2016
2015
Net cash flows from/(used in) operating activities
Capital expenditures
Change in restricted cash
Free Cash Flow
573
(135 )
2
440
344
(125 )
(10 )
209
179
(36 )
(34 )
109
101
(27 )
(1 )
73
(38 )
(44 )
(10 )
(92 )
6
B. Capitalization and Indebtedness.
Not applicable
C. Reasons for the Offer and Use of Proceeds.
Not applicable
D. Risk Factors
An investment in our ordinary shares involves a high degree of risk. You should carefully read and consider the following risks,
along with the other information included in this Annual Report on Form 20-F. If any of the risks actually occur, our business, results
of operations, financial condition, and cash flow could be materially impaired. The risks described below are not the only ones that we
may face. Additional risks that are not currently known to us or that we currently consider immaterial may also impair our business,
operating results, or financial condition. The trading price of our ordinary shares could decline due to any of these risks, and you could
lose all or part of your investment.
Risks Related to Our Business
If our efforts to attract prospective users and to retain existing users are not successful, our growth prospects and revenue
will be adversely affected.
Our ability to grow our business and generate revenue depends on retaining, expanding, and effectively monetizing our total
user base, including by increasing advertising revenue on our ad-supported service (“Ad-Supported Service”), increasing the number
of subscribers to our premium service (“Premium Service”, and together with the Ad-Supported Service, the “Service”), and finding
ways to monetize content across the Service. We must convince prospective users of the benefits of our Service and our existing users
of the continuing value of our Service. Our ability to attract new users, retain existing users, and convert users of our Ad-Supported
Service (“Ad-Supported Users”) to subscribers to our Premium Service (“Premium Subscribers”) depends in large part on our ability
to continue to offer leading technologies and products, compelling content, superior functionality, and an engaging user experience.
Some of our competitors, including Apple, Amazon, and Google, have developed, and are continuing to develop, devices for which
their audio streaming services are preloaded or may also be set as the default providers, which puts us at a significant competitive
disadvantage. As consumer tastes and preferences change on the internet and with mobile devices and other internet-connected
products, we will need to enhance and improve our existing Service, introduce new services and features, and maintain our
competitive position with additional technological advances and an adaptable platform. If we fail to keep pace with technological
advances or fail to offer compelling product offerings and state-of-the-art delivery platforms to meet consumer demands, our ability to
grow or sustain the reach of our Service, attract and retain users, and increase our Premium Subscribers may be adversely affected.
In addition, in order to increase our advertising revenue, we also seek to increase the listening time that our Ad-Supported Users
spend on our Ad-Supported Service and find new opportunities to deliver advertising to users on the Service, such as through podcasts
and other opportunities relating to content promotion to users. The more content users stream on the Ad-Supported Service, the more
advertising inventory we generally have to sell. Further, growth in our Ad-Supported User base increases the size and scope of user
pools targeted by advertisers, which improves our ability to deliver relevant advertising to those users in a manner that maximizes our
advertising customers’ return on investment and that ultimately allows us to better demonstrate the effectiveness of our advertising
solutions and justifies a pricing structure that is advantageous for us. If we fail to grow our Ad-Supported User base, the amount of
content streamed, and the listening time spent by our Ad-Supported Users, we may be unable to grow Ad-Supported revenue.
Moreover, given that Premium Subscribers are sourced primarily from the conversion of our Ad-Supported Users to Premium
Subscribers, any failure to grow our Ad-Supported User base or convert Ad-Supported Users to Premium Subscribers may negatively
impact our revenue.
In order to increase our Ad-Supported Users and our Premium Subscribers, we will need to address a number of challenges,
including:
•
•
•
•
improving our Ad-Supported Service;
providing users with a consistently high-quality and user-friendly experience;
continuing to curate a catalog of content that consumers want to engage with on our Service;
continuing to innovate and keep pace with changes in technology and our competitors; and
• maintaining and building our relationships with the makers of consumer products such as mobile devices.
7
Failure to overcome any one of these challenges could have a material adverse effect on our business, operating results, and
financial condition.
Moreover, the provisions of certain of our license agreements may require consent to implement improvements to, or otherwise
change, our Service. We may not be able to obtain consent from our rights holders to add additional features and functionality to our
Service or our rights holders may be delayed in providing such consent, which may hinder our ability to be responsive to our users’
tastes and preferences and may make us less competitive with other services.
We face and will continue to face competition for Ad-Supported Users, Premium Subscribers, and user listening time.
We compete for the time and attention of our users with other content providers on the basis of a number of factors, including
quality of experience, relevance, diversity of content, ease of use, price, accessibility, perception of advertising load, brand awareness,
and reputation.
We compete with providers of on-demand music, which is purchased or available for free and playable on mobile or other
connected devices. These forms of media may be purchased, downloaded, and owned, such as iTunes audio files, MP3s, or CDs, or
accessed from subscription or free online on-demand offerings by music providers or content streams from other online services. We
face increasing competition for users from a growing variety of businesses, including other free-to-the-user and/or subscription music
services around the world, many of which offer services that seek to emulate our Service and/or have differentiated service offerings.
Many of our current or future competitors are already entrenched or may have significant brand recognition, existing user bases,
and/or ability to bundle with other goods and/or services, both globally and in particular regions and/or markets which we seek to
penetrate.
We also compete with providers of podcasts that offer an on-demand catalog of podcast content that is similar to ours. We face
increasing competition from a growing variety of podcast providers that seek to differentiate their service by content offering and
product features, and they may be more successful than us in predicting user preferences, providing popular content, and innovating
new features.
Our competitors also include providers of internet radio, terrestrial radio, and satellite radio. Internet radio providers may offer
more extensive content libraries than we offer and some may be offered internationally more broadly than our Service. In addition,
internet radio providers may leverage their existing infrastructure and content libraries, as well as their brand recognition and user
base, to augment their services by offering competing on-demand music features to provide users with more comprehensive music
service delivery choices. Terrestrial radio providers often offer their content for free, are well-established and accessible to consumers,
and offer media content that we currently do not offer. In addition, many terrestrial radio stations have begun broadcasting digital
signals, which provide high-quality audio transmission. Satellite radio providers, such as Sirius XM and iHeartRadio, may offer
extensive and exclusive news, comedy, sports and talk content, and national signal coverage.
We believe that companies with a combination of technical expertise, brand recognition, financial resources, and digital media
experience also pose a significant threat of developing competing on-demand audio distribution technologies. In particular, if known
incumbents in the digital media space such as Facebook choose to offer competing services, they may devote greater resources than
we have available, have a more accelerated time frame for deployment, and leverage their existing user base and proprietary
technologies to provide services that our users and advertisers may view as superior. Furthermore, Amazon Music, Apple Music,
Apple Podcasts, Deezer, Google Play Music, Joox, Pandora, SoundCloud, Tik-Tok, YouTube Music, and others have competing
services, which may negatively impact our business, operating results, and financial condition. Our current and future competitors
may have higher brand recognition, more established relationships with content licensors and mobile device manufacturers, greater
financial, technical, and other resources, more sophisticated technologies, and/or more experience in the markets in which we
compete. Our current and future competitors may also engage in mergers or acquisitions with each other, as Sirius XM and Pandora
have done, to combine and leverage their audiences. Our current and future competitors may innovate new features or introduce new
ways of consuming or engaging with content that cause our users, especially the younger demographic, to switch to another product,
which would negatively affect our user retention, growth, and engagement. In addition, Apple and Google also own application store
platforms and are charging in-application purchase fees, which are not being levied on their own applications, thus creating a
competitive advantage for themselves against us. If other competitors that own application store platforms and competitive services
adopt similar practices, we may be similarly impacted. As the market for on-demand audio on the internet and mobile and connected
devices increases, new competitors, business models, and solutions are likely to emerge.
We also compete for users based on our presence and visibility as compared with other businesses and platforms that deliver
audio content through the internet and connected devices. We face significant competition for users from companies promoting their
own digital audio content online or through application stores, including several large, well-funded, and seasoned participants in the
digital media market. Device application stores often offer users the ability to browse applications by various criteria, such as the
8
number of downloads in a given time period, the length of time since an application was released or updated, or the category in which
the application is placed. The websites and applications of our competitors may rank higher than our website and our Spotify
application, and our application may be difficult to locate in device application stores, which could draw potential users away from our
Service and toward those of our competitors. In addition, some of our competitors, including Apple, Amazon, and Google, have
developed, and are continuing to develop, devices for which their music and/or podcast streaming service is preloaded and/or able to
be used out-of-the-box without the need to log in, creating a visibility and access advantage. If we are unable to compete successfully
for users against other digital media providers by maintaining and increasing our presence, ease of use, and visibility online, on
devices, and in application stores, our number of Premium Subscribers, Ad-Supported Users, and the amount of content streamed on
our Service may fail to increase or may decline and our subscription fees and advertising sales may suffer. See “—If our efforts to
attract prospective users and to retain existing users are not successful, our growth prospects and revenue will be adversely affected.”
We compete for a share of advertisers’ overall marketing budgets with other content providers on a variety of factors, including
perceived return on investment, effectiveness and relevance of our advertising products, pricing structure, and ability to deliver large
volumes or precise types of advertisements to targeted user demographic pools. We also compete for advertisers with a range of
internet companies, including major internet portals, search engine companies, social media sites, and mobile applications, as well as
traditional advertising channels such as terrestrial radio and television.
Large internet companies with strong brand recognition, such as Facebook, Google, Amazon, and Twitter, have significant
numbers of sales personnel, substantial advertising inventory, proprietary advertising technology solutions, and traffic across web,
mobile, and connected devices that provide a significant competitive advantage and have a significant impact on pricing for reaching
these user bases. Failure to compete successfully against our current or future competitors could result in the loss of current or
potential advertisers, a reduced share of our advertisers’ overall marketing budget, the loss of existing or potential users, or diminished
brand strength, which could adversely affect our pricing and margins, lower our revenue, increase our research and development and
marketing expenses, and prevent us from achieving or maintaining profitability.
We depend upon third-party licenses for most of the content we stream and an adverse change to, loss of, or claim that we do
not hold any necessary licenses may materially adversely affect our business, operating results, and financial condition.
To secure the rights to stream content, we enter into license agreements to obtain licenses from rights holders such as record
labels, aggregators, artists, music publishers, performing rights organizations, collecting societies, podcasters and podcast networks,
and other copyright owners or their agents, and pay royalties or other consideration to such parties or their agents around the world.
We cannot guarantee that our efforts to obtain all necessary licenses to stream content will be successful, nor that the licenses
available to us now will continue to be available in the future at rates and on terms that are favorable or commercially reasonable or at
all. The terms of these licenses, including the royalty rates that we are required to pay pursuant to them, may change as a result of
changes in our bargaining power, the industry, laws and regulations, or for other reasons. Increases in royalty rates or changes to other
terms of these licenses may materially impact our business, operating results, and financial condition.
We enter into license agreements to obtain rights to stream sound recordings, including from the major record labels who hold
the rights to stream a significant number of sound recordings—Universal Music Group, Sony Music Entertainment, and Warner Music
Group—as well as Music and Entertainment Rights Licensing Independent Network (“Merlin”), which represents the digital rights on
behalf of numerous independent record labels. If we fail to obtain these licenses, the size and quality of our catalog may be materially
impacted and our business, operating results, and financial condition could be materially harmed.
We generally obtain licenses for two types of rights with respect to musical compositions: mechanical rights and public
performance rights.
With respect to mechanical rights, in the United States, the rates we pay are, to a significant degree, a function of a ratemaking
proceeding conducted by an administrative agency called the Copyright Royalty Board. The rates that the Copyright Royalty Board
set apply both to compositions that we license under the compulsory license in Section 115 of the Copyright Act of 1976 (the
“Copyright Act”), and to a number of direct licenses that we have with music publishers for U.S. rights, in which the applicable rate is
generally pegged to the statutory rate set by the Copyright Royalty Board. The most recent proceeding before the Copyright Royalty
Board, known as the “Phonorecords III Proceedings,” set the rates for the Section 115 compulsory license for calendar years 2018 to
2022. The Copyright Royalty Board issued its final written determination in November 2018. Based on management’s estimates and
forecasts for the next two fiscal years, we currently believe that the rates determined by the Copyright Royalty Board will increase our
royalty costs in 2020. The rates set by the Copyright Royalty Board may still be modified if the determination is overturned in the
appeals process. In March 2019, we, Google, Amazon, and Pandora each filed an appeal of the Copyright Royalty Board’s
determination. We cannot assure you that the outcome of the appeal will be successful in our favor or that any changes to the rates or
terms determined by the Copyright Royalty Board or the application of such rates or terms will not adversely affect our business,
operating results, and financial condition, prospectively or retrospectively. The rates set by the Copyright Royalty Board are also
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subject to further change as part of future Copyright Royalty Board proceedings. If any such rate change increases our content
acquisition costs and impacts our ability to obtain content on pricing terms favorable to us, it could negatively harm our business,
operating results, and financial condition and hinder our ability to provide interactive features in our services, or cause one or more of
our services not to be economically viable.
In the United States, public performance rights are generally obtained through intermediaries known as performing rights
organizations (“PROs”), which negotiate blanket licenses with copyright users for the public performance of compositions in their
repertory, collect royalties under such licenses, and distribute those royalties to copyright owners. The royalty rates available to us
today may not be available to us in the future. Licenses provided by two of these PROs, the American Society of Composers, Authors
and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”), cover the majority of the music we stream and are governed by
consent decrees relating to decades-old litigations. In 2019, the U.S. Department of Justice indicated that it was formally reviewing the
relevance and need of these consent decrees. Changes to the terms of or interpretation of these consent decrees, up to and including the
dissolution of the consent decrees, could affect our ability to obtain licenses from these PROs on reasonable terms, which could harm
our business, operating results, and financial condition. In addition, an increase in the number of compositions that must be licensed
from PROs that are not subject to the consent decrees, or from copyright owners that have withdrawn public performance rights from
the PROs, could likewise impede our ability to license public performance rights on favorable terms.
In other parts of the world, including Europe, Asia Pacific, and Latin America, we obtain mechanical and performance licenses
for musical compositions either through local collecting societies representing publishers or from publishers directly, or a combination
thereof. We cannot guarantee that our licenses with collecting societies and our direct licenses with publishers provide full coverage
for all of the musical compositions we make available to our users in such countries. In Asia Pacific and Latin America, we are seeing
a trend of movement away from blanket licenses from copyright collectives, which is leading to a fragmented copyright licensing
landscape. Publishers, songwriters, and other rights holders choosing not to be represented by collecting societies could adversely
impact our ability to secure favorable licensing arrangements in connection with musical compositions that such rights holders own or
control, including by increasing the costs of licensing such musical compositions, or subjecting us to significant liability or injunctions
for copyright infringement. In addition, in markets that lack collecting society infrastructure, such as in the Middle East and parts of
Africa and Asia Pacific, it is extremely difficult to identify who owns the publishing rights in the content we stream. This practical
obstacle creates additional risk exposure as there inevitably will be licensing gaps in the content we stream, and these risks may
increase as we look to expand into new developing markets with uncertain publishing licensing landscapes.
With respect to podcasts and other non-music content, we produce or commission the content ourselves or obtain distribution
rights directly from rights holders. In the former scenario, we employ various business models to create original content. In the latter
scenario, we either negotiate licenses directly with individuals or entities or obtain rights through our owned and operated platforms,
such as Anchor, Soundtrap for Storytellers, and Spotify for Podcasters, that enable creators to post content directly to our Service after
agreeing to comply with the applicable terms and conditions. In all of the above scenarios, we are dependent on those who provide
content on our Service complying with the terms and conditions of our license agreements as well as the Spotify Terms and
Conditions of Use (the “Terms and Conditions of Use”). However, we cannot guarantee that rights holders or content providers will
comply with their obligations, and such failure to do so may materially impact our business, operating results, and financial condition.
There is also no guarantee that we have all of the licenses we need to stream content, as the process of obtaining such licenses
involves many rights holders, some of whom are unknown, and myriad complex legal issues across many jurisdictions, including open
questions of law as to when and whether particular licenses are needed. Additionally, there is a risk that rights holders, creators,
performers, writers and their agents, or societies, unions, guilds, or legislative or regulatory bodies will create or attempt to create new
rights or regulations that could require us to enter into license agreements with, and pay royalties to, newly defined groups of rights
holders, some of which may be difficult or impossible to identify. See also “—Difficulties in obtaining accurate and comprehensive
information necessary to identify the compositions embodied in sound recordings on our Service and the ownership thereof may
impact our ability to perform our obligations under our licenses, affect the size of our catalog, impact our ability to control content
acquisition costs, and lead to potential copyright infringement claims.”
Even when we are able to enter into license agreements with rights holders, we cannot guarantee that such agreements will
continue to be renewed indefinitely. For example, from time to time, our license agreements with certain rights holders and/or their
agents expire while we negotiate their renewals and, per industry custom and practice, we may enter into brief (for example, month-,
week-, or even days-long) extensions of those agreements or provisional licenses and/or continue to operate on an at will basis as if
the license agreement had been extended, including by our continuing to make content available. During these periods, we may not
have assurance of long-term access to such rights holders’ content, which could have a material adverse effect on our business and
could lead to potential copyright infringement claims.
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It is also possible that such agreements will never be renewed at all. The lack of renewal, or termination, of one or more of our
license agreements, or the renewal of a license agreement on less favorable terms, could have a material adverse effect on our
business, operating results, and financial condition.
We have no control over third-party providers of our content. The concentration of control of content by our major providers
means that even one entity, or a small number of entities working together, may unilaterally affect our access to music and other
content.
We rely on various rights holders, over whom we have no control, for the content we make available on our Service. We cannot
guarantee that these parties will always choose to license to us or license to us on terms that are acceptable to us.
The music industry has a high level of concentration, which means that one or a small number of entities may, on their own,
take actions that adversely affect our business. For example, with respect to sound recordings, the music licensed to us under our
agreements with Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin, makes up the majority of
music consumed on our Service. For the year ended December 31, 2019, this content accounted for approximately 82% of music
streams. Our business may be adversely affected if our access to music is limited or delayed because of deterioration in our
relationships with one or more of these rights holders or if they choose not to license to us for any other reason. Rights holders also
may attempt to take advantage of their market power (including by leveraging their publishing affiliate) to seek onerous financial or
other terms from us or otherwise impose restrictions that hinder our ability to further innovate our service offerings. We have
particular issues in markets where local content is important and such local content is held by local major labels or even individual
artists, making it difficult to obtain such local content at all or on economically favorable terms. In addition, publishers’ fractional
ownership of shares of musical works enhances their market power. As a result, the loss of rights to a major publisher catalogue would
force us to take down a significant portion of popular repertoire in the applicable territory or territories, which would significantly
disadvantage us in such territory or territories. The lack of complete metadata with respect to publisher ownership may also present
challenges in taking down all the tracks of a given publisher. Even if we are able to secure rights to sound recordings from record
labels and other copyright owners, artists and/or artist groups may object and may exert public or private pressure on those record
labels or copyright owners or other third parties to discontinue licensing rights to us, hold back content from us, or increase royalty
rates. As a result, our ability to continue to license rights to sound recordings is subject to convincing a broad range of stakeholders of
the value and quality of our Service. To the extent that we are unable to license a large amount of content or the content of certain
popular artists, our business, operating results, and financial condition could be materially harmed.
We are a party to many license agreements that are complex and impose numerous obligations upon us that may make it
difficult to operate our business, and a breach of such agreements could adversely affect our business, operating results, and
financial condition.
Many of our license agreements are complex and impose numerous obligations on us, including obligations to, among other
things:
• meet certain user and conversion targets in order to secure certain licenses and royalty rates;
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calculate and make payments based on complex royalty structures, which requires tracking usage of content on our
Service that may have inaccurate or incomplete metadata necessary for such calculation;
provide periodic reports on the exploitation of the content;
represent that we will obtain all necessary publishing licenses and consents and pay all associated fees, royalties, and other
amounts due for the licensing of musical compositions;
provide advertising inventory at discounted rates or on other favorable terms;
comply with certain service offering restrictions;
comply with certain marketing and advertising restrictions; and
comply with certain security and technical specifications.
Many of our license agreements grant the licensor the right to audit our compliance with the terms and conditions of such
agreements. Some of our license agreements also include steering, non-discrimination and so-called “most favored nations”
provisions, which require that certain material terms of such agreements are no less favorable than those provided in our agreements
with any other similarly situated licensor. If triggered, these provisions could cause our payments or other obligations under those
agreements to escalate substantially. Additionally, some of our license agreements require consent to undertake certain business
initiatives and, without such consent, our ability to undertake or continue operating new business initiatives may be limited. This could
hurt our competitive position.
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If we materially breach any of these obligations or any other obligations set forth in any of our license agreements, or if we use
content in ways that are found to exceed the scope of such agreements, we could be subject to monetary penalties, and/or rights
holders could impede our business by withholding content, discounts and bundle approvals and the rights to launch new service
offerings, and could ultimately terminate our rights under such license agreements, any of which could have a material adverse effect
on our business, operating results, and financial condition. We have entered into settlement agreements requiring us to make
substantial payments in the past, and may do so in the future, as a result of claims that we are in breach of certain provisions in, or
have exceeded the scope of, our license agreements.
Our royalty payment scheme is complex, and it is difficult to estimate the amount payable under our license agreements.
Under our license agreements and relevant statutes, we must pay all required royalties to record labels, music publishers, and
other copyright owners in order to stream content. The determination of the amount and timing of such payments is complex and
subject to a number of variables, including the type of content streamed, the country in which it is streamed, the service tier such
content is streamed on, the amount of revenue generated by the streaming of the content, the identity of the license holder to whom
royalties are owed, the current size of our user base, our current ratio of Ad-Supported Users to Premium Subscribers, the applicability
of any most favored nations provisions, and any applicable advertising fees and discounts, among other variables. Additionally, we
have certain arrangements whereby royalty costs are paid in advance or are subject to minimum guaranteed amounts. An accrual is
estimated when actual royalty costs to be incurred during a contractual period are expected to fall short of the minimum guaranteed
amount. Moreover, for minimum guarantee arrangements for which we cannot reliably predict the underlying expense, we will
expense the minimum guarantee on a straight-line basis over the term of the arrangement. Additionally, we also have license
agreements that include so-called “most favored nations” provisions that require that the material terms of such agreements are the
most favorable material terms provided to any music licensor, which, if triggered, could cause our royalty payments under those
agreements to escalate substantially. An accrual and expense is recognized when it is probable that we will make additional royalty
payments under these terms.
We cannot assure you that the internal controls and systems we use to determine royalties payable will always be effective. We
have in the past identified a material weakness in our internal controls relating to rights holder liabilities and may identify additional
material weaknesses in the future. See “—If we fail to implement and maintain effective internal control over financial reporting, our
ability to accurately and timely report our financial results could be adversely affected.” If we fail to implement and maintain effective
controls relating to rights holder liabilities, we may underpay/under-accrue or overpay/over-accrue the royalty amounts payable to
record labels, music publishers, and other copyright owners. Underpayment could result in (i) litigation or other disputes with record
labels, music publishers, and other copyright owners, (ii) the unexpected payment of additional royalties in material amounts, and (iii)
damage to our business relationships with record labels, music publishers, other copyright owners, and artists and/or artist groups. If
we overpay royalties, we may be unable to reclaim such overpayments, and our profits will suffer. Failure to accurately pay our
royalties may adversely affect our business, operating results, and financial condition.
Minimum guarantees required under certain of our license agreements may limit our operating flexibility and may adversely
affect our business, operating results, and financial condition.
Certain of our license agreements contain minimum guarantees and/or require that we make minimum guarantee payments. As
of December 31, 2019, we have estimated future minimum guarantee commitments of €1.0 billion, primarily under license agreements
for sound recordings and musical compositions (both for mechanical rights and public performance rights) but also under license
agreements for podcasts. Such minimum guarantees related to our content acquisition costs are not always tied to our revenue and/or
user growth forecasts (e.g., number of users, active users, Premium Subscribers), or the number of sound recordings and musical
compositions or podcasts used on our Service. We may also be subject to minimum guarantees to rights holders with respect to certain
strategic partnerships we enter into that may not produce all of the expected benefits. Accordingly, our ability to achieve and sustain
profitability and operating leverage on our Service in part depends on our ability to increase our revenue through increased sales of
Premium Service and advertising sales on terms that maintain an adequate gross margin. The duration of our license agreements for
sound recordings and musical compositions that contain minimum guarantees is frequently between one and two years, but our
Premium Subscribers may cancel their subscriptions at any time. If our forecasts of Premium Subscriber acquisition or retention do
not meet our expectations or the number of our Premium Subscribers or advertising sales decline significantly during the term of our
license agreements, our margins may be materially and adversely affected. To the extent our Premium Service revenue growth or
advertising sales do not meet our expectations, our business, operating results, and financial condition could also be adversely affected
as a result of such minimum guarantees. In addition, the fixed cost nature of these minimum guarantees may limit our flexibility in
planning for, or reacting to, changes in our business and the market segments in which we operate.
We rely on estimates of the market share of streaming content owned by each content provider, as well as our own user growth
and forecasted advertising revenue, to forecast whether such minimum guarantees could be recouped against our actual content
acquisition costs incurred over the duration of the license agreement. To the extent that these revenue and/or market share estimates
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underperform relative to our expectations, leading to content acquisition costs that do not exceed such minimum guarantees, our
margins may be materially and adversely affected.
Difficulties in obtaining accurate and comprehensive information necessary to identify the compositions embodied in sound
recordings on our Service and the ownership thereof may impact our ability to perform our obligations under our licenses, affect
the size of our catalog, impact our ability to control content acquisition costs, and lead to potential copyright infringement claims.
Comprehensive and accurate ownership information for the musical compositions embodied in sound recordings is often
unavailable to us or difficult or, in some cases, impossible for us to obtain, sometimes because it is withheld by the owners or
administrators of such rights. We currently rely on the assistance of third parties to determine this information. If the information
provided to us or obtained by such third parties does not comprehensively or accurately identify the ownership of musical
compositions, or if we are unable to determine which musical compositions correspond to specific sound recordings, it may be
difficult or impossible to identify the appropriate rights holders from whom to obtain licenses or to whom to pay royalties. This may
make it difficult to comply with the obligations of any agreements with those rights holders. This may also make it difficult to identify
content for removal from the Service if we lose the rights to such musical compositions.
In the United States, we also rely on the assistance of third parties to issue notices of intent (“NOIs”) to obtain a compulsory
license under Section 115 of the Copyright Act to those copyright owners with whom we do not have a direct license agreement. The
enactment of the Music Modernization Act (“MMA”) in October 2018 amended the process to obtain a compulsory license under
Section 115 of the Copyright Act. In particular, from October 2018 through December 31, 2020, to the extent we do not have a direct
license and cannot locate the owner of a composition, the law no longer provides a mechanism for us to obtain a compulsory license,
but instead provides a limitation of liability under which our only liability for the reproduction and/or distribution of such
compositions is the royalty rate set by the U.S. Copyright Royalty Board. That limitation of liability is contingent upon following
various procedural steps outlined in the MMA and there is a risk that we can be found to not have properly followed those steps
(which could expose us to the risk of increased financial liability in litigations). Beginning on January 1, 2021, the MMA will provide
a blanket license to reproduce and/or distribute musical compositions on our service. See “—We depend upon third-party licenses for
most of the content we stream and an adverse change to, loss of, or claim that we do not hold any necessary licenses may materially
adversely affect our business, operating results, and financial condition.”
The lack of comprehensive and accurate ownership information or the inability to determine which musical compositions
correspond to specific sound recordings can cause difficulties in issuing NOIs to the correct parties (including the United States
Copyright Office prior to the enactment of the MMA) or serving NOIs in a timely manner and can otherwise cause difficulties in
obtaining licenses. This could lead to a reduction of sound recordings available to be streamed on our Service, adversely impacting our
ability to retain and expand our user base, and could make it difficult to ensure that we are fully licensed.
These challenges, and others concerning the licensing of musical compositions embodied in sound recordings on our Service,
may subject us to significant liability for copyright infringement, breach of contract, or other claims. See “Item 8.A. Consolidated
Statements and Other Financial Information—Legal or Arbitration Proceedings.”
New copyright legislation enacted in the United States may increase the costs and/or difficulty of music licensing.
The recently enacted MMA makes a number of significant changes to the legal regime governing music licensing in the United
States. This legislation could, when fully implemented, increase the cost and/or difficulty of obtaining necessary music licenses. The
legislation must initially be implemented by the responsible government agencies: the United States Copyright Office and the
Copyright Royalty Board. If there is a delay in the adoption of new regulations, or if the rules adopted are burdensome, it may make it
more challenging for us to obtain the necessary licenses and/or increase our costs. In July 2019, the Copyright Office selected an
entity to serve as the “mechanical licensing collective” (“MLC”) to collect mechanical licensing payments from digital music services
and distribute them to the correct copyright owners. If the MLC cannot carry out its duties, we may be unable to obtain the necessary
licenses.
Additionally, the legislation makes various changes in the rules and procedures of the “rate courts” that set royalty rates paid to
ASCAP and BMI for performance licenses covering musical compositions. It changes the mechanism by which judges are assigned to
hear rate-setting disputes. For some proceedings, it also eliminates a provision barring the introduction of sound recording royalty
rates in rate court proceedings. The legislation also makes changes to how royalty rates are set by the Copyright Royalty Board for
statutory mechanical licenses. The precise effect of these changes is uncertain, but it could lead the rate courts or the Copyright
Royalty Board to adopt less favorable terms for performance licenses or statutory mechanical licenses in the future, which could
negatively harm our business, operating results, and financial condition.
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The legislation also gives copyright owners a new federal digital performance right for sound recordings made prior to February
15, 1972, which were previously governed exclusively by state laws. We must ensure that our license agreements for the right to
stream sound recordings encompass this new federal right. If we fail to do so, the size and quality of our catalog may be materially
impacted and our business, operating results, and financial condition could be materially harmed.
We face many risks associated with our international expansion, including difficulties obtaining rights to stream content on
favorable terms.
We are continuing to expand our operations into additional international markets. However, offering our Service in a new
geographical area involves numerous risks and challenges. For example, the licensing terms offered by rights organizations and
individual copyright owners in countries around the world are currently expensive. Addressing licensing structure and royalty rate
issues in any new geographic market requires us to make very substantial investments of time, capital, and other resources, and our
business could fail if such investments do not succeed. There can be no assurance that we will succeed or achieve any return on these
investments.
In addition to the above, continued expansion around the world exposes us to other risks such as:
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lack of well-functioning copyright collective management organizations that are able to grant us music licenses, process
reports, and distribute royalties in markets;
fragmentation of rights ownership in various markets causing lack of transparency of rights coverage and overpayment or
underpayment to record labels, music publishers, artists, performing rights organizations, and other copyright owners;
difficulties in obtaining license rights to local content;
increased risk of disputes with and/or lawsuits filed by rights holders in connection with our expansion into new markets
(see “Item 8.A. Consolidated Statements and Other Financial Information—Legal or Arbitration Proceedings”);
difficulties in achieving market acceptance of our Service in different geographic markets with different tastes and
interests;
difficulties in achieving viral marketing growth in certain other countries where we commit fewer sales and marketing
resources;
difficulties in managing operations due to language barriers, distance, staffing, user behavior and spending capability,
cultural differences, business infrastructure constraints, and laws regulating corporations that operate internationally;
application of different laws and regulations of other jurisdictions, including privacy, censorship, and liability standards
and regulations, as well as intellectual property laws;
potential adverse tax consequences associated with foreign operations and revenue;
complex foreign exchange fluctuation and associated issues;
increased competition from local websites and audio content providers, some with financial power and resources to
undercut the market or enter into exclusive deals with local content providers to decrease competition;
credit risk and higher levels of payment fraud;
political and economic instability in some countries;
restrictions on international monetary flows; and
reduced or ineffective protection of our intellectual property rights in some countries.
As a result of these obstacles, we may find it impossible or prohibitively expensive to enter additional markets, or entry into
foreign markets could be delayed, which could hinder our ability to grow our business.
If we fail to effectively manage our growth, our business, operating results, and financial condition may suffer.
Our rapid growth has placed, and will continue to place, significant demands on our management and our operational and
financial infrastructure. In order to attain and maintain profitability, we will need to recruit, integrate, and retain skilled and
experienced personnel who can demonstrate our value proposition to users, advertisers, and business partners and who can increase
the monetization of the music and podcasts streamed on our Service, particularly on mobile devices. Continued growth could also
strain our ability to maintain reliable service levels for our users, effectively monetize the music and podcasts streamed, develop and
improve our operational and financial controls, and recruit, train, and retain highly skilled personnel. If our systems do not evolve to
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meet the increased demands placed on us by an increasing number of advertisers, we also may be unable to meet our obligations under
advertising agreements with respect to the delivery of advertising or other performance obligations. As our operations grow in size,
scope, and complexity, we will need to improve and upgrade our systems and infrastructure, which will require significant
expenditures and allocation of valuable technical and management resources. If we fail to maintain efficiency and allocate limited
resources effectively in our organization as it grows, our business, operating results, and financial condition may suffer.
We have experienced rapid growth rates in both the number of active users of our Service and revenue over the last few years.
As we grow larger and increase our user base and usage, we expect it will become increasingly difficult to maintain the rate of growth
we currently experience.
Our business emphasizes rapid innovation and prioritizes long-term user engagement over short-term financial condition or
results of operations. That strategy may yield results that sometimes do not align with the market’s expectations. If that happens,
our stock price may be negatively affected.
Our business is growing and becoming more complex, and our success depends on our ability to quickly develop and launch
new and innovative products. We believe our culture fosters this goal. Our focus on complexity and quick reactions could result in
unintended outcomes or decisions that are poorly received by our users, advertisers, or partners. We have made, and expect to
continue to make, significant investments to develop and launch new products, services, and initiatives, which may involve significant
risks and uncertainties, including the fact that such offerings may not be commercially viable for an indefinite period of time or at all,
or may not result in adequate return of capital on our investments. No assurance can be given that such new offerings will be
successful and will not adversely affect our reputation, operating results, and financial condition. Our culture also prioritizes our long-
term user engagement over short-term financial condition or results of operations. We frequently make decisions that may reduce our
short-term revenue or profitability if we believe that the decisions benefit the aggregate user experience and will thereby improve our
financial performance over the long-term. These decisions may not produce the long-term benefits that we expect, in which case our
user growth and engagement, our relationships with advertisers and partners, as well as our business, operating results, and financial
condition could be seriously harmed.
If we fail to accurately predict, recommend, and play content that our users enjoy, we may fail to retain existing users and
attract new users in sufficient numbers to meet investor expectations for growth or to operate our business profitably.
We believe that a key differentiating factor between Spotify and other audio content providers is our ability to predict music or
podcasts that our users will enjoy. Our system for predicting user preferences and selecting content tailored to our users’ individual
tastes is based on advanced data analytics systems and our proprietary algorithms. We have invested, and will continue to invest,
significant resources in refining these technologies; however, we cannot assure you that such investments will yield an attractive
return or that such refinements will be effective. The effectiveness of our ability to predict user preferences and select content tailored
to our users’ individual tastes depends in part on our ability to gather and effectively analyze large amounts of user data. In addition,
our ability to offer users content that they have not previously heard and impart a sense of discovery depends on our ability to acquire
and appropriately categorize additional content that will appeal to our users’ diverse and changing tastes. While we have a large
catalog of music and podcasts available to stream, we must continuously identify and analyze additional content that our users will
enjoy and we may not effectively do so. Our ability to predict and select content that our users enjoy is critical to the perceived value
of our Service among users and failure to make accurate predictions could materially adversely affect our ability to adequately attract
and retain users, increase content hours consumed, and sell advertising to meet investor expectations for growth or to operate the
business profitably.
If we are unable to increase revenue from our Service on mobile and other connected devices, our results of operations may
be materially adversely affected.
Our business model with respect to monetization of our Service on mobile and other connected devices is still evolving. As
users migrate away from personal computers, there is increasing pressure to monetize mobile and other connected devices, including
cars and in-home devices. In all markets, we offer our Ad-Supported Service on mobile, from which we generate advertising revenue.
However, to date, we primarily rely on our Premium Service to generate revenue on mobile and other connected devices. If we are
unable to effectively monetize our Service on mobile and other connected devices, our business, operating results, and financial
condition may suffer.
We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to be
profitable, or to generate positive cash flow on a sustained basis. In addition, our revenue growth rate may decline.
Since our inception in April 2006, we have incurred significant operating losses and, as of December 31, 2019, had an
accumulated deficit of €2,709 million. For the years ended December 31, 2019, 2018, and 2017, our operating losses were €73
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million, €43 million, and €378 million, respectively. We have incurred significant costs to license content and continue to pay
royalties to record labels, publishers, and other copyright owners for such content. We cannot guarantee that we will generate
sufficient revenue from our efforts to monetize the Service via the sale of our Premium Service and generating advertising revenue,
including on our Ad-Supported Service, to offset the cost of our content and these royalty expenses. If we cannot successfully earn
revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our Service, we will not be able to
achieve or sustain profitability or generate positive cash flow on a sustained basis.
Furthermore, we cannot assure you that the growth in revenue we have experienced over the past few years will continue at the
same rate or even continue to grow at all. We expect that, in the future, our revenue growth rate may decline because of a variety of
factors, including increased competition and the maturation of our business. You should not consider our historical revenue growth or
operating expenses as indicative of our future performance. If our revenue growth rate declines or our operating expenses exceed our
expectations, our financial performance may be adversely affected.
Additionally, we also expect our costs to increase in future periods, which could negatively affect our future operating results
and ability to achieve profitability. We expect to continue to expend substantial financial and other resources on:
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securing top quality audio and video content from leading record labels, distributors, and aggregators, as well as the
publishing right to any underlying musical compositions;
creating new forms of original content;
our technology infrastructure, including website architecture, development tools, scalability, availability, performance,
security, and disaster recovery measures;
research and development, including investments in our research and development team and the development of new
features;
sales and marketing, including a significant expansion of our field sales organization;
international expansion in an effort to increase our member base, engagement, and sales;
capital expenditures, including costs related to our facilities, that we will incur to grow our operations and remain
competitive; and
general administration, including legal and accounting expenses.
These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and
overall business, our business, operating results, and financial condition would be harmed.
Expansion of our operations to deliver content beyond music, including podcasts, subjects us to increased business, legal,
financial, reputational, and competitive risks.
Expansion of our operations to deliver content beyond music involves numerous risks and challenges, including increased
capital requirements, new competitors, and the need to develop new strategic relationships. Growth in these areas may require
additional changes to our existing business model and cost structure, modifications to our infrastructure, and exposure to new
regulatory, legal and reputational risks, including infringement liability, any of which may require additional expertise that we
currently do not have. See “—We may be subject to disputes or liabilities associated with content made available on our Service.”
There is no guarantee that we will be able to generate sufficient revenue from podcasts or other non-music content to offset the costs
of creating or acquiring this content. Further, we have initially established a reputation as a music streaming service and our ability to
gain acceptance and listenership for podcasts or other non-music content, and thus our ability to attract users and advertisers to this
content, is not certain. Failure to successfully monetize and generate revenues from such content, including failure to obtain or retain
rights to podcasts or other non-music content on acceptable terms, or at all, or to effectively manage the numerous risks and
challenges associated with such expansion could adversely affect our business, operating results, and financial condition.
In addition, we enter into multi-year commitments for original content that we produce or commission. Given the multiple-year
duration and largely fixed cost nature of such commitments, if our user growth and retention do not meet our expectations, our
margins may be adversely impacted. Payment terms for certain content that we produce or commission will typically require more
upfront cash payments than other content licenses or arrangements whereby we do not pay for the production of such content. To the
extent our user and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected
as a result of such content commitments. The long-term and fixed cost nature of certain content commitments may also limit our
flexibility in planning for or reacting to changes in our business, as well as our ability to adjust our content offering if our users do not
react favorably to the content we produce. Any such event could adversely impact our business, operating results, and financial
condition.
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Streaming depends on effectively working with operating systems, online platforms, hardware, networks, regulations, and
standards we do not control. Changes in our Service or those operating systems, hardware, networks, regulations, or standards,
and our limitations on our ability to access those platforms, operating systems, hardware, or networks may seriously harm our
business.
We rely on a variety of operating systems, online platforms, hardware, and networks to reach our users. These platforms range
from desktop and mobile operating systems and application stores to wearables and intelligent voice assistants. The owners or
operators of these platforms may not share our interests and may restrict our access to them or place conditions on access that would
materially affect our ability to access those platforms. In particular, where the owner of a platform is also our direct competitor, the
platform may attempt to use this position to affect our access to users and ability to compete. For example, an online platform might
arbitrarily remove our Service from its platform, deprive us of access to business critical data, or engage in other harmful practices.
Online platforms also may unilaterally impose certain requirements that negatively affect our ability to convert users to the Premium
Service, such as conditions that limit our freedom to communicate promotions and offers to our users. Similarly, online platforms may
force us to use the platform’s payment processing systems that may be inferior to, and more costly than other payment processing
services available in the market. Online platforms frequently change the rules and requirements for services like ours to access the
platform, and such changes may adversely affect the success or desirability of our Service. To maintain certain elements of the Service
on a platform, we may need to make additional concessions to the platform operator that may adversely affect other aspects of the
business or require us to invest significant expenses. Online platforms may limit our access to information about users, limiting our
ability to convert and retain them. Online platforms also may deny access to application programming interfaces or documentation,
limiting functionality of our Service on the platform.
In March 2019, we filed a complaint against Apple with the European Commission for engaging in certain behaviors that we
believe are unlawful and anti-competitive. We cannot assure you that the outcome of the process with the European Commission will
be successfully resolved in our favor.
Furthermore, because devices providing access to our Service are not manufactured and sold by us, we cannot guarantee that
these devices perform reliably, and any faulty connection between these devices and our Service may result in consumer
dissatisfaction toward us, which could damage our brand.
Moreover, our Service requires high-bandwidth data capabilities. If the costs of data usage increase or access to data networks is
limited, our business may be seriously harmed. Additionally, to deliver high-quality audio, video, and other content over networks, our
Service must work well with a range of technologies, systems, networks, regulations, and standards that we do not control. In addition,
the adoption of any laws or regulations that adversely affect the growth, popularity, or use of the internet, including laws governing
internet neutrality, could decrease the demand for our Service and increase our cost of doing business. Previously, Federal
Communications Commission (the “FCC”) “open internet rules” included bright-line provisions prohibiting internet service providers
from blocking lawful internet content, throttling such content, or engaging in paid prioritization, as well as a general conduct standard
barring such providers from unreasonably interfering with or disadvantaging online content providers’ access to end users and end
users’ access to online content. However, on December 14, 2017, the FCC voted to repeal these regulations, while leaving in place a
revised set of disclosure obligations for internet service providers backed by potential enforcement by the Federal Trade Commission
under its general authority to prevent unfair, deceptive, or anticompetitive practices. A number of parties appealed this order, and
although the U.S. Court of Appeals for the D.C. Circuit largely rejected challenges to the FCC’s order in October 2019, the petitioners
may pursue further appellate proceedings before the Court of Appeals or the U.S. Supreme Court. Several states also have imposed
their own open internet protections modeled on the repealed bright-line provisions, although internet service providers have filed
lawsuits challenging such measures in two states, and additional challenges are likely. It is also possible that Congress may adopt
legislation restoring some of the repealed FCC regulations. If, as a result of the repeal of these bright-line rules, internet service
providers in the United States impede access to certain content, start entering into arrangements with specific content providers for
faster or better access over their data networks, or otherwise unfairly discriminate against content providers like us, such conduct
could increase our cost of doing business and put us at a competitive disadvantage relative to larger competitors. Additionally, if, as a
result of the repeal of these bright-line rules, mobile providers attempt to limit our users’ ability to access Spotify or make Spotify a
less attractive alternative to our competitors’ applications, our business, operating results, and financial condition would be seriously
harmed.
The European Union (the “EU”) currently requires equal access to internet content. If the EU or the courts modify these open
internet rules, mobile providers may be able to limit our users’ ability to access Spotify or make Spotify a less attractive alternative to
our competitors’ applications. If that occurs, our business, operating results, and financial condition would be seriously harmed.
Additionally, as part of the EU’s Digital Single Market initiative and the implementation of the European Electronic Communications
Code at the national level, EU Member States may impose network security and disability access obligations on “over-the-top”
services such as those provided by us, which could increase our costs. Based on the Directive on Copyright in the Digital Single
Market, EU Member States are also required to implement new rules on copyright protection before 2021, including rules on
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remuneration for use of copyrighted content and obligations on online content providers to compensate for breaches of copyright,
which could also impact our costs or the conditions for users to access licensed content.
There can be no assurance that we will be able to comply with the requirements of various operating systems, online platforms,
hardware, networks, regulations, and standards on which our Service depends, and failure to do so could result in serious harm to our
business.
If our security systems are breached, we may face civil liability and/or statutory fines, and/or enforcement action causing us
to change our practices, and public perception of our security measures could be diminished, either of which would negatively
affect our ability to attract and retain Premium Subscribers, Ad-Supported Users, advertisers, content providers, and other
business partners.
Techniques used to gain unauthorized access to data and software are constantly evolving, and we may be unable to anticipate
or prevent unauthorized access to data pertaining to our users, including credit card and debit card information and other personal data
about our users, business partners, and employees. Like all internet services, our Service, which is supported by our own systems and
those of third parties that we work with, is vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks,
attempts to overload servers with denial-of-service, or other attacks and similar disruptions from unauthorized use of our and third-
party computer systems, any of which could lead to system interruptions, delays, or shutdowns, causing loss of critical data or
unauthorized access to personal data. Computer malware, viruses, and computer hacking and phishing attacks have become more
prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Because of our
prominence, we believe that we are a particularly attractive target for such attacks. Though it is difficult to determine what, if any,
harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, and
availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to
retain existing users and attract new users. We cannot assure you that the systems and processes that we have designed to protect our
data and our users’ data, to prevent data loss, to disable undesirable accounts and activities on our platform, and to prevent or detect
security breaches, will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
In addition, if an actual or perceived breach of security occurs to our systems or a third party’s systems, we may face regulatory
or civil liability and public perception of our security measures could be diminished, either of which would negatively affect our
ability to attract and retain users, which in turn would harm our efforts to attract and retain advertisers, content providers, and other
business partners. We also would be required to expend significant resources to mitigate the breach of security and to address matters
related to any such breach. In Europe, we also may be required to notify European Data Protection Authorities, within strict time
periods, about any personal data breaches, unless the personal data breach is unlikely to result in a risk to the rights and freedoms of
the affected individuals. We may also be required to notify the affected individuals of the personal data breach where there is a high
risk to their rights and freedoms. If we are found to have inadequate security measures in place (which, for example, results in a
personal data breach), we could be fined up to EUR 20 million or 4% of worldwide annual turnover of the preceding financial year,
whichever is greater. Any data breach by service providers that are acting as data processors (i.e., processing personal data on our
behalf) could also mean that we are subject to these fines and have to comply with the notification obligations set out above.
Any failure, or perceived failure, by us to maintain the security of data relating to our users, to comply with our posted privacy
policy, laws and regulations, rules of self-regulatory organizations, industry standards, and contractual provisions to which we may be
bound, could result in the loss of confidence in us, or result in actions against us by governmental entities, data protection authorities,
or others, all of which could result in litigation and financial losses, and could potentially cause us to lose users, advertisers, and
revenues. Any of these events could have a material adverse effect on our business, operating results, and financial condition and
could cause our stock price to drop significantly.
Our Service and software are highly technical and may contain undetected software bugs or vulnerabilities, which could
manifest in ways that could seriously harm our reputation and our business.
Many of the products we offer are highly technical and complex, including (i) our Service, (ii) Spotify Connect, which allows
users to use the Spotify application to transfer and control playback on speakers, TVs, cars, smart watches and other wearable devices,
phones, tablets, computers, game consoles, and other devices, (iii) our application programming interfaces and software development
kits, which enable users to interact with, and control playback from, the Service within third-party applications and services, and (iv)
services we offer to artists, podcasters, publishers, and other creators, such as Spotify Analytics, Spotify for Artists, Spotify Publishing
Analytics, Spotify Ad Studio, Spotify for Podcasters, Soundtrap, Anchor, and SoundBetter, which provide access to various tools.
These products or any other product we may introduce in the future may contain undetected software bugs, hardware errors, and other
vulnerabilities. These bugs and errors can manifest in any number of ways in our products, including through diminished performance,
security vulnerabilities, malfunctions, or even permanently disabled products. We have a practice of rapidly updating our products,
and as a result some errors in our products may be discovered only after a product has been used by users, and may in some cases be
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detected only under certain circumstances or after extended use. Additionally, many of our products are available on multiple
operating systems and/or multiple devices offered by different manufacturers, and changes or updates to such operating systems or
devices may cause errors or functionality problems in our products, including rendering our products inoperable by some users. Any
errors, bugs, or other vulnerabilities discovered in our code or backend after release could damage our reputation, drive away users,
allow third parties to manipulate or exploit our software (including, for example, providing mobile device users a means to suppress
advertisements without payment and gain access to features only available to the Ad-Supported Service on tablets and desktop
computers), lower revenue, and expose us to claims for damages, any of which could seriously harm our business. See “— We are at
risk of attempts to manipulate or exploit our software for the purpose of gaining or providing unauthorized access to certain features of
our Service, and failure to effectively prevent and remediate such attempts could have an adverse impact on our business, operating
results, and financial condition.” Additionally, errors, bugs, or other vulnerabilities may—either directly or if exploited by third
parties—affect our ability to make accurate royalty payments. See “—Our royalty payment scheme is complex, and it is difficult to
estimate the amount payable under our license agreements.”
We could also face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly
and may divert management’s attention and seriously harm our reputation and our business. In addition, if our liability insurance
coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be seriously harmed.
Interruptions, delays, or discontinuations in service arising from our own systems or from third parties could impair the
delivery of our Service and harm our business.
We rely on systems housed in our own facilities and upon third parties, including bandwidth providers and third-party “cloud”
data storage services, to enable our users to receive our content in a dependable, timely, and efficient manner. We have experienced,
and may in the future experience, periodic service interruptions and delays involving our own systems and those of third parties that
we work with. Both our own facilities and those of third parties are vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunications failures, and similar events. They are also subject to break-ins, sabotage, intentional acts of
vandalism, the failure of physical, administrative, technical, and cyber security measures, terrorist acts, natural disasters, human error,
the financial insolvency of third parties that we work with, and other unanticipated problems or events. The occurrence of any of these
events could result in interruptions in our Service and unauthorized access to, or alteration of, the content and data contained on our
systems that these third parties store and deliver on our behalf.
Any disruption in the services provided by these third parties could materially adversely impact our business reputation,
customer relations, and operating results. Upon expiration or termination of any of our agreements with third parties, we may not be
able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are
favorable to us, and a transition from one third party to another could subject us to operational delays and inefficiencies until the
transition is complete.
We rely upon the Google Cloud Platform to operate certain aspects of our business and to store almost all of our data, and
any disruption of or interference with our use of the Google Cloud Platform could have a material adverse effect on our business,
operating results, and financial condition.
Google Cloud Platform (“GCP”) provides a distributed computing infrastructure platform for business operations, or what is
commonly referred to as a cloud computing service. We have designed our software and computer systems to utilize data processing,
storage capabilities, and other services provided by GCP. We have transitioned all of our primary data storage (including personal data
of users and audio data licensed from rights holders) and computing from our own servers to GCP. We cannot easily switch our GCP
operations to another cloud provider, and any disruption of, or interference with, our use of GCP could have a material adverse effect
on our business, operating results, and financial condition. While the consumer side of Google competes with us, we do not believe
that Google will use the GCP operation in such a manner as to gain competitive advantage against our Service. In 2018, we entered
into a new service agreement with Google for the use of GCP. We must make minimum payments during the first three years of the
service. As of December 31, 2019, the remaining minimum payments are approximately €138 million.
Assertions by third parties of infringement or other violation by us of their intellectual property rights could harm our
business, operating results, and financial condition.
Third parties have asserted, and may in the future assert, that we have infringed, misappropriated, or otherwise violated their
copyrights, patents, and other intellectual property rights, and as we face increasing competition, the possibility of intellectual property
rights claims against us grows. See “Item 8.A. Consolidated Statements and Other Financial Information—Legal or Arbitration
Proceedings.”
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Our ability to provide our Service is dependent upon our ability to license intellectual property rights to audio content, including
sound recordings, any musical compositions embodied therein, and podcasts, as well as visual and related content, such as music
videos, clips, album cover art, artist images, and any other media assets that artists and/or labels can add or provide with their tracks.
Various laws and regulations govern the copyright and other intellectual property rights associated with audio and visual content,
including sound recordings and musical compositions. Existing laws and regulations are evolving and subject to different
interpretations, and various legislative or regulatory bodies may expand current or enact new laws or regulations. Although we expend
significant resources to seek to comply with the statutory, regulatory, and judicial frameworks by, for example, entering into license
agreements, we cannot assure you that we are not infringing or violating any third-party intellectual property rights, or that we will not
do so in the future. See “—Difficulties in obtaining accurate and comprehensive information necessary to identify the compositions
embodied in sound recordings on our Service and the ownership thereof may impact our ability to perform our obligations under our
licenses, affect the size of our catalog, impact our ability to control content acquisition costs, and lead to potential copyright
infringement claims.” Moreover, while we may often be able to seek indemnities from our licensors with respect to infringement
claims that may relate to the content they provide to us, such indemnities may not be sufficient to cover the associated liability if the
licensor at issue does not have adequate financial resources.
In addition, music, internet, technology, and media companies are frequently subject to litigation based on allegations of
infringement, misappropriation, or other violations of intellectual property rights. Many companies in these industries, including many
of our competitors, have substantially larger patent and intellectual property portfolios than we do, which could make us a target for
litigation. We may not be able to assert counterclaims against parties that sue us for patent, or other intellectual property infringement.
In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert
claims in order to extract value from technology companies. Further, from time to time we may introduce new products and services,
including in territories where we currently do not have an offering, which could increase our exposure to patent and other intellectual
property claims from competitors and non-practicing entities. It is difficult to predict whether assertions of third-party intellectual
property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business,
operating results, and financial condition. If we are forced to defend against any infringement or misappropriation claims, whether
they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time
and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay significant
damages, which may be even greater if we are found to have willfully infringed upon a party’s intellectual property; cease exploiting
copyrighted content that we have previously had the ability to exploit; cease using solutions that are alleged to infringe or
misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into
potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content, or materials;
indemnify our partners and other third parties; and/or take other actions that may have material effects on our business, operating
results, and financial condition.
Moreover, we rely on multiple software programmers to design our proprietary technologies, and we regularly contribute
software source code under “open source” licenses and have made technology we developed available under open source licenses. We
cannot assure you that our efforts to prevent the incorporation of licenses that would require us to disclose code and/or innovations in
our products will always be successful, as we do not exercise complete control over the development efforts of our programmers, and
we cannot be certain that our programmers have not used software that is subject to such licenses or that they will not do so in the
future. In the event that portions of our proprietary technology are determined to be subject to licenses that require us to publicly
release the affected portions of our source code, re-engineer a portion of our technologies, or otherwise be limited in the licensing of
our technologies, we may be forced to do so, each of which could materially harm our business, operating results, and financial
condition.
Failure to protect our intellectual property could substantially harm our business, operating results, and financial condition.
The success of our business depends on our ability to protect and enforce our patents, trade secrets, trademarks, copyrights, and
all of our other intellectual property rights, including our intellectual property rights underlying our Service. We attempt to protect our
intellectual property under patent, trade secret, trademark, and copyright law through a combination of intellectual property
registration, employee, third-party assignment and nondisclosure agreements, other contractual restrictions, technological measures,
and other methods. These afford only limited protection and we are still continuing to develop our processes for securing our
intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy
aspects of our product and brand features, or obtain and use our trade secrets and other confidential information. Moreover, policing
our intellectual property rights is difficult and time-consuming. We cannot assure you that we would have adequate resources to
protect and police our intellectual property rights, and we cannot assure you that the steps we take to do so will always be effective.
We have filed, and may in the future file, patent applications on certain of our innovations. It is possible, however, that these
innovations may not be patentable. In addition, given the cost, effort, risks, and downside of obtaining patent protection, including the
requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for some innovations.
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Furthermore, our patent applications may not issue as granted patents, the scope of the protection gained may be insufficient or an
issued patent may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents or other
intellectual property rights will not lapse or be invalidated, circumvented, challenged, or abandoned. Neither can we guarantee that our
intellectual property rights will provide competitive advantages to us. Our ability to assert our intellectual property rights against
potential competitors or to settle current or future disputes could be limited by our relationships with third parties, and any of our
pending or future patent applications may not have the scope of coverage originally sought. We cannot guarantee that our intellectual
property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak. We could
lose both the ability to assert our intellectual property rights against, or to license our technology to, others and the ability to collect
royalties or other payments.
We currently own the www.spotify.com internet domain name and various other related domain names. Internet regulatory
bodies generally regulate domain names. If we lose the ability to use a domain name in a particular country, we may be forced either
to incur significant additional expenses to market our Service within that country or, in extreme cases, to elect not to offer our Service
in that country. Either result could harm our business, operating results, and financial condition. The regulation of domain names in
the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire
or maintain the domain names that utilize our brand names in the United States or other countries in which we may conduct business
in the future.
Litigation or proceedings before governmental authorities and administrative bodies may be necessary in the future to enforce
our intellectual property rights, to protect our patent rights, trademarks, trade secrets, and domain names and to determine the validity
and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective and could result
in substantial costs and diversion of resources and management time, each of which could substantially harm our operating results.
Additionally, changes in law may be implemented, or changes in interpretation of such laws may occur, that may affect our ability to
protect and enforce our patents and other intellectual property.
Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies
in those metrics may seriously harm and negatively affect our reputation and our business.
We regularly review key metrics related to the operation of our business, including, but not limited to, our monthly active users
(“MAUs”), Ad-Supported MAUs, Premium average revenue per user (“ARPU”), and Premium Subscribers, to evaluate growth trends,
measure our performance, and make strategic decisions. These metrics are calculated using internal company data and have not been
validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates of our user base
for the applicable period of measurement, there are inherent challenges in measuring how our Service is used across large populations
globally. For example, we believe that while there are individuals who have multiple Spotify accounts, which we treat as multiple
users for purposes of calculating our active users, there are also Spotify accounts that are used by more than one person. Accordingly,
the calculations of our active users may not reflect the actual number of people using our Service. In addition, we are continually
seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our
methodology, including improvements in our ability to identify and/or address previously undetected undesirable user behaviors. We
cannot assure you that our efforts to improve our estimates of user base and to identify and/or address undesirable user behaviors will
be successful, and these efforts could result in the removal of certain user accounts and/or a reduction in MAUs or other metrics.
Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies, including expending
resources to implement unnecessary business measures or failing to take required actions to attract a sufficient number of users to
satisfy our growth strategies.
In addition, advertisers generally rely on third-party measurement services to calculate metrics related to our advertising
business, and these third-party measurement services may not reflect our true audience. Some of our demographic data also may be
incomplete or inaccurate because users self-report their names and dates of birth or because we receive them from other third parties.
Consequently, the personal data we have may differ from our users’ actual names and ages. If advertisers, partners, or investors do not
perceive our user, geographic, or other demographic metrics to be accurate representations of our user base, or if we discover material
inaccuracies in our user, geographic, or other demographic metrics, our reputation may be seriously harmed. See “—We rely on
advertising revenue to monetize our Service, and any failure to convince advertisers of the benefits of advertising on our Service in the
future could harm our business, operating results, and financial condition,” “—We are at risk of artificial manipulation of stream
counts and failure to effectively manage and remediate such fraudulent streams could have an adverse impact on our business,
operating results, and financial condition. Fraudulent streams and potentially associated fraudulent user accounts or artists may cause
us to overstate key performance indicators, which once discovered, corrected, and disclosed, could undermine investor confidence in
the integrity of our key performance indicators and could cause our stock price to drop significantly,” and “—We are at risk of
attempts to manipulate or exploit our software for the purpose of gaining or providing unauthorized access to certain features of our
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Service, and failure to effectively prevent and remediate such attempts could have an adverse impact on our business, operating
results, and financial condition.”
We are at risk of artificial manipulation of stream counts and failure to effectively manage and remediate such fraudulent
streams could have an adverse impact on our business, operating results, and financial condition. Fraudulent streams and
potentially associated fraudulent user accounts or artists may cause us to overstate key performance indicators, which once
discovered, corrected, and disclosed, could undermine investor confidence in the integrity of our key performance indicators and
could cause our stock price to drop significantly.
We have in the past been, and continue to be, impacted by attempts by third parties to artificially manipulate stream counts.
Such attempts may, for example, be designed to generate revenue for rights holders or to influence placement of content on Spotify-
created playlists or industry music charts. These potentially fraudulent streams may involve creating non-bona fide user accounts or
artists or using compromised passwords to access legitimate user accounts. For example, we have detected instances of botnet
operators creating fake user accounts or hackers using passwords compromised as a result of a breach on a non-Spotify service to
access legitimate user accounts and streaming specific content repeatedly, thereby generating royalties each time the content is
streamed or increasing its visibility on our or third-party charts. We use a combination of algorithms and manual review by employees
to detect fraudulent streams and aim to remove fake user accounts created for the above purposes and filter them out from our metrics
on an ongoing basis, as well as to require users to reset passwords that we suspect have been compromised. However, we may not be
successful in detecting, removing, and addressing all fraudulent streams and any related user accounts. If in the future we fail to
successfully detect, remove, and address fraudulent streams and associated user accounts, it may result in the manipulation of our data,
including the key performance indicators, which underlie, among other things, our contractual obligations with rights holders and
advertisers (which could expose us to the risk of litigation), as well as harm our relationships with rights holders and advertisers. In
addition, once we detect, correct, and disclose fraudulent streams and associated user accounts, this may result in the removal of
certain user accounts and/or a reduction in account activity, which may affect key performance indicators and undermine investor
confidence in the integrity of our key performance indicators. These could have a material adverse impact on our business, operating
results, and financial condition.
We are at risk of attempts to manipulate or exploit our software for the purpose of gaining or providing unauthorized access
to certain features of our Service, and failure to effectively prevent and remediate such attempts could have an adverse impact on
our business, operating results, and financial condition.
We have in the past been, and continue to be, impacted by attempts by third parties to manipulate or exploit our software for the
purpose of gaining or providing unauthorized access to certain features of our Service. For example, we have detected instances of
third parties seeking to provide mobile device users a means to suppress advertisements without payment and gain access to features
only available to the Ad-Supported Service on tablets and desktop computers. If we fail to successfully detect and address such issues,
it may have artificial effects on our key performance indicators, such as MAUs, which underlie, among other things, our contractual
obligations with rights holders and advertisers (which could expose us to the risk of litigation), as well as harm our relationship with
rights holders and advertisers. The discovery or development of any new method to gain unauthorized access to certain features of our
Service, such as through the exploitation of software vulnerabilities, and the sharing of any such method among third parties, may
increase the level of unauthorized access (and the attendant negative financial impact described above). We cannot assure you we will
be successful in finding ways to effectively address unauthorized access achieved through any such method. Additionally, compared
to our Ad-Supported Users, individuals using unauthorized versions of our application may be less likely to convert to Premium
Subscribers. Moreover, once we detect and disable such unauthorized access, this may result in the removal of certain user accounts
and/or a reduction in account activity, which may affect our key performance indicators and could undermine investor confidence in
the integrity of our key performance indicators. These could have a material adverse impact on our business, operating results, and
financial condition.
Our business is subject to a variety of laws around the world. Government regulation of the internet is evolving and any
changes in government regulations relating to the internet or other areas of our business or other unfavorable developments may
adversely affect our business, operating results, and financial condition.
We are an international company that is registered under the laws of Luxembourg, with offices and/or operations in 79 countries
and territories around the world. As a result of this organizational structure and the scope of our operations, we are subject to a variety
of laws in different countries. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may
be conflicting. It is also likely that if our business grows and evolves and our solutions are used more globally, we will become subject
to laws and regulations in additional jurisdictions. It is difficult to predict how existing laws will be applied to our business and the
new laws to which we may become subject.
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We are subject to general business regulations and laws, as well as regulations and laws specific to the internet. Such laws and
regulations include, but are not limited to, labor, advertising and marketing, real estate, taxation, user privacy, data collection and
protection, intellectual property, anti-corruption, anti-money laundering, sanctions, foreign exchange controls, antitrust and
competition, electronic contracts, telecommunications, sales procedures, automatic subscription renewals, credit card processing
procedures, consumer protections, broadband internet access, and content restrictions. We cannot guarantee that we have been or will
be fully compliant in every jurisdiction in which we are subject to regulation, as existing laws and regulations governing issues such as
intellectual property, privacy, taxation, and consumer protection, among others, are constantly changing. The adoption or modification
of laws or regulations relating to the internet or other areas of our business could limit or otherwise adversely affect the manner in
which we currently conduct our business. For example, certain jurisdictions have implemented or are contemplating implementing
laws that may negatively impact our automatic renewal structure or our free or discounted trial incentives. Further, compliance with
laws, regulations, and other requirements imposed upon our business may be onerous and expensive, and they may be inconsistent
from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business.
Moreover, as internet commerce continues to evolve, increasing regulation by U.S. federal and state agencies and other
international regulators becomes more likely and may lead to more stringent consumer protection laws, which may impose additional
burdens on us. The adoption of any laws or regulations that adversely affect the popularity or growth in use of the internet, including
laws limiting internet neutrality, artificial intelligence, or machine learning, could decrease user demand for our Service and increase
our cost of doing business. Future regulations, or changes in laws and regulations or their existing interpretations or applications,
could also hinder our operational flexibility, raise our compliance costs, and result in additional historical or future liabilities for us,
resulting in material adverse impacts on our business, operating results, and financial condition.
Various regulations as well as self-regulation related to privacy and data security concerns pose the threat of lawsuits,
regulatory fines and other liability, require us to expend significant resources, and may harm our business, operating results, and
financial condition.
As we collect and utilize personal data about our users as they interact with our Service, we are subject to new and existing laws
and regulations that govern our use of user data. We are likely to be required to expend significant capital to ensure ongoing
compliance with these laws and regulations. Claims or allegations that we have violated laws and regulations relating to privacy and
data security could result in negative publicity and a loss of confidence in us by our users and our partners. We may be required to
make significant expenditure to resolve these issues and we could be subject to civil liability and/or fines or other penalties, including
by government and data protection authorities.
The General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018, implemented stringent operational
requirements for companies that are established in the EU or, where not established in the EU, offer goods or services to individuals in
the EU or monitor the behavior of individuals in the EU. Failure to comply with the GDPR can result in fines of up to EUR 20 million
or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher.
The requirements of the GDPR include, for example, expanded disclosures about how personal data is processed, mandatory
data breach notification requirements, a strengthened data subject rights regime and higher standards for obtaining consent from
individuals to process their personal data (including in certain circumstances for marketing), all of which involve significant ongoing
expenditure. The principle of accountability likewise requires us to put significant documentation in place to demonstrate compliance.
While the GDPR in large part harmonizes data protection requirements across EU countries, some provisions allow EU Member
States to adopt additional or different requirements, which could limit our ability to use and share personal data or could require
localized changes to our operating model. For example, Member States have adopted different ages at which parental consent is
required to process the personal data of children. This has required us to adopt mechanisms which ensure effective age-gating which
may lead us to incur operating costs. Separately, we rely on third parties to carry out a number of services for us (for example, cloud-
based vendors), including processing personal data on our behalf, and while we enter into contractual arrangements to ensure that they
only process such data according to our instructions and have sufficient security measures in place, any security breach, non-
compliance with our contractual terms or breach of applicable law by such third parties could result in governmental or regulatory
enforcement actions, litigation, fines and penalties or adverse publicity and could cause our users to lose trust in us, which could have
an adverse impact on our reputation and business. We are also likely to be affected by legal challenges to the validity of EU
mechanisms for transfers of personal data outside the EU (such as the Privacy Shield Framework and the standard contractual
clauses), and our business could be impacted by changes in law as a result of future review of these mechanisms by European courts
or regulators under EU law, as well as current challenges to these mechanisms in the European courts.
The GDPR together with recent regulatory guidance has changed the requirements relating to cookies and similar technologies.
In the EU, under the current Directive 2002/58 on Privacy and Electronic Communications (the “ePrivacy Directive”), informed and
freely given consent is required for the placement of certain cookies on a user’s device. The GDPR has raised the standard of consent
in the EU so that it has to be fully informed, freely given, specific and opt-in, which could, as companies move towards this model,
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impact user uptake and the ability to generate revenue from advertising. In addition, the ePrivacy Directive is going through the
European legislative process. A draft of the new Regulation (EC) 2017/0003 concerning the respect for private life and the protection
of personal data in electronic communications (the “e-Privacy Regulations”) is intended to replace the ePrivacy Directive and is likely
to codify the existing rules around the use of cookies and similar technologies and may place broader restrictions on our online
activities, including efforts to understand our user’s internet usage and advertise to them. The e-Privacy Regulations may also extend
strict marketing rules with limited exceptions to business to business communications, and will significantly increase penalties.
Existing privacy-related laws and regulations in the EU, United States, and in other countries are evolving and are subject to
potentially differing interpretations, and various U.S. federal and state or other international legislative and regulatory bodies may
expand or enact laws regarding privacy and data security-related matters. The state of California enacted the California Consumer
Privacy Act (“CCPA”), which came into effect on January 1, 2020, and imposes heightened transparency obligations and creates new
data privacy rights for California residents. Failure to comply with the CCPA can result in fines of up to $7,500 per intentional
violation and $2,500 per other violation. Consumers have a private right of action with respect to certain data breaches and can
recover civil damages of up to $750 per incident, per consumer or actual damages, whichever is greater. Similar laws coming into
effect in other states, adoption of a comprehensive federal data privacy law, and new legislation in international jurisdictions may
continue to change the data protection landscape globally and could result in us expending considerable resources to meet these
requirements.
We may find it necessary or desirable to join self-regulatory bodies or other privacy-related organizations that require
compliance with their rules pertaining to privacy and data security. We also may be bound by contractual obligations that limit our
ability to collect, use, disclose, share, and leverage user data and to derive economic value from it. New laws, amendments to, or
reinterpretations of existing laws, rules of self-regulatory bodies, industry standards, and contractual obligations, as well as changes in
our users’ expectations and demands regarding privacy and data security, may limit our ability to collect, use, and disclose, and to
leverage and derive economic value from user data. Restrictions on our ability to collect, access and harness user data, or to use or
disclose user data, may require us to expend significant resources to adapt to these changes, and would in turn limit our ability to
stream personalized content to our users and offer advertising and promotional opportunities to users on the Service.
We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by
law, regulation, self-regulatory bodies, industry standards, and contractual obligations. Any failure to comply with privacy laws could
result in litigation, regulatory or governmental investigations, enforcement action requiring us to change the way we use personal data,
restrictions on how we use personal data, or significant regulatory fines. In addition to statutory enforcement, a data breach could lead
to compensation claims by affected individuals (including consumer advocacy groups), negative publicity and a potential loss of
business as a result of customers losing trust in us. Such failures could have a material adverse effect on our financial condition and
operations.
Changes in regulations or user concerns regarding privacy and protection of user data, or any failure or appearance of
failure to comply with such laws, could diminish the value of our Service and cause us to lose users and revenue.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future.
Practices regarding the collection, use, storage, transmission, and security of personal data by companies operating over the internet
have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and the
Department of Commerce, as well as other national, state, and local governments, may continue to review the need for greater
regulation over the collection of information concerning consumer behavior on the internet, including regulation aimed at restricting
certain targeted advertising practices. In addition, the EU may continue to review the need for greater regulation or reform to its
existing data protection legal framework, which may result in a greater compliance burden for companies with users in Europe.
Various government and consumer agencies also have called for new regulation and changes in industry practices. Our business,
including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted,
interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these
practices, the design of our website, services, features, or our privacy policy. In particular, the success of our business has been, and
we expect will continue to be, driven by our ability to responsibly use the personal data that our users share with us. Therefore, our
business could be harmed by any significant change to applicable laws, regulations, or industry practices regarding the use of our
users’ personal data — for example, regarding the manner in which disclosures are made and how consent or other legal basis for the
use of personal data is obtained. Such changes may require us to modify our services and features, possibly in a material manner, and
may limit our ability to develop new services and features that make use of the data that our users voluntarily share with us. In
addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store
information provided by us or by our users through mobile or web applications integrated with our Service. We provide limited
information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to
adopt or adhere to adequate data security and purpose limitation practices, or in the event of a breach of their networks, our data or our
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users’ data may be improperly accessed, used, or disclosed. Such failures could have a material adverse effect on our business,
operating results, and financial condition.
If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately and timely
report our financial results could be adversely affected.
We are required to maintain internal control over financial reporting and to report any material weaknesses in those controls. We
previously identified a material weakness in our internal control over financial reporting that related to accounting for rights holder
liabilities. During 2019, we took a number of actions designed to remediate this material weakness, including the hiring of additional
accounting, finance, system engineers, and data analysts, and the implementation of new controls, processes, and technologies over
the calculation, processing, reconciliations, and analysis of right holder liabilities. Based on the testing of operating effectiveness of
these controls completed to date, as of December 31, 2019, the previously identified material weakness has been remediated.
If we identify future material weaknesses in our internal control over financial reporting or fail to meet our obligations as a
public company, including the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), we may be unable to
accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations, and we
could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our ordinary
shares to decline. Under Section 404 of the Sarbanes-Oxley Act, we are required to evaluate and determine the effectiveness of our
internal control over financial reporting and provide a management report as to internal control over financial reporting. Failure to
maintain effective internal control over financial reporting also could potentially subject us to sanctions or investigations by the SEC,
the NYSE, or other regulatory authorities, or shareholder lawsuits, which could require additional financial and management
resources. We cannot assure you that additional material weaknesses will not occur in the future, which could materially adversely
affect our business, operating results, and financial condition.
We rely on advertising revenue to monetize our Service, and any failure to convince advertisers of the benefits of advertising
on our Service in the future could harm our business, operating results, and financial condition.
Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors,
including:
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increasing the number of hours our Ad-Supported Users spend listening to audio or otherwise engaging with content on
our Ad-Supported Service;
increasing the number of Ad-Supported Users;
keeping pace with changes in technology and our competitors;
competing effectively for advertising dollars with other online and mobile marketing and media companies;
• maintaining and growing our relationships with marketers, agencies, and other demand sources who purchase advertising
inventory from us;
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implementing and maintaining an effective infrastructure for order management; and
continuing to develop and diversify our advertising platform and offerings, which currently include delivery of advertising
products through multiple delivery channels, including traditional computers, mobile, and other connected devices, and
multiple content types, including podcasts.
We may not succeed in capturing a greater share of our advertisers’ core marketing budgets, particularly if we are unable to
achieve the scale, reach, products, and market penetration necessary to demonstrate the effectiveness of our advertising solutions, or if
our advertising model proves ineffective or not competitive when compared to other alternatives and platforms through which
advertisers choose to invest their budgets.
Failure to grow the Ad-Supported User base and to effectively demonstrate the value of our Ad-Supported Service and other
similar offerings on the Service to advertisers could result in loss of, or reduced spending by, existing or potential future advertisers,
which would materially harm our business, operating results, and financial condition.
Selling advertisements requires that we demonstrate to advertisers that our offerings on the Service are effective. For example,
we need to show that our Ad-Supported Service has substantial reach and engagement by relevant demographic audiences. Some of
our demographic data may be incomplete or inaccurate. For example, because Ad-Supported Users self-report their personal data,
which may include their genders and dates of birth, the personal data we have may differ from our Ad-Supported Users’ actual
genders and ages. If our Ad-Supported Users provide us with incorrect or incomplete information regarding their personal data, such
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as genders, age, or other attributes we use to target advertisements to users, or the data are otherwise not available to us, then we may
fail to target the correct demographic with our advertising. Advertisers often rely on third parties to quantify the reach and
effectiveness of our ad products. These third-party measurement services may not reflect our true audience or the performance of our
ad products, and their underlying methodologies are subject to change at any time. In addition, the methodologies we apply to measure
the key performance indicators that we use to monitor and manage our business may differ from the methodologies used by third-party
measurement service providers, who may not integrate effectively with our Ad-Supported Service. Measurement technologies for
mobile devices may be even less reliable in quantifying the reach and usage of our Ad-Supported Service, and it is not clear whether
such technologies will integrate with our systems or uniformly and comprehensively reflect the reach, usage, or overall audience
composition of our Ad-Supported Service. If such third-party measurement providers report lower metrics than we do, there is wide
variance among reported metrics, or we cannot adequately integrate with such services that advertisers require, our ability to convince
advertisers of the benefits of our Ad-Supported Service could be adversely affected. See “—Our user metrics and other estimates are
subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively
affect our reputation and our business.”
Emerging industry trends in digital advertising may pose challenges for our ability to forecast or optimize our advertising
inventory, which may adversely impact our Ad-Supported revenue.
The digital advertising industry is introducing new ways to measure and price advertising inventory. For example, a significant
portion of advertisers are in the process of moving from purchasing advertisement impressions based on the number of advertisements
served by the applicable ad server to a new “viewable” impression standard (based on number of pixels in view and duration) for
select products. In the absence of a uniform industry standard, agencies, advertisers, and other third parties have adopted several
different measurement methodologies and standards. In addition, measurement services may require technological integrations, which
are still being evaluated by the advertising industry without an agreed-upon industry standard metric. Other advertisers will measure
the effectiveness of their advertising campaigns based on our ability to serve their ads to audiences that match their demographic data
benchmarks, and our ability to meet the requirements of these third party measurement providers may be impacted when we do not
have accurate or complete user data. As these trends in the industry continue to evolve, our advertising revenue may be adversely
affected by the availability, accuracy, and utility of analytics and measurement technologies as well as our ability to successfully
implement and operationalize such technologies and standards.
Further, the digital advertising industry is shifting to data-driven technologies and advertising products, such as automated
buying. These data-driven advertising products and automated buying technologies allow publishers and advertisers to use data to
target advertising toward specific groups of users who are more likely to be interested in the advertising message delivered to them.
These advertising products and programmatic technologies may not integrate with our Ad-Supported Service, especially our desktop
software version, as they are currently more technologically developed and more widely adopted by the advertising industry on the
web than they are on mobile or on other software applications. Because the majority of our Ad-Supported User hours occur on mobile
devices, if we are unable to deploy effective solutions to monetize the mobile device usage by our Ad-Supported User base, our ability
to attract advertising spend, and ultimately our advertising revenue, may be adversely affected by this shift. In addition, we rely on
third-party advertising technology platforms to participate in automated buying, and if these platforms cease to operate or experience
instability in their business models, it also may adversely affect our ability to capture advertising spend. The evolution of privacy
laws, including the GDPR, CCPA and the e-Privacy Regulation (which is still in draft form), may also impact the way we generate
revenue from advertising. See “—Various regulations as well as self-regulation related to privacy and data security concerns pose the
threat of lawsuits, regulatory fines, and other liability, require us to expend significant resources, and may harm our business,
operating results, and financial condition.”
Negative media coverage could adversely affect our business.
We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, payments to
record labels, publishers, artists, and other copyright owners, our privacy practices, terms of service, service changes, service quality,
litigation or regulatory activity, government surveillance, the actions of our advertisers, the actions of our developers whose services
are integrated with our Service, the use of our Service for illicit, objectionable, or illegal ends, the actions of our users, the quality and
integrity of content shared on our Service, or the actions of other companies that provide similar services to us, could materially
adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our
user base and result in decreased revenue, which could materially adversely affect our business, operating results, and financial
condition.
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Our business depends on a strong brand, and any failure to maintain, protect, and enhance our brand would hurt our ability
to retain or expand our base of Ad-Supported Users, Premium Subscribers, and advertisers.
We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining,
protecting, and enhancing the “Spotify” brand is critical to expanding our base of Ad-Supported Users, Premium Subscribers, and
advertisers, and will depend largely on our ability to continue to develop and provide an innovative and high-quality experience for
our users and to attract advertisers, content owners, mobile device manufacturers, and other consumer electronic product
manufacturers to work with us, which we may not do successfully. If we do not successfully maintain a strong brand, our business
could be harmed.
Our brand may be impaired by a number of other factors, including any failure to keep pace with technological advances on our
platform or with our Service, slower load times for our Service, a decline in the quality or quantity of the content available on our
Service, a failure to protect our intellectual property rights, or any alleged violations of law, regulations, or public policy.
Additionally, the actions of our developers, advertisers, and content partners may affect our brand if users do not have a positive
experience using third-party applications or websites integrated with Spotify or that make use of Spotify content, or brand features.
Further, if our partners fail to maintain high standards for products that are integrated into our Service, fail to display our trademarks
on their products in breach of our agreements with them, or use our trademarks incorrectly or in an unauthorized manner, or if we
partner with manufacturers of products that our users reject, the strength of our brand could be adversely affected.
If we are unable to maintain the growth rate in the number of our Ad-Supported Users and Premium Subscribers, we may be
required to expend greater resources than we currently spend on advertising, marketing, and other brand-building efforts to preserve
and enhance consumer awareness of our brand, which would adversely affect our operating results and may not be effective.
Our trademarks, trade dress, and other designations of origin are important elements of our brand. We have registered “Spotify”
and other marks as trademarks in the United States and certain other jurisdictions around the world. Nevertheless, competitors or other
companies may adopt marks similar to ours, or use our marks and confusingly similar terms as keywords in internet search engine
advertising programs, thereby impeding our ability to build brand identity and possibly leading to confusion among our users. We
cannot assure you that our trademark applications, even for key marks, will be approved. We may face opposition from third parties to
our applications to register key trademarks in foreign jurisdictions in which we have expanded or may expand our presence. If we are
unsuccessful in defending against these oppositions, our trademark applications may be denied. Whether or not our trademark
applications are denied, third parties may claim that our trademarks infringe upon their rights. As a result, we could be forced to pay
significant settlement costs or cease the use of these trademarks and associated elements of our brand in those or other jurisdictions.
Doing so could harm our brand or brand recognition and adversely affect our business, operating results, and financial condition.
We may be subject to disputes or liabilities associated with content made available on our Service.
We provide various services and products that enable artists, podcasters, and other creators or users to make content available on
our Service. For example, creators or users can record and distribute podcasts using Anchor and can upload cover art and profile
images. These may subject us to heightened risk of claims of intellectual property infringement by third parties if such creators do not
obtain the appropriate authorizations from rights holders. We are dependent on those who provide content on our Service complying
with the terms and conditions of any license agreements with us as well as our Terms and Conditions of Use, which prohibit providing
content that infringes the intellectual property or proprietary rights of third parties or is otherwise legally actionable pursuant to
privacy and/or publicity rights. However, we cannot guarantee that the creators and users who provide content on our Service will
comply with their obligations, and any failure of creators and users to do so may materially impact our business, operating results, and
financial condition. In addition, while we may avail ourselves of various legal safe harbors related to third-party content, we cannot be
certain that courts will always agree that these safe harbors apply. We also face a risk that the laws related to these safe harbors or the
removal of content could change. Changes in any such laws that shield us from liability could materially harm our business, operating
results, and financial condition.
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We also cannot guarantee the integrity of the content third parties make available on our Service, which may adversely affect
our reputation and our business. Given the large volume of content that various third parties, including record labels, distributors,
aggregators, podcasters, and our users, make available on our platform, it is challenging for us to accurately verify the legitimacy of
such content, including their copyright status and whether such content implicates the legal rights of third parties, or review and
moderate such content to ensure that our users find the content provided by our Service to be trustworthy and safe or that such content
is otherwise in compliance with our policies. If we fail to build and maintain an effective system to moderate the content on our
platform, our users may lose trust in us, our reputation may be impaired and our business may be adversely affected.
We are subject to a number of risks related to credit card and debit card payments we accept.
We accept payments mainly through credit and debit card transactions. For credit and debit card payments, we pay interchange
and other transaction fees, which may increase over time. An increase in those fees would require us to either increase the prices we
charge for our Premium Service, which could cause us to lose Premium Subscribers and subscription revenue, or suffer an increase in
our costs without a corresponding increase in the price we charge for our Premium Service, either of which could harm our business,
operating results, and financial condition.
Additionally, we rely on third-party service providers for payment processing services, including the processing of credit and
debit cards. In particular, we rely on one third-party service provider, Adyen, for approximately 74% of our payment processing. Our
business could be materially disrupted if these third-party service providers become unwilling or unable to provide these services to
us.
If we or our service providers for payment processing services have problems with our billing software, or the billing software
malfunctions, it could have a material adverse effect on our user satisfaction and could cause one or more of the major credit card
companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a
result, we do not automatically charge our Premium Subscribers’ credit cards on a timely basis or at all, our business, operating
results, and financial condition could be materially adversely affected.
We are also subject to payment card association operating rules, certification requirements, and rules governing electronic funds
transfers, which could change or be reinterpreted to make it more difficult for us to comply. Currently, we are fully compliant with the
Payment Card Industry Data Security Standard v3.2.1 (“PCI DSS”), a security standard with which companies that collect, store, or
transmit certain data regarding credit and debit cards, credit and debit card holders, and credit and debit card transactions are required
to comply. This is an annual certification exercise, and if we fail to comply, we may violate payment card association operating rules,
U.S. federal and state laws and regulations, and the terms of our contracts with payment processors and merchant banks. Such failure
to comply fully also may subject us to fines, penalties, damages, and civil liability, and may result in the loss of our ability to accept
credit and debit card payments. Further, there is no guarantee that, even if we are in compliance with PCI DSS, we will maintain PCI
DSS compliance or that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of
data pertaining to credit and debit cards, credit and debit card holders, and credit and debit card transactions. Other payment card
associations have proposed additional requirements for trial offers for automatic renewal subscription services, which may hinder our
ability to attract or retain Premium Subscribers.
If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of
our security measures, and significantly higher credit card-related costs, each of which could adversely affect our business, financial
condition, and results of operations. If we are unable to maintain our chargeback rate or refund rates at acceptable levels, credit card
and debit card companies may increase our transaction fees or terminate their relationships with us. Any increases in our credit card
and debit card fees could adversely affect our results of operations, particularly if we elect not to raise our rates for our Premium
Service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly
impair our ability to operate our business.
We are subject to a number of risks related to other payment solution providers.
We accept payments through various payment solution providers, such as telco integrated billings and prepaid codes vendors.
These payment solution providers provide services to us in exchange for a fee, which may be subject to change. Furthermore, we rely
on their accurate and timely reports on sales and redemptions. If such accurate and timely reports are not being provided, it will affect
the accuracy of our reports to our licensors, and also affect the accuracy of our financial reporting.
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We depend on highly skilled key personnel to operate our business, and if we are unable to attract, retain, and motivate
qualified personnel, our ability to develop and successfully grow our business could be harmed.
We believe that our future success is highly dependent on the talents and contributions of our senior management, including
Daniel Ek, our Chief Executive Officer, members of our executive team, and other key employees, such as key engineering, finance,
research and development, marketing, and sales personnel. Our future success depends on our continuing ability to attract, develop,
motivate, and retain highly qualified and skilled employees. All of our employees, including our senior management, are free to
terminate their employment relationship with us at any time, and their knowledge of our business and industry may be difficult to
replace. Qualified individuals are in high demand, particularly in the digital media industry, and we may incur significant costs to
attract them. We use equity awards to attract talented employees. If the value of our ordinary shares declines significantly and remains
depressed, that may prevent us from recruiting and retaining qualified employees. If we are unable to attract and retain our senior
management and key employees, we may not be able to achieve our strategic objectives, and our business could be harmed. In
addition, we believe that our key executives have developed highly successful and effective working relationships. We cannot assure
you that we will be able to retain the services of any members of our senior management or other key employees. If one or more of
these individuals leave, we may not be able to fully integrate new executives or replicate the current dynamic, and working
relationships that have developed among our senior management and other key personnel, and our operations could suffer.
We have acquired and invested in, and may continue to acquire or invest in, other companies or technologies, which could
divert management’s attention and otherwise disrupt our operations and harm our operating results. We may fail to acquire or
invest in companies whose market power or technology could be important to the future success of our business.
We have recently acquired and invested in, and may in the future seek to acquire or invest in, other companies or technologies
that we believe could complement or expand our Service, enhance our technical capabilities or content offerings, or otherwise offer
growth opportunities. Pursuit of future potential acquisitions or investments may divert the attention of management and cause us to
incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not they are consummated. In
addition, we have limited experience acquiring and integrating other businesses. We may be unsuccessful in integrating our recently
acquired businesses or any additional business we may acquire in the future, and we may fail to acquire companies whose market
power or technology could be important to the future success of our business.
We also may not achieve the anticipated benefits from any acquisition or investment due to a number of factors, including:
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•
•
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unanticipated costs or liabilities associated with the acquisition or investment, including costs or liabilities arising from
the acquired companies’ failure to comply with intellectual property laws and licensing obligations they are subject to;
incurrence of acquisition- or investment-related costs;
diversion of management’s attention from other business concerns;
regulatory uncertainties;
harm to our existing business relationships with business partners and advertisers as a result of the acquisition or
investment;
harm to our brand and reputation;
the potential loss of key employees;
use of resources that are needed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition or investment.
If we acquire or invest in other companies, these acquisitions or investments may reduce our operating margins for the
foreseeable future. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired
goodwill, which must be assessed for impairment at least annually. The market value of our investments may also fluctuate due to
volatility in the share price used to measure the investment. For example, the majority of our long term investments relate to Tencent
Music Entertainment (“TME”). Please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Investment Risk”
for a discussion of the risk relating to our long term investment in TME. In the future, if our acquisitions or investments do not yield
expected returns, we may be required to take charges to our operating results based on this impairment assessment process.
Acquisitions or investments could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely
affect our operating results. In addition, if a business we acquire or invest in fails to meet our expectations, our business, operating
results, and financial condition may suffer.
We have also entered into, and may in the future enter into, additional, strategic alliances with certain partners that we believe
will help advance the success of our business. Such partnerships may divert management focus and resources from other aspects of
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our business, it may take longer than expected for them to produce the expected benefits, they may subject us to additional and
unknown licensing or regulatory requirements across different jurisdictions, and they may fail to produce all of the expected benefits.
For example, we recently announced our membership in the Libra Association, which plans to administer a global digital currency that
could provide a lower-cost method for customers to pay for services, including our Service and other products. Libra is a novel project
that has attracted regulatory scrutiny that could prevent its launch or limit the scope of its adoption. The success of Libra and other
partnerships will depend in part on our ability to leverage them to enhance our Service and other products, or to develop new services
and products, and we may not be successful in doing so. Any adverse results related to our strategic partnerships could negatively
impact our business, operating results, and financial condition.
Our operating results may fluctuate, which makes our results difficult to predict.
Our revenue and operating results could vary significantly from quarter to quarter and year to year because of a variety of
factors, many of which are outside our control. As a result, comparing our operating results on a period-to-period basis may not be
meaningful. Factors that may contribute to the variability of our quarterly and annual results include:
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our ability to retain our current user base, increase our number of Ad-Supported Users and Premium Subscribers, and
increase users’ time spent streaming content on our Service;
our ability to more effectively monetize our Service on mobile and other connected devices, particularly as the number of
our users on mobile and other connected devices grow;
our ability to effectively manage our growth;
our ability to attract user and/or customer adoption of and generate significant revenue from new products, services, and
initiatives;
our ability to attract and retain existing advertisers and prove that our advertising products are effective enough to justify a
pricing structure that is profitable for us;
the effects of increased competition in our business;
our ability to keep pace with changes in technology and our competitors;
lack of accurate and timely reports and invoices from our rights holders and partners;
interruptions in service, whether or not we are responsible for such interruptions, and any related impact on our reputation;
our ability to pursue and appropriately time our entry into new geographic or content markets and, if pursued, our
management of this expansion;
costs associated with defending any litigation, including intellectual property infringement litigation;
the impact of general economic conditions on our revenue and expenses; and
changes in regulations affecting our business.
Seasonal variations in user and marketing behavior may also cause fluctuations in our financial results. We expect to experience
some effects of seasonal trends in user behavior due to increased internet usage and sales of streaming service subscriptions and
devices during holiday periods. We may also experience higher advertising sales during the fourth quarter of each calendar year due to
greater advertiser demand during the holiday season, but also incur greater marketing expenses as we attempt to attract new users to
our Service and convert our Ad-Supported Users to Premium Subscribers. In addition, expenditures by advertisers tend to be cyclical
and are often discretionary in nature, reflecting overall economic conditions, the economic prospects of specific advertisers or
industries, budgeting constraints and buying patterns, and a variety of other factors, many of which are outside our control.
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We may require additional capital to support business growth and objectives, and this capital might not be available on
acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to
business challenges, including the need to develop new features or enhance our existing Service, expand into additional markets
around the world, improve our infrastructure, or acquire complementary businesses and technologies. Accordingly, we have in the
past engaged, and may in the future engage, in equity and debt financings to secure additional funds. If we raise additional funds
through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our ordinary shares. Any
debt financing we secure in the future could also contain restrictive covenants relating to our capital-raising activities and other
financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business
opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If
we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth, acquire or retain users, and to respond to business challenges could be significantly impaired, and our
business may be harmed.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in Euros,
could be adversely affected.
As we continue to expand our international operations, we become increasingly exposed to the effects of fluctuations in
currency exchange rates. We incur expenses for employee compensation, property leases, and other operating expenses in the local
currency, and an increasing percentage of our international revenue is from users who pay us in currencies other than U.S. dollars and
Euros, including the Swedish Krona, the Australian dollar, and the British Pound Sterling. In addition, while we incur royalty
expenses primarily in U.S. dollars and Euros, the corresponding revenues are being generated in local currencies and, as such, the
multiple currency conversions will be affected by currency fluctuations, which may result in losses to us. Fluctuations in the exchange
rates between the Euro and other currencies may impact expenses as well as revenue, and consequently have an impact on margin and
the reported operating results. This could have a negative impact on our reported operating results. To date, we have engaged in
limited hedging strategies related to foreign exchange risk stemming from our operations. These strategies may include instruments
such as foreign exchange forward contracts and options. However, these strategies should not be expected to fully eliminate the
foreign exchange rate risk that we are exposed to.
The impact of worldwide economic conditions may adversely affect our business, operating results, and financial condition.
Our financial performance is subject to worldwide economic conditions and their impact on levels of advertising spending.
Expenditures by advertisers generally tend to reflect overall economic conditions, and to the extent that the economy continues to
stagnate, reductions in spending by advertisers could have a material adverse impact on our business. Historically, economic
downturns have resulted in overall reductions in advertising spending.
Economic conditions may adversely impact levels of consumer spending, which could adversely impact the number of users
who purchase our Premium Service on our website and mobile application. Consumer purchases of discretionary items generally
decline during recessionary periods and other periods in which disposable income is adversely affected. To the extent that overall
economic conditions reduce spending on discretionary activities, our ability to retain current and obtain new Premium Subscribers
could be hindered, which could reduce our subscription revenue and negatively impact our business. For example, under the terms of a
withdrawal agreement between the United Kingdom and the EU, the United Kingdom formally left the EU on January 31, 2020. The
United Kingdom will be subject to a transitional period until December 31, 2020 and negotiations are ongoing to determine the future
terms of the United Kingdom’s relationship with the EU. Although it is unknown what the result of those negotiations will be, it is
possible that new terms, as well as the continued uncertainty regarding the ongoing process of negotiation, may adversely affect
consumer confidence and the level of consumer purchases of discretionary items, including our Service. Any such effect could
adversely affect our business, operating results, and financial condition.
We are a multinational company that faces complex taxation regimes in various jurisdictions. Audits, investigations, and tax
proceedings could have a material adverse effect on our business, operating results, and financial condition.
We are subject to income and non-income taxes in numerous jurisdictions. Income tax accounting often involves complex
issues, and judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In particular, most
of the jurisdictions in which we conduct business have detailed transfer pricing rules, which require that all transactions with non-
resident related parties be priced using arm’s length pricing principles within the meaning of such rules. We are subject to ongoing tax
audits in several jurisdictions, and most of such audits involve transfer pricing issues. We regularly assess the likely outcomes of these
audits in order to determine the appropriateness of our tax reserves as well as tax liabilities going forward. We have initiated and are in
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negotiations of an Advance Pricing Agreement (“APA”) between Sweden and the United States governments for tax years 2014
through 2020 covering various transfer pricing matters. These transfer pricing matters may be significant to our consolidated financial
statements. In addition, the application of withholding tax, value added tax, goods and services tax, sales taxes and other non-income
taxes is not always clear and we may be subject to tax audits relating to such withholding or non-income taxes. We believe that our tax
positions are reasonable and our tax reserves are adequate to cover any potential liability. However, tax authorities in certain
jurisdictions may disagree with our position, including the propriety of our related party arm’s length transfer pricing policies and the
tax treatment of corresponding expenses and income. If any of these tax authorities were successful in challenging our positions, we
may be liable for additional income tax and penalties and interest related thereto in excess of any reserves established therefor, which
may have a significant impact on our results and operations and future cash flow.
We may not be able to utilize all, or any, of our net operating loss carry-forwards.
We have significant net operating loss carry-forwards in Sweden and the United States. As of December 31, 2019, we had net
operating loss carry-forwards of €5 million in Luxembourg, €723 million in Sweden, €461 million in the United States relating to
federal taxes, and €309 million in the United States relating to state taxes. In certain jurisdictions, if we are unable to earn sufficient
income or profits to utilize such carry-forwards before they expire, they will no longer be available to offset future income or profits.
In Sweden, utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation or elimination
in full or part if there is an ownership or control change within the meaning of Chapter 40, paragraphs 10-14 of the Swedish Income
Tax Act (the “Swedish Income Tax Act”). In general, an ownership or control change, as defined by the Swedish Income Tax Act,
results from a transaction or series of transactions over a five-year period resulting in an ownership or control change of a company by
certain categories or individuals, businesses or organizations. The treatment of our issuance of the beneficiary certificates in February
2018 is unclear under the Swedish Income Tax Act and there is a risk that such issuance may have constituted an ownership or control
change, as defined by the Swedish Income Tax Act. If our issuance of the beneficiary certificates were to be deemed to have
constituted an ownership or control change, our ability to use our net operating loss carry-forwards may be limited or eliminated.
In addition, in the United States, utilization of these net operating loss carry-forwards may be subject to a substantial annual
limitation if there is an ownership change within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). In
general, an ownership change, as defined by Section 382, results from a transaction or series of transactions over a three-year period
resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.
Since our formation, we have raised capital through the issuance of capital stock on several occasions, and we may continue to do so
in the future, which, combined with current or future shareholders’ disposition of ordinary shares, may have resulted in such an
ownership change. Such an ownership change may limit the amount of net operating loss carry-forwards that can be utilized to offset
future taxable income.
If the fair market value of our ordinary shares fluctuates unpredictably and significantly on a quarterly basis, the social
costs we accrue for share-based compensation may fluctuate unpredictably and significantly, which could result in our failing to
meet our expectations or investor expectations for quarterly financial performance. This could negatively impact investor
sentiment for the Company, and as a result, adversely impact the price of our ordinary shares.
Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation that we are
subject to in various countries in which we operate. This is not a withholding tax. For the year ended December 31, 2019, we recorded
a social cost expense related to share-based compensation of €37 million compared to a €30 million expense for the year ended
December 31, 2018.
When the fair market value of our ordinary shares increases on a quarter-to-quarter basis, the accrued expense for social costs
will increase, and when the fair market value of ordinary shares falls, the accrued expense will become a reduction in social costs
expense, all other things being equal, including the number of vested stock options and exercise price remaining constant. The fair
market value of our ordinary shares has been and will likely continue to be volatile. See “—Risks Related to Owning Our Ordinary
Shares—The trading price of our ordinary shares has been and will likely continue to be volatile.” As a result, the accrued expense for
social costs may fluctuate unpredictably and significantly from quarter to quarter, which could result in our failing to meet our
expectations or investor expectations for quarterly financial performance. This could negatively impact investor sentiment for the
company, and as a result, the price for our ordinary shares.
Additionally, approximately 31% of our employees are in Sweden. With respect to our employees in Sweden, we are required to
pay a 31.42% tax to the Swedish government on the profit an employee realizes on the exercise of our stock options or the vesting of
our restricted stock units (“RSUs”). They accounted for a total of 1,849,493 in vested options as of December 31, 2019 compared to a
total of 1,618,539 in vested options as of December 31, 2018. We cannot accurately predict how many of their vested options will
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remain outstanding. As a result, the cash payments to the Swedish government upon the exercise of vested stock options may vary
significantly from quarter to quarter.
Changes to tax laws in any of the jurisdictions in which we operate or plan to operate in the future could have a material
adverse effect on our business, results of operations, and financial condition. New proposals on taxing digital companies could
have an adverse effect on our business.
We are a multinational company that is subject to complex taxation regimes in numerous jurisdictions. Our future effective tax
rates could be affected by changes in tax laws or their interpretation in any of those jurisdictions. Tax laws, including tax rates, in the
jurisdictions in which we operate may change as a result of macroeconomic or other factors outside of our control. For example,
various governments and organizations such as the EU and Organization for Economic Co-operation and Development are
increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue, such as the imposition of taxes in
connection with certain digital services. In particular, some EU member states have enacted or currently have pending legislation for
taxes on certain digital services, including the sale of online advertising, and on companies with a significant digital presence. Other
countries have enacted or are considering extraterritorial VAT legislation.
The recently enacted U.S. tax reform (informally titled the “Tax Cuts and Jobs Act”) introduced a number of significant changes
to the U.S. federal income tax rules. Among other things, the Tax Cuts and Jobs Act reduced the marginal U.S. corporate income tax
rate from 35% to 21%, limited the deduction for net interest expense, shifted the United States toward a more territorial tax system,
and imposed new taxes to combat erosion of the U.S. federal income tax base. Our financial statements for the year ended December
31, 2019 reflect the effects of the Tax Cuts and Jobs Act based on current guidance. However, there are uncertainties and ambiguities
in the application of certain provisions of the Tax Cuts and Jobs Act, and as a result we made certain judgments and assumptions in
the interpretation thereof. The U.S. Treasury Department and the Internal Revenue Service have issued certain guidance, and may
issue further guidance on how the provisions of the Tax Cuts and Jobs Act will be applied or otherwise administered that differs from
our current interpretation. In addition, the Tax Cuts and Jobs Act could be subject to potential amendments and technical corrections,
any of which could materially lessen or increase certain adverse impacts of the legislation on us. We may make adjustments to the
provisional amounts to reflect such guidance as well as amendments.
Changes in tax laws, treaties, or regulations or their interpretation or enforcement are unpredictable. Any of these occurrences
could have a material adverse effect on our results of operations and financial condition.
Risks Related to Owning Our Ordinary Shares
The trading price of our ordinary shares has been and will likely continue to be volatile.
The trading price of our ordinary shares has been and is likely to continue to be volatile. In 2019, the trading price of our
ordinary shares has ranged from $108.59 to $161.38. The market price of our ordinary shares may fluctuate or decline significantly in
response to numerous factors, many of which are beyond our control, including:
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the number of our ordinary shares publicly owned and available for trading;
quarterly variations in our results of operations or those of our competitors;
the accuracy of our financial guidance or projections;
our actual or anticipated operating performance and the operating performance of similar companies in the internet, radio,
or digital media spaces;
our announcements or our competitors’ announcements regarding new services, enhancements, significant contracts,
acquisitions, or strategic investments;
general economic conditions and their impact on advertising spending;
the overall performance of the equity markets;
threatened or actual litigation;
changes in laws or regulations relating to our Service;
any major change in our board of directors or management;
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publication of research reports about us or our industry or changes in recommendations or withdrawal of research
coverage by securities analysts; and
sales or expected sales, or repurchases or expected repurchases, of our ordinary shares by us, and our officers, directors,
and significant shareholders.
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to the operating performance of those companies. Price
volatility over a given period may cause the average price at which the Company repurchases its ordinary shares to exceed the trading
price at a given point in time. Securities class action litigation has often been instituted against companies following periods of
volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in
very substantial costs, divert our management’s attention and resources and harm our business, operating results, and financial
condition.
Because of their significant ownership of our ordinary shares and beneficiary certificates, our founders have substantial
control over our business, and their interests may differ from our interests or those of our other shareholders. Sales of substantial
amounts of our ordinary shares in the public markets by our founders or other shareholders, or the perception that such sales
might occur, could reduce the price that our ordinary shares might otherwise attain and may dilute your voting power and your
ownership interest in us.
As of December 31, 2019, our founders, Daniel Ek and Martin Lorentzon, beneficially owned or controlled, directly or
indirectly, ordinary shares and beneficiary certificates representing 33.6% and 43.8% of the combined voting power of all of our
outstanding voting securities, respectively (or 77.4% in the aggregate). See “Item 7.A. Major Shareholders.” Additionally, our
shareholders have authorized the issuance of up to 1,400,000,000 beneficiary certificates to shareholders of the Company. We may
issue additional beneficiary certificates under the total authorized amount at the discretion of our board of directors, of which our
founders are members. Pursuant to our articles of association, the beneficiary certificates may be issued at a ratio of between one and
20 beneficiary certificates per ordinary share as determined by our board of directors or its delegate at the time of issuance. For
example, in the future, we may issue to Mr. Ek up to 20 beneficiary certificates for each ordinary share he receives upon the exercise
of outstanding warrants, of which he currently holds 2,400,000 in the aggregate.
As a result of this ownership or control of our voting securities, if our founders act together, they will have control over the
outcome of substantially all matters submitted to our shareholders for approval, including the election of directors. This may delay or
prevent an acquisition or cause the trading price of our ordinary shares to decline. Our founders may have interests different from
yours. Therefore, the concentration of voting power among our founders may have an adverse effect on the price of our ordinary
shares.
Sales of substantial amounts of our ordinary shares in the public market by our founders, affiliates, or non-affiliates, or the
perception that such sales could occur, could adversely affect the trading price of our ordinary shares and may make it more difficult
for you to sell your ordinary shares at a time and price that you deem appropriate.
Although we currently are not considered to be a “controlled company” under the NYSE corporate governance rules, we
may in the future become a controlled company due to the concentration of voting power among our founders resulting from the
issuance of beneficiary certificates.
A “controlled company” pursuant to NYSE corporate governance rules is a company of which more than 50% of the voting
power is held by an individual, group, or another company. In the event we no longer qualify as a foreign private issuer, we may in the
future be able to rely on the “controlled company” exemptions under the NYSE corporate governance rules due to the concentration of
voting power among our founders and the ability of our founders to act as a group. If we were a controlled company, we would be
eligible to, and, in the event we no longer qualify as a foreign private issuer, could elect not to comply with certain of the NYSE
corporate governance standards. Such standards include the requirement that a majority of directors on our board of directors are
independent directors and the requirement that our remuneration committee and nominating and corporate governance committee
consist entirely of independent directors. In such a case, our shareholders would not have the same protection afforded to shareholders
of companies that are subject to all of the NYSE corporate governance standards, and the ability of our independent directors to
influence our business policies and affairs may be reduced.
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If securities or industry analysts publish inaccurate or unfavorable research about our business or cease publishing research
about our business, our share price and trading volume could decline.
The trading market for our ordinary shares will be influenced by the research and reports that securities or industry analysts
publish about our Company or us. If one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or
unfavorable research about our Company, our ordinary share price would likely decline. Further, if one or more of these analysts cease
coverage of our Company or fail to publish reports on us regularly, demand for our ordinary shares could decrease, which might cause
our ordinary share price and trading volume to decline.
The requirements of being a public company may strain our resources and divert management’s attention.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the
Sarbanes-Oxley Act, the listing requirements of the NYSE, and other applicable securities rules and regulations. Compliance with
these rules and regulations incurs substantial legal and financial compliance costs, makes some activities more difficult, time-
consuming, or costly, and places increased demand on our systems and resources. The Exchange Act requires, among other things,
that we file annual and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to
maintain disclosure controls and procedures and internal control over financial reporting that meet this standard, significant resources
and management oversight are required. As a result, management’s attention may be diverted from other business concerns, which
could harm our business and operating results.
Provisions in our articles of association, the issuance of beneficiary certificates, and the existence of certain voting
agreements may delay or prevent our acquisition by a third party.
Our articles of association contain provisions that may make it more difficult or expensive for a third party to acquire control of
us without the approval of our board of directors and, if required, our shareholders. These provisions also may delay, prevent, or deter
a merger, acquisition, tender offer, proxy contest, or other transaction that might otherwise result in our shareholders receiving a
premium over the market price for their ordinary shares. The provisions include, among others, the authorization granted by the
general meeting of shareholders to our board of directors to issue ordinary shares within the limits of the authorized share capital at
such times and on such terms as our board of directors may decide for a maximum period of five years after the date of publication in
the Luxembourg official gazette (Recueil électronique des Sociétés et Associations, as applicable) of the minutes of the relevant
general meeting approving such authorization. The general meeting may amend, renew, or extend such authorized share capital and
such authorization to the board of directors to issue ordinary shares.
The provisions of our articles of association could discourage potential takeover attempts and reduce the price that investors
might be willing to pay for our ordinary shares in the future, which could reduce the trading price of our ordinary shares.
Additionally, the issuance of beneficiary certificates also may make it more difficult or expensive for a third party to acquire
control of us without the approval of our founders. See “—Because of their significant ownership of our ordinary shares and
beneficiary certificates, our founders have substantial control over our business, and their interests may differ from our interests or
those of our other shareholders. Sales of substantial amounts of our ordinary shares in the public markets by our founders or other
shareholders, or the perception that such sales might occur, could reduce the price that our ordinary shares might otherwise attain and
may dilute your voting power and your ownership interest in us.” and “—The issuance of beneficiary certificates to certain
shareholders will limit your voting power and will limit your ability to influence the composition of the board of directors, strategy, or
performance of the business. We cannot predict the impact that beneficiary certificates may have on our stock price.”
We do not expect to pay cash dividends in the foreseeable future.
We have never declared or paid any cash dividends on our share capital. We currently intend to retain any future earnings for
working capital and general corporate purposes and do not expect to pay dividends or other distributions on our ordinary shares in the
foreseeable future. As a result, you may only receive a return on your investment in our ordinary shares if you sell some or all of your
ordinary shares after the trading price of our ordinary shares increases. You may not receive a gain on your investment when you sell
your ordinary shares and you may lose the entire amount of the investment.
Moreover, we are a holding company and have no material assets other than our direct and indirect ownership of shares in our
subsidiaries. Our ability to pay any future dividends is subject to restrictions on the ability of our subsidiaries to pay dividends or
make distributions to us, including the laws of the relevant jurisdiction in which the subsidiaries are organized or located, as well as
any restrictions in the future indebtedness of our subsidiaries or on our ability to receive dividends or distributions from our
subsidiaries. Since we are expected to rely primarily on dividends from our direct and indirect subsidiaries to fund our financial and
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other obligations, restrictions on our ability to receive such funds may adversely impact our ability to fund our financial and other
obligations.
The issuance of beneficiary certificates to certain shareholders will limit your voting power and will limit your ability to
influence the composition of the board of directors, strategy, or performance of the business. We cannot predict the impact that
beneficiary certificates may have on our stock price.
Our shareholders have authorized the issuance of up to 1,400,000,000 beneficiary certificates to shareholders of the Company
without reserving to our existing shareholders a preemptive right to subscribe for the beneficiary certificates issued in the future.
Entities beneficially owned by our founders, Daniel Ek and Martin Lorentzon, collectively have 378,201,910 beneficiary certificates
outstanding as of December 31, 2019. We may issue additional beneficiary certificates under the total authorized amount at the
discretion of our board of directors, of which our founders are members. Pursuant to our articles of association, our beneficiary
certificates may be issued at a ratio of between one and 20 beneficiary certificates per ordinary share as determined by our board of
directors or its delegate at the time of issuance. For example, in the future, we may issue to Mr. Ek up to 20 beneficiary certificates for
each ordinary share he receives upon the exercise of outstanding warrants, of which he currently holds 2,400,000. See “Item 6.B.
Compensation—Compensation Discussion & Analysis—Warrants.” Each beneficiary certificate entitles its holder to one vote. The
beneficiary certificates carry no economic rights and are issued to provide the holders of such beneficiary certificates additional voting
rights. The beneficiary certificates, subject to certain exceptions, may not be transferred and will automatically be canceled for no
consideration in the case of sale or transfer of the ordinary share to which they are linked. As a result, the issuance of the beneficiary
certificates and the voting power that they provide to the shareholders receiving those beneficiary certificates will limit the voting
power of minority shareholders and the ability of minority shareholders to influence the composition of the board of directors,
strategy, or performance of our business. See “—Because of their significant ownership of our ordinary shares and beneficiary
certificates, our founders have substantial control over our business, and their interests may differ from our interests or those of our
other shareholders. Sales of substantial amounts of our ordinary shares in the public markets by our founders or other shareholders, or
the perception that such sales might occur, could reduce the price that our ordinary shares might otherwise attain and may dilute your
voting power and your ownership interest in us,” “Item 7.A. Major Shareholders”, and “Item 10.B. Memorandum and Articles of
Association—Voting Rights.”
Finally, we cannot predict whether the issuance of additional beneficiary certificates will result in a lower or more volatile
trading price of our ordinary shares or result in adverse publicity or other adverse consequences. For example, FTSE Russell requires
new constituents of its indexes to have greater than five percent of the company’s voting rights in the hands of public shareholders,
and S&P Dow Jones will not admit companies with multiple-class share structures to certain of its indexes. While we do not have a
multiple-class share structure, we cannot predict if we would be excluded from these indexes as a result of the issuance of beneficiary
certificates and we cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment
funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by
many of these funds and could make our ordinary shares less attractive to other investors. As a result, the trading price of our ordinary
shares could be adversely affected.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax
consequences to U.S. Holders of our ordinary shares.
We would be classified as a passive foreign investment company (“PFIC”) for any taxable year if, after the application of
certain look-through rules, either: (i) 75% or more of our gross income for such year is “passive income” (as defined in the relevant
provisions of the Internal Revenue Code of 1986, as amended), or (ii) 50% or more of the value of our assets (determined on the basis
of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. Based
on the trading price of our ordinary shares and the composition of our income, assets and operations, we do not believe that we were a
PFIC for U.S. federal income tax purposes for the taxable year ending on December 31, 2019, nor that we will be a PFIC in the
foreseeable future. However, this is a factual determination that must be made annually after the close of each taxable year. Moreover,
the value of our assets for purposes of the PFIC determination may be determined by reference to the trading price of our ordinary
shares, which could fluctuate significantly. Therefore, there can be no assurance that we will not be classified as a PFIC in the future.
Certain adverse U.S. federal income tax consequences could apply to a U.S. Holder if we are treated as a PFIC for any taxable year
during which such U.S. Holder holds our ordinary shares. Accordingly, each holder of our ordinary shares should consult such
holder’s tax advisor as to the potential effects of the PFIC rules.
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Risks Related to Investment in a Luxembourg Company and Our Status as a Foreign Private Issuer
As a foreign private issuer, we are exempt from a number of U.S. securities laws and rules promulgated thereunder and are
permitted to publicly disclose less information than U.S. companies must. This may limit the information available to holders of
the ordinary shares.
We currently qualify as a foreign private issuer, as defined in the SEC’s rules and regulations, and, consequently, we are not
subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt
from certain rules under the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation
of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors
are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with
respect to their purchases and sales of our securities. For example, some of our key executives may sell a significant amount of
ordinary shares and such sales will not be required to be disclosed as promptly as companies organized within the United States would
have to disclose. Accordingly, once such sales are eventually disclosed, our ordinary share price may decline significantly. Moreover,
we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public
companies. We are also not subject to Regulation FD under the Exchange Act, which would prohibit us from selectively disclosing
material nonpublic information to certain persons without concurrently making a widespread public disclosure of such information.
Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.
As a foreign private issuer, we are required to file an annual report on Form 20-F within four months of the close of each fiscal
year ended December 31 and furnish reports on Form 6-K relating to certain material events promptly after we publicly announce
these events. However, because of the above exemptions for foreign private issuers, which we intend to rely on, our shareholders will
not always be afforded the same information generally available to investors holding shares in public companies that are not foreign
private issuers.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
This would make us subject to U.S. GAAP reporting requirements, which may be difficult for us to comply with.
As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements
of the Exchange Act and related rules and regulations. Under those rules, the determination of foreign private issuer status is made
annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination
will be made with respect to us on June 30, 2020.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S.
citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we
intend to follow certain practices that are consistent with U.S. regulatory provisions applicable to U.S. companies, such as providing
quarterly financial information to the SEC and providing comprehensive executive compensation disclosure substantially consistent
with the disclosure requirements for domestic issuers, our loss of foreign private issuer status would make such provisions mandatory.
The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are
not a foreign private issuer, we will be required to file periodic reports and prospectuses on U.S. domestic issuer forms with the SEC,
which are in general more detailed and extensive than the forms available to a foreign private issuer. For example, we would become
subject to Regulation FD, aimed at preventing issuers from making selective disclosures of material information. We may also be
required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such
conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain
corporate governance requirements of the NYSE that are available to foreign private issuers. For example, the NYSE’s corporate
governance rules require listed companies to have, among other things, a majority of independent board members and independent
director oversight of executive compensation, nomination of directors, and corporate governance matters. As a foreign private issuer,
we are permitted to follow home country practice in lieu of the above requirements. As long as we rely on the foreign private issuer
exemption to certain of the NYSE corporate governance standards, a majority of the directors on our board of directors are not
required to be independent directors, our remuneration committee is not required to be comprised entirely of independent directors,
and we will not be required to have a nominating and corporate governance committee. Also, we would be required to change our
basis of accounting from IFRS as issued by the IASB to U.S. generally accepted accounting principles (“U.S. GAAP”), which may be
difficult and costly for us to comply with. If we lose our foreign private issuer status and fail to comply with U.S. securities laws
applicable to U.S. domestic issuers, we may have to de-list from the NYSE and could be subject to investigation by the SEC, NYSE,
and other regulators, among other materially adverse consequences.
37
The rights of our shareholders may differ from the rights they would have as shareholders of a U.S. corporation, which
could adversely impact trading in our ordinary shares and our ability to conduct equity financings.
Our corporate affairs are governed by our articles of association and the laws of Luxembourg, including the Luxembourg
Company Law (loi du 10 août 1915 concernant les sociétés commerciales, telle qu’elle a été modifiée). The rights of our shareholders
and the responsibilities of our directors and officers under Luxembourg law are different from those applicable to a corporation
incorporated in the United States. For example, under Delaware law, the board of directors of a Delaware corporation bears the
ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, directors of a Delaware
corporation owe fiduciary duties of care and loyalty to the corporation and its shareholders. Luxembourg law imposes a duty on
directors of a Luxembourg company to: (i) act in good faith with a view to the best interests of a company; and (ii) exercise the care,
diligence, and skill that a reasonably prudent person would exercise in a similar position and under comparable circumstances.
Additionally, under Delaware law, a shareholder may bring a derivative action on behalf of a company to enforce a company’s rights.
Under Luxembourg law, the board of directors has sole authority to decide whether to initiate legal action to enforce a company’s
rights (other than, in certain circumstances, an action against board members). See “Item 10.B. Memorandum and Articles of
Association—Differences in Corporate Law” for an additional explanation of the differences. Further, under Luxembourg law there
may be less publicly available information about us than is regularly published by or about U.S. issuers. In addition, Luxembourg law
governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg
law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state corporation
laws in the United States. Therefore, our shareholders may have more difficulty in protecting their interests in connection with actions
taken by our directors and officers or our principal shareholders than they would as shareholders of a corporation incorporated in the
United States. As a result of these differences, our shareholders may have more difficulty protecting their interests than they would as
shareholders of a U.S. issuer.
We are organized under the laws of Luxembourg and a substantial amount of our assets are not located in the United States.
It may be difficult for you to obtain or enforce judgments or bring original actions against us or the members of our board of
directors in the United States.
We are organized under the laws of Luxembourg. In addition, a substantial amount of our assets are located outside the United
States. Furthermore, many of the members of our board of directors and officers reside outside the United States and a substantial
portion of their assets are located outside the United States. Investors may not be able to effect service of process within the United
States upon us or these persons or enforce judgments obtained against us or these persons in U.S. courts, including judgments in
actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for an
investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United
States, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Awards of punitive
damages in actions brought in the United States or elsewhere are generally not enforceable in Luxembourg.
As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters
between the United States and Luxembourg, courts in Luxembourg will not automatically recognize and enforce a final judgment
rendered by a U.S. court. A valid judgment obtained from a court of competent jurisdiction in the United States may be entered and
enforced through a court of competent jurisdiction in Luxembourg, subject to compliance with the enforcement procedures
(exequatur). The enforceability in Luxembourg courts of judgments rendered by U.S. courts will be subject, prior to any enforcement
in Luxembourg, to the procedure and the conditions set forth in the Luxembourg procedural code, which conditions may include the
following as of the date of this prospectus (which may change):
•
•
•
•
•
•
the judgment of the U.S. court is final and enforceable (exécutoire) in the United States;
the U.S. court had jurisdiction over the subject matter leading to the judgment (that is, its jurisdiction was in compliance
both with Luxembourg private international law rules and with the applicable domestic U.S. federal or state jurisdictional
rules);
the U.S. court applied to the dispute the substantive law that would have been applied by Luxembourg courts (based on
recent case law and legal doctrine, it is not certain that this condition would still be required for an exequatur to be granted
by a Luxembourg court);
the judgment was granted following proceedings where the counterparty had the opportunity to appear and, if it appeared,
to present a defense, and the decision of the foreign court must not have been obtained by fraud, but in compliance with
the rights of the defendant;
the U.S. court acted in accordance with its own procedural laws; and
the decisions and the considerations of the U.S. court must not be contrary to Luxembourg international public policy
rules or have been given in proceedings of a tax or criminal nature or rendered subsequent to an evasion of Luxembourg
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law (fraude à la loi). Awards of damages made under civil liabilities provisions of the U.S. federal securities laws, or
other laws, which are classified by Luxembourg courts as being of a penal or punitive nature (for example, fines or
punitive damages), might not be recognized by Luxembourg courts. Ordinarily, an award of monetary damages would not
be considered as a penalty, but if the monetary damages include punitive damages, such punitive damages may be
considered a penalty.
In addition, actions brought in a Luxembourg court against us, the members of our board of directors, or our officers to enforce
liabilities based on U.S. federal securities laws may be subject to certain restrictions. In particular, Luxembourg courts generally do
not award punitive damages. Litigation in Luxembourg also is subject to rules of procedure that differ from the U.S. rules, including,
with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in
Luxembourg would have to be conducted in the French or German language, and all documents submitted to the court would, in
principle, have to be translated into French or German. For these reasons, it may be difficult for a U.S. investor to bring an original
action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against us, the members
of our board of directors, or our officers. In addition, even if a judgment against the Company, the non-U.S. members of our board of
directors, or our officers based on the civil liability provisions of the U.S. federal securities laws is obtained, a U.S. investor may not
be able to enforce it in U.S. or Luxembourg courts.
Our articles of association provide that directors and officers, past and present, are entitled to indemnification from us to the
fullest extent permitted by Luxembourg law against all liability and expenses reasonably incurred or paid by him or her in connection
with any claim, action, suit, or proceeding in which he or she would be involved by virtue of his or her being or having been a director
or officer and against amounts paid or incurred by him or her in the settlement thereof. However, no indemnification will be provided
against any liability to our directors, officers, or shareholders (i) by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties of a director or officer, (ii) with respect to any matter as to which any director or officer shall have
been finally adjudicated to have acted in bad faith and not in our interest, or (iii) in the event of a settlement, unless approved by a
court or the board of directors. The rights to and obligations of indemnification among or between us and any of our current or former
directors and officers are generally governed by the laws of Luxembourg and subject to the jurisdiction of the Luxembourg courts,
unless such rights or obligations do not relate to or arise out of such persons’ capacities listed above. Although there is doubt as to
whether U.S. courts would enforce this indemnification provision in an action brought in the United States under U.S. federal or state
securities laws, this provision could make it more difficult to obtain judgments outside Luxembourg or from non-Luxembourg
jurisdictions that would apply Luxembourg law against our assets in Luxembourg.
Luxembourg and European insolvency and bankruptcy laws are substantially different from U.S. insolvency laws and may
offer our shareholders less protection than they would have under U.S. insolvency and bankruptcy laws.
As a company organized under the laws of Luxembourg and with its registered office in Luxembourg, we are subject to
Luxembourg insolvency and bankruptcy laws in the event any insolvency proceedings are initiated against us including, among other
things, Council and European Parliament Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast). Should
courts in another European country determine that the insolvency and bankruptcy laws of that country apply to us in accordance with
and subject to such EU regulations, the courts in that country could have jurisdiction over the insolvency proceedings initiated against
us. Insolvency and bankruptcy laws in Luxembourg or the relevant other European country, if any, may offer our shareholders less
protection than they would have under U.S. insolvency and bankruptcy laws and make it more difficult for them to recover the amount
they could expect to recover in a liquidation under U.S. insolvency and bankruptcy laws.
39
If a United States person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S.
federal income tax consequences.
If a United States person is treated as owning (directly, indirectly, or constructively) at least 10% of the value or voting power of
our ordinary shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation”
in our group (if any). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated
as controlled foreign corporations (regardless of whether or not we are treated as a controlled foreign corporation). A United States
shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata
share of “Subpart F income,” “global intangible low-taxed income,” and investments in U.S. property by controlled foreign
corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a
controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a
United States shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject a United States
shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder’s U.S. federal
income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist
investors in determining whether any of our non-U.S. subsidiaries is treated as a controlled foreign corporation or whether any
investor is treated as a United States shareholder with respect to any such controlled foreign corporation or furnish to any United
States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A
United States investor should consult its advisors regarding the potential application of these rules to an investment in our ordinary
shares.
Item 4. Information on the Company
A. History and Development of the Company
We are a Luxembourg public limited liability company (société anonyme), which means that shareholders’ liability is limited to
their contributions to the company. The shares forming the share capital of a Luxembourg public limited liability company (société
anonyme) may be publicly traded and registered on a stock exchange. Our legal name is “Spotify Technology S.A.” and our
commercial name is “Spotify.” We were incorporated on December 27, 2006 as a Luxembourg private limited liability company
(société à responsabilité limitée) and were transformed, on March 20, 2009, into a Luxembourg public limited liability company
(société anonyme). The principal legislation under which we operate, and under which our ordinary share capital has been created, is
the law of 10 August 1915 on commercial companies, as amended, and the law of 19 December 2002 on the register of commerce and
companies and the accounting and annual accounts of undertakings and the regulations, as amended, made thereunder.
We are registered with the Luxembourg Trade and Companies’ Register under number B.123.052. Our registered office is
located at 42-44, avenue de la Gare L-1610 Luxembourg, Grand Duchy of Luxembourg, and our principal operational office is located
at Regeringsgatan 19, 111 53 Stockholm, Sweden. Our agent for U.S. federal securities law purposes is Horacio Gutierrez, Head of
Global Affairs and Chief Legal Officer, 150 Greenwich Street, 63rd Floor, New York, New York 10007.
On April 3, 2018, we completed a direct listing of the Company’s ordinary shares on the NYSE.
On February 14, 2019, we acquired Anchor FM Inc. (“Anchor”), a software company that enables users to create and distribute
their own podcasts, for a total purchase consideration of €136 million. The acquisition allows us to leverage Anchor’s creator-focused
platform to accelerate the Group’s path to becoming the world’s leading audio platform.
On February 15, 2019, we acquired Gimlet Media Inc. (“Gimlet”), an independent producer of podcast content, for a total
purchase consideration of €172 million. The acquisition allows us to leverage Gimlet’s in-depth knowledge of original content
production and podcast monetization.
On April 1, 2019, we acquired Cutler Media, LLC (“Parcast”), a premier storytelling podcast studio, for a total purchase
consideration of €49 million. The acquisition allows us to bolster its content portfolio and utilize Parcast’s writers, producers, and
researchers in the production of high-quality content.
See Note 5 to our consolidated financial statements included elsewhere in this report.
B. Business Overview
Our mission is to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art
and billions of fans the opportunity to enjoy and be inspired by these creators.
We are the most popular global audio streaming subscription service. With a presence in 79 countries and territories and
growing, our platform includes 271 million MAUs and 124 million Premium Subscribers as of December 31, 2019.
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Our users are highly engaged. We currently monetize our Service through both subscriptions and advertising. Our Premium
Subscribers grew 29% year-over-year as of December 31, 2019 to 124 million. Our 271 million MAUs grew 31% year-over-year as of
December 31, 2019. The Premium Service and Ad-Supported Service live independently, but thrive together. Our Ad-Supported
Service serves as a funnel, driving a significant portion of our total gross added Premium Subscribers. With a 30% increase in revenue
from our Ad-Supported Service from 2017 to 2018 and a 25% increase in revenue from our Ad-Supported Service from 2018 to 2019,
we believe our Ad-Supported Service is a strong and viable stand-alone product with considerable long-term opportunity for growth in
Ad-Supported Users and revenue. However, we face intense competition in growing both our Ad-Supported Users and Premium
Subscribers, as well as in keeping our users highly engaged. If user engagement declines or if we fail to continue to grow our Ad-
Supported User base or Premium Subscriber base, our revenue growth will be negatively impacted. See “Risk Factors—Risks Related
to Our Business—If our efforts to attract prospective users and to retain existing users are not successful, our growth prospects and
revenue will be adversely affected.”
For the years ended December 31, 2019, 2018, and 2017, we generated €6,764 million, €5,259 million, and €4,090 million in
revenue, respectively, representing a CAGR of 29%. For the years ended December 31, 2019, 2018, and 2017, we incurred net losses
of €186 million, €78 million, and €1,235 million, respectively. For the years ended December 31, 2019, 2018, and 2017, our EBITDA
was €14 million, €(11) million, and €(324) million, respectively. For the years ended December 31, 2019, 2018, and 2017, our net
cash flow from operating activities was €573 million, €344 million, and €179 million, respectively. For the years ended December 31,
2019, 2018, and 2017, our Free Cash Flow was €440 million, €209 million, and €109 million, respectively. EBITDA and Free Cash
Flow are non-IFRS financial measures. For a discussion of EBITDA and Free Cash Flow and a reconciliation of each to their most
closely comparable IFRS measures, see “Item 3.A. Selected Financial Data.”
Music Industry Returns to Growth Led by Streaming
Global recorded music industry revenues grew 10% to $19.1 billion in 2018 following on growth of 8% in 2017, 9% in 2016,
and 4% in 2015. This marks the fourth consecutive year of global growth, and one of the highest rates of growth in more than 20
years, according to management estimates and industry reports.
Through December 31, 2019, we have paid more than €15 billion in royalties to artists, music labels, and publishers since our
launch. In 2019, our expenses for rights holders grew by 30% compared to the prior year, making us one of the largest engines for
revenue growth to artists and labels in the music industry.
Spotify is the Most Popular Global Audio Streaming Subscription Service
Spotify has transformed the way people access and enjoy music and podcasts. Today, millions of people around the world have
access to over 50 million tracks, including 700,000 podcast titles, through Spotify whenever and wherever they want.
We are transforming the music industry by allowing users to move from a “transaction-based” experience of buying and owning
music to an “access-based” model which allows users to stream music on demand. In contrast, traditional radio relies on a linear
distribution model in which stations and channels are programmed to deliver a limited song selection with little freedom of choice.
We are investing in podcasts and other forms of alternative and spoken word content to complement the music library available
through our platform. More than 16% of our Monthly Active Users as of December 31, 2019 have consumed this kind of content. We
believe offering a more diverse selection of content will lead to a more enriching experience and higher user engagement.
Spotify is more than an audio streaming service. We are in the discovery business. Every day, fans from around the world trust
our brand to guide them to music and entertainment that they would never have discovered on their own. If discovery drives delight,
and delight drives engagement, and engagement drives discovery, we believe Spotify wins and so do our users. Our brand reflects
culture—and occasionally creates it—by turning vast and intriguing listening data into compelling stories that remind people of the
role music plays in their lives and encourages new fans to join Spotify each week.
Our Business Model
We offer both Premium and Ad-Supported Services. Our Premium and Ad-Supported Services live independently, but thrive
together. We believe this business model has allowed us to achieve scale with attractive unit economics and is a critical part of our
success. Our Ad-Supported Service serves as a funnel, driving a significant portion of our total gross added Premium Subscribers.
With a 25% increase in revenue from our Ad-Supported Service from 2018 to 2019, we believe our Ad-Supported Service is a strong
and viable stand-alone product with considerable long-term opportunity for growth in Ad-Supported Users and revenue. However, we
face intense competition in growing both our Ad-Supported Users and Premium Subscribers, as well as in keeping our users highly
engaged. If user engagement declines or if we fail to continue to grow our Ad-Supported User base or Premium Subscriber base, our
revenue growth will be negatively impacted. See “Risk Factors—Risks Related to Our Business—If our efforts to attract prospective
users and to retain existing users are not successful, our growth prospects and revenue will be adversely affected.”
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We continue to invest heavily in developing our two-sided marketplace with new and better product features and functionality
for users and creators and believe our investments are leading to higher user engagement and enjoyment. We provide personalization
that drives a unique and tailored experience to each user and the tools for artists to reach the widest fan base.
We are currently in 79 countries and territories, including our latest launch in India in February 2019, and are growing in each of
our four geographic regions. Europe is our largest region with 95 million MAUs, accounting for 35% of our total MAUs as of
December 31, 2019, an increase of 26% from the prior year. In our North America region, MAUs increased by 17% from
December 31, 2018 to December 31, 2019 and now account for 27% of our MAUs. Our two fastest growing regions are Latin
America, with 22% of our MAUs, an increase of 34% from December 31, 2018 to December 31, 2019, and the rest of the world, with
16% of our MAUs, an increase of 78% from December 31, 2018 to December 31, 2019.
Our Ad-Supported Users and Premium Subscribers are spending more time with the Service each year. Combined, our audience
streamed 73 billion hours of content for the year ended December 31, 2019, an increase of 34% compared to the year ended December
31, 2018.
Premium Service
Our Premium Service provides Premium Subscribers with unlimited online and offline high-quality streaming access to our
catalog of music and podcasts. In addition to accessing our catalog on computers, tablets, and mobile devices, users can connect
through speakers, receivers, televisions, cars, game consoles, and smart watches. The Premium Service offers a music listening
experience without commercial breaks.
We generate revenue for our Premium segment through the sale of Premium Services. Premium Services are sold directly to end
users and through partners who are generally telecommunications companies that bundle the subscription with their own services or
collect payment for the stand-alone subscriptions from end customers.
We offer a variety of subscription pricing plans for our Premium Service, including our standard plan, Family Plan, and Student
Plan, among others, to appeal to users with different lifestyles and across various demographics and age groups. Our pricing varies by
plan and is adapted to each local market to align with consumer purchasing power, general cost levels, and willingness to pay for an
audio service.
We also bundle the Premium Service with third-party services and products.
In addition, as we have entered into new markets where recurring subscription services are less common, we have expanded our
subscription products to include prepaid options and durations other than monthly (both longer and shorter durations), as well as
expanded both online and offline payment options.
Premium partner services are priced on a per-subscriber rate in a negotiated agreement.
Revenue for our Premium segment is a function of the number of Premium Subscribers who use our Premium Service. As of
December 31, 2019 and 2018, we had approximately 124 million and 96 million Premium Subscribers, respectively. New Premium
Subscribers primarily are sourced from the conversion of our Ad-Supported Users to Premium Subscribers. Through both our online
platform and external marketing efforts, we engage our Ad-Supported Users by highlighting key features that encourage conversion to
our subscription offerings. These efforts include product links, campaigns targeting existing users, and performance marketing across
leading social media platforms. Additionally, new subscriber growth also is driven by the success of converting users from our trial
programs to full-time Premium Subscribers. These trial campaigns typically offer our Premium Service free or at a discounted price
for a period of time.
Ad-Supported Service
Our Ad-Supported Service has no subscription fees and generally provides Ad-Supported Users with limited on-demand online
access to our catalog of music and unlimited online access to our catalog of podcasts on their computers, tablets, and compatible
mobile devices. We generate revenue for our Ad-Supported segment from the sale of display, audio, and video advertising delivered
through advertising impressions across our music and podcast content. We generally enter into arrangements with advertising agencies
that purchase advertising on our platform on behalf of the agencies’ clients. These advertising arrangements typically specify the type
of advertising product, pricing, insertion dates, and number of impressions in a stated period. Revenue for our Ad-Supported segment
is affected primarily by, but not limited to, the number of our Ad-Supported Users, the total content hours per MAU of our Ad-
Supported Users, and our ability to provide innovative advertising products that are relevant to our Ad-Supported Users and enhance
returns for our advertising partners. Our advertising strategy centers on the belief that advertising products that are based in music and
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podcasts and are relevant to the Ad-Supported User can enhance Ad-Supported Users’ experiences and provide even greater returns
for advertisers. We have historically introduced, and continue to introduce, new advertising products across both music and podcast
content. Offering advertisers additional ways to purchase advertising on a programmatic basis is a key way that we intend to expand
our portfolio of advertising products and enhance advertising revenue. Furthermore, we continue to focus on analytics and
measurement tools to evaluate, demonstrate, and improve the effectiveness of advertising campaigns on our platform.
Licensing Agreements
In order to stream content to our users, we generally secure intellectual property rights to such content by obtaining licenses
from, and paying royalties or other consideration to, rights holders or their agents. Below is a summary of certain provisions of our
license agreements relating to sound recordings and the musical compositions embodied therein (i.e., the musical notes and the lyrics),
as well as podcasts and other non-music content.
Sound Recording License Agreements with Major and Independent Record Labels
We have license agreements with record label affiliates of the three largest music companies—Universal Music Group, Sony
Music Entertainment, and Warner Music Group—as well as Merlin, which represents the digital rights on behalf of numerous
independent record labels. These agreements require us to pay royalties and make minimum guaranteed payments, and they include
marketing commitments, advertising inventory, and financial and data reporting obligations. Rights to sound recordings granted
pursuant to these agreements accounted for over 82% of music streams for the year ended December 31, 2019. Generally (with certain
exceptions), these license agreements have a duration of between one and two years, are not automatically renewable, and apply
worldwide (subject to agreement on rates with certain rights holders prior to launching in new territories). The license agreements also
allow for the record label to terminate the agreement in certain circumstances, including, for example, our failure to timely pay sums
due within a certain period, our breach of material terms, and in some situations which could constitute a “change of control” of
Spotify. These agreements generally provide that the record labels have the right to audit us for compliance with the terms of these
agreements. Further, they contain “most favored nations” provisions, which require that certain material contract terms are at least as
favorable as the terms we have agreed to with any other record label. As of December 31, 2019, we have estimated future minimum
guarantee commitments of €1.0 billion. See “Risk Factors—Risks Related to Our Business—Minimum guarantees required under
certain of our license agreements may limit our operating flexibility and may adversely affect our business, operating results, and
financial condition.”
We also have direct license agreements with independent labels, as well as companies known as “aggregators” (for example,
Believe Digital, CDBaby, Distrokid, and TuneCore). The majority of these agreements are worldwide (subject to agreement on rates
with certain rights holders prior to launching in new territories) but others, with local repertoire, are limited to certain launch
territories. These agreements have financial and data reporting obligations and audit rights.
Musical Composition License Agreements with Music Publishers
We generally obtain licenses for two types of rights with respect to musical compositions: mechanical rights and public
performance rights. In the United States, the rates that the Copyright Royalty Board set apply both to compositions that we license
under the compulsory license in Section 115 of the Copyright Act and to a number of direct licenses that we have with music
publishers for U.S. rights, in which the applicable rate is generally pegged to the statutory rate set by the Copyright Royalty Board. In
the United States, all compulsory licenses obtained by Spotify pursuant to Section 115 of the Copyright Act and direct licenses entered
into between Spotify and music publishers are administered by a third-party company, the Harry Fox Agency. In January 2021,
Spotify will begin obtaining a new blanket compulsory license available under U.S. law, administered by an entity called the
Mechanical Licensing Collective. The Phonorecords III Proceedings set the rates for the Section 115 compulsory license for calendar
years 2018 to 2022. The Copyright Royalty Board issued its final written determination in November 2018. Based on management’s
estimates and forecasts for the next two fiscal years, we currently believe that the rates determined by the Copyright Royalty Board
will increase our royalty costs in 2020. The rates set by the Copyright Royalty Board may still be modified if the determination is
overturned in the appeals process. In March 2019, we, Google, Amazon, and Pandora each filed an appeal of the Copyright Royalty
Board’s determination. We cannot assure you that the outcome of the appeal will be successful in our favor or that any changes to the
rates or terms determined by the Copyright Royalty Board or the application of such rates or terms will not adversely affect our
business, operating results, and financial condition, prospectively or retrospectively. The rates set by the Copyright Royalty Board are
also subject to further change as part of future Copyright Royalty Board proceedings. If any such rate change increases our content
acquisition costs and impacts our ability to obtain content on pricing terms favorable to us, it could hinder our ability to provide
interactive features in our services, or cause one or more of our services not to be economically viable.
In the United States, public performance rights are generally obtained through intermediaries known as PROs, which negotiate
blanket licenses with copyright users for the public performance of compositions in their repertory, collect royalties under such
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licenses, and distribute those royalties to copyright owners. We have obtained public performance licenses from, and pay license fees
to, the major PROs in the United States—ASCAP, BMI, and SESAC, among others. These agreements have music usage reporting
obligations on Spotify and audit rights for the PROs. In addition, these agreements typically have one- to two-year terms, and some
have continuous renewal provisions, with either party able to terminate for convenience with one to two months’ prior written notice,
and are limited to the territory of the United States and its territories and possessions.
In other parts of the world, including Europe, Asia Pacific, and Latin America, we obtain mechanical and performance licenses
for musical compositions either through local collecting societies representing publishers or from publishers directly, or a combination
thereof. We cannot guarantee that our licenses with collecting societies and our direct licenses with publishers provide full coverage
for all of the musical compositions we make available to our users in such countries. Our license agreements with local collecting
societies and direct license agreements with publishers worldwide are generally in place for one to three years and provide for
reporting obligations on both Spotify and the licensor and auditing rights for the licensors. Certain of these license agreements also
provide for minimum guaranteed payments or advance payment obligations.
Podcast License Agreements with Podcasters and Podcast Networks
With respect to podcasts and other non-music content for which we obtain distribution rights directly from rights holders, we
either negotiate licenses directly with individuals or entities or obtain rights through our owned and operated platforms, such as
Anchor, Soundtrap for Storytellers, and Spotify for Podcasters, that enable creators to post content directly to our Service after
agreeing to comply with the applicable terms and conditions.
For original content that we produce or commission, we typically enter into multi-year commitments. Payment terms for content
that we produce or commission will often require payments in advance of delivery of content. Some of these agreements also require
us to share associated revenues, which can include minimum guarantees, and include other payments contingent on performance of the
content.
License Agreement Extensions and Renewals
From time to time, our license agreements with certain rights holders and/or their agents expire while we negotiate their
renewals. Per industry custom and practice, we may enter into brief (for example, month-, week-, or even days-long) extensions of
those agreements or provisional licenses and/or continue to operate on an at will basis as if the license agreement had been extended,
including by our continuing to make content available. It is also possible that such agreements will never be renewed at all. The lack
of renewal, or termination, of one or more of our license agreements, or the renewal of a license agreement on less favorable terms,
could have a material adverse effect on our business, financial condition, and results of operations. See “Risk Factors—Risks Related
to Our Business—We depend upon third-party licenses for most of the content we stream and an adverse change to, loss of, or claim
that we do not hold any necessary licenses may materially adversely affect our business, operating results, and financial condition.”
Government Regulation
We are subject to many U.S. federal and state, European, Luxembourg, and other foreign laws and regulations, including those
related to privacy, data protection, content regulation, intellectual property, consumer protection, rights of publicity, health and safety,
employment and labor, competition, and taxation. These laws and regulations are constantly evolving and may be interpreted, applied,
created, or amended in a manner that could harm our business. In addition, it is possible that certain governments may seek to block or
limit our products or otherwise impose other restrictions that may affect the accessibility or usability of any or all of our products for
an extended period of time or indefinitely.
In the area of information security and data protection, the laws in several jurisdictions require companies to implement specific
information security controls to protect certain types of information. Data protection, privacy, cybersecurity, consumer protection,
content regulation, and other laws and regulations can be very stringent and vary from jurisdiction to jurisdiction. For example, we are
subject to the GDPR, which came into effect on May 25, 2018, as well as its implementing legislation in the EU member states. The
GDPR implements more stringent operational requirements for processors and controllers of personal data, including, for example,
requiring enhanced disclosures to data subjects about how personal data is processed, limiting retention periods of personal data,
requiring mandatory data breach notification, and requiring additional policies and procedures to comply with the accountability
principle under the GDPR. In addition, data subjects have more robust rights with regard to their personal data and can withdraw their
consent to data processing at any time. The GDPR includes significant penalties for non-compliance. We will remain subject to a
similar legal regime in the United Kingdom even where it ceases to be an EU member state, by virtue of its national legislation that
was edited to implement the GDPR; the United Kingdom may also implement new or amended data protection legislation. We are
also subject to the CCPA, which came into effect on January 1, 2020, and imposes heightened transparency obligations and creates
44
new data privacy rights for California residents. Similar laws coming into effect in other states, adoption of a comprehensive federal
data privacy law, and new legislation in international jurisdictions may continue to change the data protection landscape globally and
could result in us expending considerable resources to meet these requirements. See “Risk Factors—Risks Related to Our Business—
Our business is subject to a variety of laws around the world. Government regulation of the internet is evolving and any changes in
government regulations relating to the internet or other areas of our business or other unfavorable developments may adversely affect
our business, operating results, and financial condition” and “—Various regulations as well as self-regulation related to privacy and
data security concerns pose the threat of lawsuits, regulatory fines and other liability, require us to expend significant resources, and
may harm our business, operating results, and financial condition.”
C. Organizational Structure
The Company’s principal subsidiaries as at December 31, 2019 are as follows:
Name
Spotify AB
Spotify USA Inc.
Spotify Ltd
Spotify Norway AS
Spotify Spain S.L.
Spotify GmbH
Spotify France SAS
Spotify Netherlands B.V.
Spotify Canada Inc.
Spotify Australia Pty Ltd
Spotify Brasil Serviços De Música LTDA
Spotify Japan K.K
Spotify India LLP
Spotify Singapore Pte Ltd.
D. Property, Plant and Equipment
Principal activities
Main operating company
USA operating company
Sales, marketing, contract
research and
development, and
customer support
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Marketing
Proportion of
voting rights
and shares
held (directly
or indirectly)
Country of
incorporation
Sweden
USA
100 %
100 %
UK
100 %
Norway
100 %
Spain
100 %
Germany
100 %
100 %
France
100 % Netherlands
Canada
100 %
Australia
100 %
Brazil
100 %
Japan
100 %
India
100 %
Singapore
100 %
Spotify’s principal operational offices are located in Stockholm, Sweden and New York, New York under leases for
approximately 375,000 and 594,000 square feet of office space respectively, expiring on September 30, 2027 and April 2034,
respectively. We also lease regional offices in Los Angeles, California; San Francisco, California; Boston, Massachusetts; Dallas,
Texas; Chicago, Illinois; Seattle, Washington; Atlanta, Georgia; Miami, Florida; Nashville, Tennessee; and Washington D.C. We also
lease other offices in Sweden and lease office space in Argentina, Australia, Belgium, Brazil, Canada, Colombia, Denmark, Finland,
France, Germany, India, Indonesia, Italy, Japan, Luxembourg, Malaysia, Mexico, Netherlands, Norway, Philippines, Poland, Russia,
Singapore, Spain, Taiwan, the United Arab Emirates, and the United Kingdom.
During 2019, to accommodate anticipated future growth, we finished construction on build-outs at our new and existing leased
office spaces in New York, Stockholm, Boston, London and São Paulo, among others. In 2019, we capitalized €126 million of fixed
assets principally related to these build-outs. We have planned capital expenditures of approximately €142 million in 2020 for
additional projects in Los Angeles, New York, Berlin, Singapore, and Miami among others.
We believe that our existing facilities are adequate to meet current requirements and that suitable additional or substitute space
will be available as needed to accommodate any further physical expansion of operations and for any additional offices.
Item 4A. Unresolved Staff Comments
None
45
Item 5. Operating and Financial Review and Prospects
For discussion related to our financial condition, changes in financial condition, and the results of operations for 2018 compared
to 2017, refer to Part I, Item 5. Operating and Financial Review and Prospects, in our Annual Report on Form 20-F for the fiscal year
ended December 31, 2018, which was filed with the United States Securities and Exchange Commission on February 12, 2019.
Overview
Our mission is to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art
and billions of fans the opportunity to enjoy and be inspired by these creators.
We are the most popular global audio streaming subscription service. With a presence in 79 countries and territories and
growing, our platform includes 271 million MAUs and 124 million Premium Subscribers as of December 31, 2019.
Our users are highly engaged. We currently monetize our Service through both subscriptions and advertising. Our Premium
Subscribers grew 29% year-over-year as of December 31, 2019 to 124 million. Our 271 million MAUs grew 31% year-over-year as of
December 31, 2019.
How We Generate Revenue
We operate and manage our business in two reportable segments—Premium and Ad-Supported. We identify our reportable
segments based on the organizational units used by management to monitor performance and make operating decisions. See Note 6 to
our consolidated financial statements included elsewhere in this report for additional information regarding our reportable segments.
Premium
Our Premium Service provides Premium Subscribers with unlimited online and offline high-quality streaming access to our
catalog of music and podcasts. In addition to accessing our catalog on computers, tablets, and mobile devices, users can connect
through speakers, receivers, televisions, cars, game consoles, and smart watches. The Premium Service offers a music listening
experience without commercial breaks.
We generate revenue for our Premium segment through the sale of the Premium Service. The Premium Service is sold directly
to end users and through partners who are generally telecommunications companies that bundle the subscription with their own
services or collect payment for the stand-alone subscriptions from the end user.
We offer a variety of subscription pricing plans for our Premium Service, including our standard plan, Family Plan, and Student
Plan, among others, to appeal to users with different lifestyles and across various demographics and age groups. Our pricing varies by
plan and is adapted to each local market to align with consumer purchasing power, general cost levels, and willingness to pay for an
audio service. Our Family Plan consists of one primary Premium Subscriber and up to five additional sub-accounts, allowing up to six
Premium Subscribers per Family Plan subscription.
We also bundle the Premium Service with third-party services and products.
In addition, as we have entered into new markets where recurring subscription services are less common, we have expanded our
subscription products to include prepaid options and durations other than monthly (both longer and shorter durations), as well as
expanded both online and offline payment options.
Premium partner services are priced on a per-subscriber rate in a negotiated agreement and may include minimum guarantees
for the number of subscriptions that will be purchased from us.
Revenue for our Premium segment is a function of the number of Premium Subscribers who subscribe to our Premium Service.
New Premium Subscribers are sourced primarily from the conversion of our Ad-Supported Users to Premium Subscribers. Through
both our online platform and external marketing efforts, we engage our Ad-Supported Users by highlighting key features that
encourage conversion to our subscription offerings. These efforts include product links, campaigns targeting existing users, and
performance marketing across leading social media platforms. Additionally, new Premium Subscriber growth is driven by the success
of converting users from our trial campaigns to full-time Premium Subscribers. These trial campaigns typically offer our Premium
Service free or at a discounted price for a period of time.
The rate of net growth in Premium Subscribers also is affected by our ability to retain our existing Premium Subscribers and the
mix of subscription pricing plans. We have increased retention over time, as new features and functionality have led to increased user
engagement and satisfaction. From a product perspective, while the launches of our Family Plan and our Student Plan have decreased
46
Premium ARPU (as further described below) due to the lower price points per Premium Subscriber for these Premium pricing plans,
each of these Plans has helped improve retention across the Premium Service.
Our platform is built to work across multiple devices, including smartphones, desktops, cars, game consoles, and in-home
devices. We have found that Premium Subscribers who access our Service over multiple devices have higher engagement and lower
Premium Churn, which increases their expected lifetime value to Spotify.
Ad-Supported
Our Ad-Supported Service has no subscription fees and generally provides Ad-Supported Users with limited on-demand online
access to our catalog of music and unlimited online access to our catalog of podcasts on their computers, tablets, and compatible
mobile devices. It serves as both a Premium Subscriber acquisition channel and a robust option for users who are unable or unwilling
to pay a monthly subscription fee but still want to enjoy access to a wide variety of high-quality audio content.
We generate revenue for our Ad-Supported segment from the sale of display, audio, and video advertising delivered through
advertising impressions across our music and podcast content.
We generally enter into arrangements with advertising agencies that purchase advertising on our platform on behalf of the
agencies’ clients. These advertising arrangements typically specify the type of advertising product, pricing, insertion dates, and
number of impressions in a stated period. Revenue for our Ad-Supported segment is comprised primarily of the number and hours of
engagement of our Ad-Supported Users and our ability to provide innovative advertising products that are relevant to our Ad-
Supported Users and enhance returns for our advertising partners. Our advertising strategy centers on the belief that advertising
products that are based in music and podcasts and are relevant to the Ad-Supported User can enhance Ad-Supported Users’
experiences and provide even greater returns for advertisers. Offering advertisers additional ways to purchase advertising on a
programmatic basis is a key way that we intend to expand our portfolio of advertising products and enhance advertising revenue.
Furthermore, we continue to focus on analytics and measurement tools to evaluate, demonstrate, and improve the effectiveness of
advertising campaigns on our platform.
Revenue from our Ad-Supported segment also will be impacted by the demographic profile of our Ad-Supported Users, our
ability to enable advertisers to reach their target audience with relevant advertising in the geographic markets in which we operate. A
large percentage of our Ad-Supported Users are between 18 and 34 years old. This is a highly sought-after demographic that has
traditionally been difficult for advertisers to reach. By offering advertisers increased “self-serve options,” we expect to improve the
efficiency and scalability of our advertising platform. Additionally, we believe that our largest markets, including Europe and North
America, are among the top advertising markets globally. However, our continuing expansion into new geographic markets will
present monetization challenges. Monetizing our Ad-Supported User base has historically been, and is expected to remain, more
challenging in our two fastest growing regions, Latin America and the rest of the world, compared to Europe and North America.
Components of our Operating Results
Cost of Revenue. Cost of revenue consists predominantly of royalty and distribution costs related to content streaming. We incur
royalty costs, which we pay to certain record labels, music publishers, and other rights holders, for the right to stream music to our
users. Royalties are typically calculated monthly based on the combination of a number of different elements. Generally, Premium
Service royalties are based on the greater of a percentage of revenue and a per user amount. Royalties for the Ad-Supported Service
are typically a percentage of revenue, although certain agreements are based on the greater of a percentage of revenue and an amount
for each time a sound recording and musical composition is streamed. We have negotiated lower per user amounts for our lower
priced subscription plans such as Family Plan and Student Plan users. In our agreements with certain record labels, the percentage of
revenue used in the calculation of royalties is generally dependent upon certain targets being met. The targets can include such
measures as the number of Premium Subscribers, the ratio of Ad-Supported Users to Premium Subscribers, and/or the rates of
Premium Subscriber churn. With minor exceptions, we are effectively currently meeting the targets and consequently we are generally
paying the lowest percentage of revenue possible per the agreements. In addition, royalty rates vary by country. Some of our royalty
agreements require that royalty costs be paid in advance or are subject to minimum guaranteed amounts. For the majority of royalty
agreements incremental costs incurred due to un-recouped advances and minimum guarantees have not been significant to date. We
also have certain so-called most favored nation royalty agreements, which require us to record additional costs if certain material
contract terms are not as favorable as the terms we have agreed to with similar licensors.
Cost of revenue also includes credit card and payment processing fees for subscription revenue, customer service, certain
employee compensation and benefits, cloud computing, streaming, facility, and equipment costs, as well as amounts incurred to
produce podcasts and other content. Direct costs incurred to acquire or develop podcasts are recognized as current assets. Cost of
revenue includes the consumption of these assets over their useful economic life, which starts at the release of each episode. In most
cases, consumption is on an accelerated basis.
47
Additionally, cost of revenue has historically included discounted trial costs related to our bi-annual trial programs. While we
believe our trial programs help drive incremental revenue and gross margins as users convert to full-time Premium Subscribers, these
trial programs, which historically have typically begun in the last month of the second and fourth quarters of each year, have led to
decreases in gross margins in the first and third calendar quarters as we absorb the promotional expenses of the discounted trial offers.
Research and Development. We invest heavily in research and development in order to drive user engagement and customer
satisfaction on our platform, which we believe helps to drive organic growth in new MAUs, which in turn drives additional growth in,
and better retention of, Premium Subscribers, as well as increased advertising opportunities to Ad-Supported Users. We aim to design
products and features that create and enhance user experiences, and new technologies are at the core of many of these opportunities.
Research and development expenses were 9%, 9%, and 10% of our total revenue in each of 2019, 2018, and 2017, respectively.
Expenses primarily comprise costs incurred for development of products related to our platform and Service, as well as new
advertising products and improvements to our mobile application and desktop application and streaming services. The costs incurred
include related facility costs, consulting costs, and employee compensation and benefits costs. We expect engineers to represent a
significant portion of our employees over the foreseeable future.
Many of our new products and improvements to our platform require large investments and involve substantial time and risks to
develop and launch. Some of these products may not be well received or may take a long time for users to adopt. As a result, the
benefits of our research and development investments may be difficult to forecast.
Sales and Marketing. Sales and marketing expenses primarily comprise employee compensation and benefits, public relations,
branding, consulting expenses, customer acquisition costs, advertising, live events and trade shows, amortization of trade name
intangible assets, the cost of working with music record labels, publishers, songwriters, and artists to promote the availability of new
releases on our platform, and the costs of providing free trials of Premium Services. Expenses included in the cost of providing free
trials are derived primarily from per user royalty fees determined in accordance with the rights holder agreements.
General and Administrative. General and administrative expenses primarily comprise employee compensation and benefits for
functions such as finance, accounting, analytics, legal, human resources, consulting fees, and other costs including facility and
equipment costs, officers’ liability insurance, director fees, and fair value adjustments on contingent consideration.
Key Performance Indicators
We use certain key performance indicators to monitor and manage our business. We use these indicators to evaluate our
business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. We
believe these indicators provide useful information to investors in understanding and evaluating our operating results in the same
manner we do.
MAUs
We track MAUs as an indicator of the size of the audience engaged with our Service. We define MAUs as the total count of Ad-
Supported Users and Premium Subscribers that have consumed content for greater than zero milliseconds in the last thirty days from
the period-end indicated. Reported MAUs may overstate the number of unique individuals who actively use our Service within a
thirty-day period as one individual may register for, and use, multiple accounts. Additionally, fraud and unauthorized access to our
Service may contribute, from time to time, to an overstatement of MAUs, if undetected. Fraudulent accounts typically are created by
bots to inflate content licensing payments to individual rights holders. We strive to detect and minimize these fraudulent accounts. Our
MAUs in the tables below are inclusive of users that may have employed methods to limit or otherwise avoid being served
advertisements. For additional information, refer to the risk factors discussed under “Item 3.D. Risk Factors” included elsewhere in
this report.
The table below sets forth our MAUs as of December 31, 2019, 2018, and 2017.
MAUs
271
207
160
64
31 %
47
29 %
As of December 31,
2018
2019
2017
(in millions, except percentages)
2019 vs. 2018
Change
2018 vs. 2017
MAUs were 271 million as of December 31, 2019. This represented an increase of 31% from the preceding fiscal year. The
increase in MAUs benefited from our continued investment in driving the growth of our Service, both through geographic expansion
and consumer marketing. The increase also benefited from continued investment in content and features on our platform, including
48
featured playlists, artist marketing campaigns, podcasts, and original content, to drive increased user engagement and customer
satisfaction. MAUs were positively impacted by an increase in Premium Subscribers, as noted below.
Premium Subscribers
We define Premium Subscribers as users that have completed registration with Spotify and have activated a payment method for
Premium Service. Our Premium Subscribers include all registered accounts in our Family Plan. Our Family Plan consists of one
primary subscriber and up to five additional sub-accounts, allowing up to six Premium Subscribers per Family Plan Subscription.
Premium Subscribers includes subscribers in a grace period of up to 30 days after failing to pay their subscription fee.
The table below sets forth our Premium Subscribers as of December 31, 2019, 2018, and 2017.
Premium Subscribers
124
96
71
28
29 %
26
36 %
As of December 31,
2018
2019
2017
(in millions, except percentages)
2019 vs. 2018
Change
2018 vs. 2017
Premium Subscribers were 124 million as of December 31, 2019. This represented an increase of 29% from the preceding fiscal
year. Our Family Plan contributed 33% of total gross added Premium Subscribers during 2019. Further, our free trial offers and global
campaigns contributed 23% and 10% of gross added Premium Subscribers during 2019, respectively.
Ad-Supported MAUs
We define Ad-Supported MAUs as the total count of Ad-Supported Users that have consumed content for greater than zero
milliseconds in the last thirty days from the period-end indicated.
The table below sets forth our Ad-Supported MAUs as of December 31, 2019, 2018, and 2017.
Ad-Supported MAUs
153
116
93
37
32 %
23
24 %
As of December 31,
2018
2019
2017
(in millions, except percentages)
2019 vs. 2018
Change
2018 vs. 2017
Ad-Supported MAUs were 153 million as of December 31, 2019. This represented an increase of 32% from the preceding fiscal
year. Growth in Ad-Supported MAUs benefited from our continued investment in driving the growth of our Ad-Supported Service,
both through geographic expansion and consumer marketing. The increase also benefited from continued investment in content and
features on our platform, including featured playlists, artist marketing campaigns, podcasts, and original content, to drive increased
Ad-Supported User engagement and customer satisfaction.
Premium ARPU
Premium ARPU is a monthly measure defined as Premium revenue recognized in the quarter indicated divided by the average
daily Premium Subscribers in such quarter, which is then divided by three months. Annual figures are calculated by averaging
Premium ARPU for the four quarters in such fiscal year.
The table below sets forth our average Premium ARPU for the years ended December 31, 2019, 2018, and 2017.
Premium ARPU
€
4.72 €
4.81 €
5.32 €
Year ended December 31,
2018
2017
2019
2019 vs. 2018
(0.09 )
Change
(2 )% €
2018 vs. 2017
(0.51 )
(10 )%
For the year ended December 31, 2019, Premium ARPU was €4.72. This represented a decrease of 2% from the preceding fiscal
year. The decrease in Premium ARPU for the year ended December 31, 2019, as compared to 2018, was due principally to the
continued growth of the Family Plan and an increase in the number of subscribers on free trials, reducing Premium ARPU by €0.08
and €0.05, respectively. These impacts were partially offset by movements in foreign exchange rates, increasing Premium ARPU by
€0.06.
49
The table below sets forth our average Premium ARPU for the quarters ended December 31, 2019, 2018, and 2017.
Premium ARPU
€
4.65 €
4.89 €
5.24 €
Three months ended
December 31,
2018
2017
2019
2019 vs. 2018
(0.24 )
Change
(5 )% €
2018 vs. 2017
(0.35 )
(7 )%
For the quarter ended December 31, 2019, Premium ARPU was €4.65. This represented a decrease of 5% from the preceding
fiscal year quarter ended December 31. The decrease in Premium ARPU for the quarter ended December 31, 2019, as compared to
2018, was due principally to an increase in the number of subscribers on free trials and the continued growth of the Family Plan,
reducing Premium ARPU by €0.21 and €0.05, respectively. These impacts were partially offset by movements in foreign exchange
rates, increasing Premium ARPU by €0.05.
A. Operating Results
Revenue
Premium
Ad-Supported
Total
Premium revenue
Year ended December 31,
2018
2019
Change
2018 vs. 2017
6,086 4,717
542
6,764 5,259
678
2019 vs. 2018
2017
(in € millions, except percentages)
3,674 1,369
136
4,090 1,505
416
29 % 1,043
25 %
126
29 % 1,169
28 %
30 %
29 %
For the years ended December 31, 2019 and 2018, Premium revenue comprised 90% of our total revenue. For the year ended
December 31, 2019, as compared to 2018, Premium revenue increased €1,369 million or 29%. The increase was attributable primarily
to a 29% increase in Premium Subscribers.
Ad-Supported revenue
For the year ended December 31, 2019 and 2018, Ad-Supported revenue comprised 10% of our total revenue. For the year
ended December 31, 2019, as compared to 2018, Ad-Supported revenue increased €136 million or 25%. This increase was due
primarily to a 17% increase in the number of impressions sold, driven largely by the growth in our programmatic channel, which grew
revenue 47% year-over-year, accounting for 25% of our Ad-Supported revenue. In addition, there was an increase in revenue from
podcasts of €19 million.
Foreign exchange impact on total revenue
The general weakening of the Euro relative to certain foreign currencies, primarily the U.S. dollar for the year ended December
31, 2019, as compared to 2018, had a favorable impact on our revenue. We estimate that total revenue for the year ended December
31, 2019 would have been approximately €117 million lower if foreign exchange rates had remained consistent with foreign exchange
rates for the year ended December 31, 2018.
Cost of revenue
Premium
Ad-Supported
Total
Change
2019 vs. 2018
2017
(in € millions, except percentages)
2,868 1,004
132
3,241 1,136
373
29 %
30 %
29 %
2018 vs. 2017
593
72
665
21 %
19 %
21 %
Year ended December 31,
2018
2019
4,465 3,461
445
5,042 3,906
577
50
Premium cost of revenue
For the year ended December 31, 2019, as compared to 2018, Premium cost of revenue increased €1,004 million, or 29%, and
Premium cost of revenue as a percentage of Premium revenue remained at 73%. The increase in Premium cost of revenue was driven
by an increase in new Premium Subscribers resulting in higher royalty costs, payment fees, and streaming delivery costs of €898
million, €43 million, and €17 million respectively. The year ended December 31, 2019 also included charges related to disputes with
certain rights holders of €8 million. The year ended December 31, 2018 included changes in prior period estimates, which reduced
rights holders costs by €21 million, a benefit of €18 million for amounts expected to be recovered from rights holders for retroactive
statutory rate changes, and a €12 million charge that relates to prior years.
Ad-Supported cost of revenue
For the year ended December 31, 2019, as compared to 2018, Ad-Supported cost of revenue increased €132 million, or 30%,
and Ad-Supported cost of revenue as a percentage of Ad-Supported revenue increased from 82% to 85%. The increase in Ad-
Supported cost of revenue is driven by growth in advertising revenue resulting in higher royalty costs and streaming delivery costs of
€93 million and €6 million, respectively, and an increase in podcasts costs of €16 million.
Foreign exchange impact on total cost of revenue
The general weakening of the Euro relative to certain foreign currencies, primarily the U.S. dollar for the year ended December
31, 2019, as compared to 2018, had an unfavorable impact on our cost of revenue. We estimate that total cost for the year ended
December 31, 2019 would have been approximately €83 million lower, if foreign exchange rates had remained consistent with foreign
exchange rates for the year ended December 31, 2018.
Gross profit and gross margin
Gross profit
Premium
Ad-Supported
Consolidated
Gross margin
Premium
Ad-Supported
Consolidated
Year ended December 31,
2018
2019
2017
2019 vs. 2018
(in € millions, except percentages)
Change
2018 vs. 2017
1,621 1,256
97
1,722 1,353
101
806 365
4
43
849 369
27 %
15 %
25 %
27 %
18 %
26 %
22 %
10 %
21 %
29 % 450
4 %
56 %
54 126 %
59 %
27 % 504
Premium gross profit and gross margin
For the year ended December 31, 2019, as compared to 2018, Premium gross profit increased by €365 million and Premium
gross margin remained at 27%. Premium gross margin remained flat due primarily to consistent licensing terms with the major labels
year-over-year.
Ad-Supported gross profit and gross margin
For the year ended December 31, 2019, as compared to 2018, Ad-Supported gross profit increased by €4 million to a gross
profit of €101 million, and Ad-Supported gross margin decreased from 18% to 15%. The decrease in margin was largely driven by an
increase in content costs, including podcast costs, that outpaced revenue growth.
Consolidated operating expenses
Research and development
Research and development
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
615
493
9 %
9 %
396 122
10 %
25 %
97
24 %
51
For the year ended December 31, 2019, as compared to 2018, research and development costs increased €122 million, or 25%,
as we continually enhance our platform to retain and grow our user base. The increase was due primarily to an increase in personnel-
related costs of €80 million and facilities costs of €10 million, each resulting from increased headcount and leased office space to
support our growth. There also was an increase in information technology costs of €20 million due to an increase in our usage of cloud
computing services and additional software license fees. The increase in personnel-related costs was due primarily to increased
salaries of €49 million, share-based payments of €23 million, and social costs of €13 million.
Sales and marketing
Sales and marketing
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
826
12 %
620
12 %
567 206
14 %
33 %
53
9 %
For the year ended December 31, 2019, as compared to 2018, sales and marketing expense increased by €206 million, or 33%.
The increase was due primarily to an increase in advertising costs of €107 million for marketing campaigns. There also was an
increase in personnel-related costs of €51 million resulting from increased headcount to support our growth. There was an increase in
the cost of providing free trials of €26 million due to an increase in the number of subscribers on free trials. The increase in personnel-
related costs was due primarily to increased salaries of €32 million, share-based payments of €8 million, and social costs of €6 million.
General and administrative
General and administrative
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
354
283
5 %
5 %
264
6 %
71
25 %
19
7 %
For the year ended December 31, 2019, as compared to 2018, general and administrative expense increased €71 million or 25%.
The increase was due primarily to an increase in personnel-related costs of €44 million, resulting from increased headcount and an
increase in external consulting and legal fees of €32 million. In addition, the year ended December 31, 2019 included a €14 million of
fair value loss on contingent consideration. There were also increases in facilities and information technology costs of €5 million. The
increase in personnel-related costs was due primarily to increased salaries of €35 million and share-based payments of €4 million.
These expenses were partially offset by €35 million of expenses in the prior period relating to our direct listing.
Finance income
Finance income consists of fair value adjustment gains on certain financial instruments, interest income earned on our cash and
cash equivalents and short term investments, and foreign currency gains.
Finance income
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
275
455
118 (180 )
(40 )% 337 286 %
4 %
9 %
3 %
52
For the year ended December 31, 2019, as compared to 2018, finance income decreased €180 million. The decrease in finance
income was due primarily to a decrease in fair value gains for warrants of €194 million and non-designated hedges of €8 million.
These decreases were partially offset by an increase in foreign exchange gains of €18 million on the remeasurement of monetary
assets and liabilities in a transaction currency other than the functional currency.
Finance costs
Finance costs consist of fair value adjustment losses on financial instruments, interest expense, and foreign currency losses.
Finance costs
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in € millions, except percentages)
(333 )
(5 )%
(584 )
(11 )%
251 (43 )% 390 (40 )%
(974 )
(24 )%
For the year ended December 31, 2019, as compared to 2018, finance costs decreased by €251 million. This decrease was due
primarily to a decrease of expense recorded for convertible senior notes (“Convertible Notes”) of €201 million, due to the
derecognition of our Convertible Notes upon direct listing in 2018 and a decrease in fair value losses recorded for warrants of €125
million. These decreases were partially offset by an increase in interest expense on lease liabilities of €38 million due to the adoption
of IFRS 16 on January 1, 2019 and an increase in foreign exchange losses of €38 million on the remeasurement of monetary assets and
liabilities in a transaction currency other than the functional currency.
Income tax expense/(benefit)
Income tax expense/(benefit)
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
55
(95 )
1 %
(2 )%
2 150 (158 )%
0 %
(97 )
N/A
For the year ended December 31, 2019, income tax expense was €55 million, as compared to income tax benefit of €95 million
for the year ended December 31, 2018. The change was due primarily to the derecognition of deferred taxes as a result of the
unrealized decrease in the fair value of our long term investment in TME. The Group will be subject to deferred tax in future periods
as a result of foreign exchange movements between USD, EUR, and SEK, primarily related to its investment in TME. The Group may
also be subject to current tax expense in future periods as a result of share based compensation activity.
Net loss attributable to owners of the parent
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in € millions, except percentages)
Net loss attributable to owners of the parent
As a percentage of revenue
(186 )
(3 )%
(78 )
(1 )%
(30 )%
(1,235 )
(108 ) 138 % 1,157
(94 )%
For the year ended December 31, 2019, as compared to 2018, net loss attributable to owners of the parent increased by €108
million, due primarily to an increase in income tax expense and an increase in operating loss offset by a decrease in finance
income/(costs) – net.
EBITDA
EBITDA
As a percentage of revenue
Year ended December 31,
Change
2019
2018
2017
2019 vs. 2018
(in € millions, except percentages)
2018 vs. 2017
14
0 %
(11 )
(0 )%
(324 )
25 (227 )% 313
(97 )%
(8 )%
For the year ended December 31, 2019, EBITDA was €14 million, as compared to EBITDA loss of €11 million for the year
ended December 31, 2018. The change was due primarily to an increase in gross profit, partially offset by an increase in operating
53
expenses, as described above. The adoption of IFRS 16 on January 1, 2019 had a favorable impact on EBITDA for the year ended
December 31, 2019 due to an increase in depreciation and lease liability interest expense. For a discussion of the limitations associated
with using EBITDA rather than IFRS measures and a reconciliation of EBITDA to net loss, see Item “3.A. Selected Financial Data.”
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. Preparing these financial
statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue,
expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may
differ from these estimates.
The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our
consolidated financial statements are described below.
Revenue Recognition
Premium Revenue
We generate revenue for our Premium segment from the sale of Premium Services. Premium Services are sold directly to end
users and through partners who are generally telecommunications companies that bundle the subscription with their own services or
collect payment for the stand-alone subscriptions from the end user.
Premium Services sold directly to end users are typically paid monthly in advance. We satisfy our performance obligation, and
revenue from these services is recognized, on a straight-line basis over the subscription period.
We periodically provide discounted trial periods for Premium Services. Consideration received for the discounted trial periods is
recognized in revenue on a straight-line basis over the term of the discounted trial period.
Premium Services sold through partners are recognized as revenue based on a per-subscriber rate in a negotiated partner
agreement. Under these arrangements, a Premium partner may bundle the Premium Service with its existing product offerings or offer
the Premium Service as an add-on. We satisfy our performance obligation, and revenue from these services is recognized, on a
straight-line basis over the subscription period. We assess the facts and circumstances, including whether the partner is acting as a
principal or agent, of all partner revenue arrangements and then recognize revenues either gross or net. Premium partner services,
whether recognized gross or net, have one material performance obligation which is the delivery of our Premium Service.
We also bundle the Premium Service with third-party services and products. In bundle arrangements where we have multiple
performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling
price. We generally determine stand-alone selling prices based on the prices charged to customers. For each performance obligation
within the bundle, revenue is recognized either on a straight-line basis over the subscription period or at a point in time when control
of the service or product is transferred to the customer.
Ad-Supported Revenue
We generate revenue for our Ad-Supported segment primarily through display, audio, and video advertising delivered through
advertising impressions and podcast downloads. We enter into arrangements with advertising agencies that purchase advertising on
our platform on behalf of the agencies’ clients and directly with some large advertisers. These advertising arrangements are typically
sold on a cost-per-thousand basis and are evidenced by an Insertion Order (“IO”) that specifies the terms of the arrangement such as
the type of advertising product, pricing, insertion dates, and number of impressions in a stated period. Ad-Supported revenue is
recognized upon delivery of impressions. IOs may include multiple performance obligations as they generally contain several different
advertising products that each represent a separately identifiable promise within the contract. For such arrangements, we allocate Ad-
Supported revenue to each performance obligation on a relative stand-alone selling price basis. We determine stand-alone selling
prices based on the prices charged to customers. We also may offer cash rebates to advertising agencies based on the volume of
advertising inventory purchased. These rebates are estimated based on historical data and projected spend and result in a reduction of
revenue recognized.
Additionally, we generate Ad-Supported revenue through arrangements with certain advertising exchange platforms to distribute
advertising inventory for purchase on a cost-per-thousand basis through their automated exchange. Ad-Supported revenue is
recognized over time when impressions are delivered on the platform.
54
Share-based Payments
Our employees and members of our board of directors receive remuneration in the form of share-based payment transactions,
whereby employees and directors render services in consideration for equity instruments.
The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of an
RSU or restricted stock award is measured using the fair value of our ordinary shares on the date of the grant. Stock-based
compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards, which is generally less than
five years.
Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including expected term
of the option, expected volatility of the price of our ordinary shares, risk-free interest rates, and the expected dividend yield of our
ordinary shares. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve
inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-
based compensation expense could be materially different in the future.
We also must estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is
based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual
forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a significant
impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the
forfeiture estimate is changed. A higher revised forfeiture rate than previously estimated will result in an adjustment that will decrease
the stock-based compensation expense recognized in the consolidated statement of operations. A lower revised forfeiture rate than
previously estimated will result in an adjustment that will increase the stock-based compensation expense recognized in the
consolidated statement of operations.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.
As we accumulate additional data related to our ordinary shares, we may have refinements to our estimates, which could materially
impact our future stock-based compensation expense.
Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation. Social costs
in connection with granted options and RSUs are accrued over the vesting period based on the intrinsic value of the award that has
been earned at the end of each reporting period. The amount of the liability reflects the amortization of the award and the impact of
expected forfeitures. The social cost rate at which the accrual is made generally follows the tax domicile within which other
compensation charges for a grantee are recognized.
Content
We incur royalty costs for the right to stream music to our users, paid to certain music record labels and other rights holders.
Royalties are calculated using negotiated rates in accordance with license agreements, estimates of those rates in instances where
rights holders are not identified, or rates as determined by government bodies. Calculations are based on either Premium and Ad-
Supported revenue earned or user/usage measures or a combination of these. The rights holder agreements are complex and our
determination of royalties payable involves certain significant judgments, assumptions, and estimates in addition to complex systems
and a significant volume of data to be processed and analyzed. In particular, in certain jurisdictions rights holders have several years to
claim royalties for works streamed each month. As such, the royalty costs incurred in a period might not be fully settled for a number
of years and are estimated. The estimate of royalty costs requires us to make assumptions about the rates to be recorded for streams
where the rights holder is not identified and the potential incidence of duplicate claims. These estimates are subject to revision until
settlement. Considering the number of variables impacting the amounts owed, the actual outcome could be different than our
estimates, resulting in an additional accrual or release of previously recorded liabilities.
In addition, some rights holders have allowed the use of their content on our platform while negotiations of the terms and
conditions of individual agreements are ongoing. In these instances, royalties are calculated based on our best estimate of the eventual
payout.
Many of the rights holders agreements include the right to audit our royalty payments, and any such audit could result in
disputes over whether we have paid the proper royalties. Given the complexity of the arrangements, if such a dispute were to occur,
we could be required to pay additional royalties, and the amounts involved could be material.
The majority of our rights holder liabilities are settled on commercial payment terms shortly after they are incurred. However,
certain of these liabilities are not settled for more significant periods of time due to uncertainties related to the reasons discussed
55
above. Of the total accruals and provisions to rights holders at December 31, 2019 and December 31, 2018, approximately €295
million and €203 million, respectively, relate to liabilities that were incurred more than twelve months prior to the date of the
statement of financial position. Of the December 31, 2019 amount, €17 million was expensed in the year ended December 31, 2019
due to an increase of estimates included in the financial statements for the year ended December 31, 2018.
From time to time, we are involved in legal actions or other third-party assertions related to content on our platform. There can
be no assurance these actions or other third-party assertions will be resolved without costly litigation in a manner that does not
adversely impact our financial position, results of operations, or cash flows, or without requiring higher royalty payments in the future,
which may adversely impact gross margins. We record a liability when it is probable that a loss has been incurred and the amount can
be reasonably estimated. In determining the probability of a loss and consequently, determining a reasonable estimate, management is
required to use significant judgment. Given the uncertainties associated with any litigation, the actual outcome can be different from
our estimates and could adversely affect our results of operations, financial position, and cash flows. See “Risk Factors—Risks
Related to Our Business—Our royalty payment scheme is complex, and it is difficult to estimate the amount payable under our license
agreements.”
We have certain arrangements whereby royalty costs are paid in advance or are subject to minimum guaranteed amounts. These
minimum guarantee amounts have been disclosed in Note 24 of the consolidated financial statements, included elsewhere in this
report. An accrual is established when actual royalty costs to be incurred during a contractual period are expected to fall short of the
minimum guaranteed amounts. For minimum guarantee arrangements for which we cannot reliably predict the underlying expense, we
will expense the minimum guarantee on a straight-line basis over the term of the arrangement. We also have certain royalty
arrangements where we would have to make additional payments if the royalty rates for specified periods were below those paid to
certain other licensors (most favored nation clauses). For rights holders with this clause, we compare royalties incurred to date plus
estimated royalties payable for the remainder of the period to estimates of the royalties payable to other appropriate rights holders, and
the shortfall, if any, is recognized on a straight-line basis over the period of the applicable most favored nation clause. An accrual and
expense is recognized when it is probable that we will make additional royalty payments under these terms. The expense related to
these accruals is recognized in cost of revenue.
Warrants
Our warrants are re-measured at each reporting date using valuation models using input data. The change in fair value of these
financial liabilities are recognized in finance income or cost in the consolidated statement of operations. Our ordinary share price is a
primary driver of the fair value of the warrants. If factors change and different assumptions are used, our finance costs (net) could be
materially different in the future. Please refer to “Item 11. Quantitative and Qualitative Disclosures About Market Risk” included
elsewhere in this report for additional information on the share price risk relate to our warrants.
See Note 23 to our consolidated financial statements included elsewhere in this report for additional information on the
valuation models used for our warrants.
Income Taxes
We are subject to income taxes in Luxembourg, Sweden, the United States, and numerous foreign jurisdictions. Significant
judgment is required in determining our uncertain tax positions.
Deferred tax assets are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the extent
that it is probable that future taxable profits will be available, against which they can be used. Unused tax loss carry-forwards are
reviewed at each reporting date and have not been recorded when we believe we will not generate future taxable income to utilize the
loss carry-forwards.
In determining the amount of current and deferred income tax, we take into account the impact of uncertain tax positions and
whether additional taxes, interest, or penalties may be due. Although we believe that we have adequately reserved for our uncertain
tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust these
reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that
the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income
taxes in the period in which such determination is made and could have a material impact on our financial condition and operating
results.
We have initiated and are in negotiations of an APA between Sweden and the United States governments for tax years 2014
through 2020 covering various transfer pricing matters. These transfer pricing matters may be significant to our consolidated financial
statements.
56
Business Combinations
In business combinations, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities
assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identified assets and liabilities is recorded as goodwill. Such valuations require management to make
significant estimates, assumptions, and judgments, especially with respect to intangible assets and contingent consideration.
Lease Agreements
As most of our lease agreements do not provide an implicit rate of return, we use our incremental borrowing rate based on the
information available at the lease commencement date to determine the present value of lease payments. For our lease agreements that
existed prior to the adoption date of IFRS 16, we determined our incremental borrowing rate as of January 1, 2019. Our incremental
borrowing rate is determined based on estimates and judgments, including the credit rating of our leasing entities and a credit spread.
Goodwill Impairment
In accordance with the accounting policy described in Note 2 to our consolidated financial statements included elsewhere in this
report, the Group annually performs an impairment test regarding goodwill. The assumptions used for estimating fair value and
assessing available headroom based on conditions that existed at the testing date are disclosed in Note 14 to our consolidated financial
statements included elsewhere in this report.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this report for recently adopted accounting
pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position
included in this report.
B. Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, short term investments, and cash generated from operations.
Cash and cash equivalents and short term investments consist mostly of cash on deposit with banks, investments in money market
funds, and investments in government and agency securities, corporate debt securities, and collateralized reverse purchase agreements.
Cash and cash equivalents and short term investments decreased by €49 million from €1,806 million as of December 31, 2018 to
€1,757 million as of December 31, 2019.
We believe our existing cash and cash equivalent balances and the cash flow we generate from our operations will be sufficient
to meet our working capital and capital expenditure needs and other liquidity requirements for at least the next 12 months. However,
our future capital requirements may be materially different than those currently planned in our budgeting and forecasting activities and
depend on many factors, including our rate of revenue growth, the timing and extent of spending on content and research and
development, the expansion of our sales and marketing activities, the timing of new product introductions, market acceptance of our
products, our continued international expansion, the acquisition of other companies, competitive factors, and overall economic
conditions, globally. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business
activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result
in additional dilution to our shareholders, while the incurrence of debt financing would result in debt service obligations. Such debt
instruments also could introduce covenants that might restrict our operations. We cannot assure you that we could obtain additional
financing on favorable terms or at all. See “Risk Factors—Risks Related to Our Business—We may require additional capital to
support business growth and objectives, and this capital might not be available on acceptable terms, if at all.”
On November 5, 2018, Spotify Technology S.A. announced that it would commence a share repurchase program that began in
the fourth quarter of 2018. Repurchases of up to 10,000,000 of the Company’s ordinary shares have been authorized by the
Company’s general meeting of shareholders, and the board of directors approved such repurchase up to the amount of $1.0 billion.
During 2019, we repurchased 3,679,156 ordinary shares for €433 million in connection with the share repurchase program and we
repurchased an aggregate of 4,366,427 ordinary shares for €510 million since the commencement of the share repurchase program.
The repurchase program will expire on April 21, 2021. The timing and actual number of shares repurchased will depend on a variety
of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program
will be executed consistent with our capital allocation strategy of prioritizing investment to grow the business over the long term.
Under the repurchase program, repurchases can be made from time to time using a variety of methods, including open market
purchases, all in compliance with the rules of the Commission and other applicable legal requirements. The repurchase program does
not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or
discontinued at any time at the Company’s discretion. We may use current cash and cash equivalents and the cash flow we generate
from our operations to fund our share repurchase program.
57
Cash Flow
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows (used in)/from financing activities
2019
Year ended
December 31,
2018
(in € millions)
2017
573
(218 )
(203 )
344
(22 )
92
179
(435 )
34
For the year ended December 31, 2019, as compared to 2018, net cash flows from operating activities increased by €229
million. The increase in net cash flows from operating activities was due primarily to changes in working capital of €200 million, due
primarily to an increase in trade and other liabilities. In addition, there are payments on lease liabilities of €17 million included in
financing activities as a result of adopting IFRS 16, as compared to none in the prior year as payments on our operating leases were
included in operating activities for the year ended December 31, 2018.
For the year ended December 31, 2019, as compared to 2018, net cash flows used in investing activities increased by €196
million, due primarily to an increase in cash used in business combinations, net of cash acquired of €322 million, offset by an increase
in net cash inflows from purchases and sales of investments of €105 million and an increase in cash inflows from restricted cash of
€12 million.
For the year ended December 31, 2019, as compared to 2018, net cash flows used in financing activities increased by €295
million, due primarily to an increase in treasury share purchases of €366 million and an increase in payments of lease liabilities of €17
million. These increases were partially offset by an increase in the proceeds from the issuance and exercise of warrants of €89 million
and an increase in lease incentives received of €15 million.
Free Cash Flow
Free Cash Flow
2019
Year ended December 31,
2018
(in € millions)
2017
440
209
109
For the year ended December 31, 2019, as compared to 2018, Free Cash Flow increased by €231 million. The increase in Free
Cash Flow was due primarily to an increase in net cash flows from operating activities of €229 million as described above.
For a discussion of the limitations associated with using Free Cash Flow rather than IFRS measures and a reconciliation of Free
Cash Flow to net cash flows from operating activities, see “Item 3.A. Selected Financial Data.”
Indebtedness
As of December 31, 2019, we have no material outstanding indebtedness, other than lease liabilities recognized upon the
adoption of IFRS 16 on January 1, 2019. We may from time to time seek to incur additional indebtedness. Such indebtedness, if any,
will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts
involved may be material.
On April 3, 2018, the Group completed a direct listing of the Company’s ordinary shares on the NYSE. Upon the direct listing,
the outstanding liability relating to the Company’s Convertible Notes was reclassified to equity. See Note 19 to our consolidated
financial statements, included elsewhere in this report, for further information regarding the Convertible Notes.
C. Research and Development, Patents and Licenses
For a detailed analysis of research and development costs, see “Item 4.B. Business Overview” and “Item 5. Operating and
Financial Review and Prospects”.
D. Trend Information
Our results reflect the effects of our bi-annual trial programs, in addition to seasonal trends in user behavior and, with respect to
our Ad-Supported segment, advertising behavior. Historically, Premium Subscriber growth accelerates when we run bi-annual trial
58
programs in the summer and winter, which typically begin in the last month of the second and fourth quarters. Historically, this has
led to decreases in gross margin in the first and third quarter of each year, as we absorb the promotional expenses of discounted trial
offers.
For our Ad-Supported segment, typically we experience higher advertising revenues in the fourth quarter of each calendar year
due to greater advertising demand during the holiday season. However, in the first quarter of each calendar year, we typically
experience a seasonal decline in advertising revenue due to reduced advertiser demand.
Other than as disclosed here and elsewhere in this report, we are not aware of any trends, uncertainties, demands, commitments,
or events since December 31, 2019 that are reasonably likely to have a material adverse effect on our revenues, income, profitability,
liquidity, or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future
operating results or financial conditions.
E. Off-balance sheet arrangements
As of December 31, 2019, we do not have transactions with unconsolidated entities, such as entities often referred to as
structured finance or special purpose entities, whereby we have financial guarantees, subordinated retained interests, derivative
instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation
under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.
F. Tabular disclosure of contractual obligations
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2019:
Contractual obligations:
Minimum guarantees(1)
Lease obligations(2)
Purchase obligations(3)
Total
Payments due by period
Total
Less than
1 year
1-3 years
(in € millions)
3-5 years
More than
5 years
1,040
1,007
200
2,247
657
83
56
796
383
163
144
690
—
168
—
168
—
593
—
593
(1) We are subject to minimum guarantees relating to the content on our service, the majority of which relate to minimum royalty payments associated with our
(2)
license agreements for the use of licensed content. See “Item 3.D. “Risk Factors”.
Included in the lease obligations are short term leases and certain lease agreements that the Group has entered into, but have not yet commenced as of December
31, 2019. Lease obligations relate to our office space. The lease terms are between one and fifteen years. See Note 12 to the consolidated financial statements for
further details regarding leases.
(3) We are subject to various non-cancelable purchase obligations and service agreements with minimum spend commitments, the majority of which relate to a
service agreement with Google for the use of Google Cloud Platform.
Subsequent to the period end, the Group signed license agreements with certain music labels and publishers and podcast
agreements with creators. Included in these agreements are minimum guarantee and spend commitments of approximately €186
million over the next three years.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the names, ages, and positions of our senior management and directors as of the date of this
report:
Name
Daniel Ek .................................................
Martin Lorentzon ......................................
Paul Vogel................................................
Katarina Berg ...........................................
Horacio Gutierrez .....................................
Alex Norström ..........................................
Gustav Söderström ...................................
Age
Position
36 Founder, Chief Executive Officer, Chairman, and Director
50 Co-Founder and Director
47 Chief Financial Officer
52 Chief Human Resources Officer
55 Head of Global Affairs & Chief Legal Officer
43 Chief Premium Business Officer
43 Chief Research & Development Officer
59
Name
Dawn Ostroff............................................
Cecilia Qvist.............................................
Christopher Marshall ................................
Barry McCarthy........................................
Shishir Mehrotra .......................................
Heidi O’Neill............................................
Ted Sarandos ............................................
Thomas Staggs .........................................
Cristina Stenbeck ......................................
Padmasree Warrior ...................................
Age
Position
59 Chief Content Officer
47 Global Head of Markets
51 Director
66 Director
40 Director
55 Director
55 Director
59 Director
42 Director
59 Director
The business address of each Director and each of Mr. Ek, Mr. Lorentzon, Ms. Berg, Mr. Norström, and Mr. Söderström is
Regeringsgatan 19, 111 53 Stockholm, Sweden. The business address of each of Ms. Ostroff, Mr. Gutierrez, Ms. Qvist, and Mr. Vogel
is 150 Greenwich Street, 63rd Floor, New York, New York 10007. The following is a brief biography of each of our senior managers
and 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, and his term will expire on the date of the general meeting of shareholders to be
held to approve the annual accounts of 2019. 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, which was acquired by eBay,
and served as Chief Technology Officer at Stardoll, a fashion and entertainment community for pre-teens.
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, and his term will expire on the date of the general meeting of shareholders to be held to approve the annual
accounts of 2019. Mr. Lorentzon previously served as Chairman of our board of directors from 2008 to 2016. In addition to his role on
our board of directors, Mr. Lorentzon has served as a member of the board of directors of Telia Company AB (“Telia Company”),
Sweden’s main telecom operator, from 2013 to 2018. In 1999, Mr. Lorentzon founded TradeDoubler, an internet marketing company
based in Stockholm, Sweden, and initially served as a member of its board of directors. Additionally, Mr. Lorentzon has held senior
roles at Telia Company and Cell Ventures. He holds a Master of Science in Civil Engineering from the Chalmers University of
Technology.
Katarina Berg is our Chief Human Resources Officer. She oversees all aspects of human resource management and is
responsible for developing and executing the people strategy in support of our overall business plan. Ms. Berg serves as a member of
the board of directors of Sqore and as member of the advisory board of directors of ToppHälsa, Bonnier Tidskrifter. Before joining
our team, Ms. Berg held human resources roles in various multinational companies, such as Swedbank, 3 Scandinavia, and Kanal 5
(SBS Broadcasting). Ms. Berg holds a Master of Arts in Human Resources Management and Development in Behavioral Science from
Lund University.
Horacio Gutierrez is our Head of Global Affairs and Chief Legal Officer. In this capacity, he oversees the Company’s work on
a wide range of areas around the world, including industry relations and partnerships, public policy and trust and safety, among others,
and leads a global team of business, public affairs, government relations, licensing, and legal professionals. Mr. Gutierrez joined
Spotify as General Counsel in 2016 after spending over 17 years at Microsoft Corporation, ultimately as General Counsel and
Corporate Vice President for Legal Affairs. Throughout his career, he has been involved in a number of high-profile legal and
regulatory matters and concluded numerous intellectual property deals, including licensing agreements with companies around the
world. Mr. Gutierrez has played a leading role on technology and innovation policy issues, including competition policy, intellectual
property policy and internet regulation. He holds a Master of Laws degree from Harvard Law School, which he attended as a Fulbright
Scholar; a Juris Doctor degree summa cum laude from the University of Miami; a Bachelor of Laws degree from Universidad Católica
Andrés Bello in Caracas, Venezuela; and a post-graduate diploma in corporate and commercial law from the same institution.
Alex Norström is our Chief Premium Business Officer. As our Chief Premium Business Officer, Mr. Norström is responsible
for overseeing strategy, marketing, global partnerships, and product offerings for our subscription business. Mr. Norström was
previously our Vice President of Growth and our Vice President of Subscription. Prior to joining Spotify in 2011, Mr. Norström was
Chief New Business Officer at King. He was a member of the board of directors of Circle from 2016 through December 2019. Mr.
Norström also has a private investment company, Fragrant Harbour Capital AB, based and registered in Stockholm, Sweden.
Mr. Norström holds a Master of Science in Business & Economics with a Major in Finance from the Stockholm School of Economics.
Gustav Söderström is our Chief Research & Development Officer. He oversees the product, design, data, and engineering
teams at Spotify and is responsible for our product strategy. Mr. Söderström is a startup seed investor and also has been an advisor to
60
Tictail since 2013 and was formerly an advisor to 13th Lab (acquired by Facebook’s Oculus). Before joining the Company in 2009,
Mr. Söderström was director of product and business development for Yahoo! Mobile from 2006 to 2009. In 2003, Mr. Söderström
founded Kenet Works, a company that developed community software for mobile phones and served as the company’s Chief
Executive Officer until it was acquired by Yahoo! in 2006. Mr. Söderström holds a Master of Science in Electrical Engineering from
KTH Royal Institute of Technology.
Dawn Ostroff is our Chief Content Officer. She is responsible for overseeing the Company’s global content and distribution
operations, including all original content and industry and creator relationships. She is also responsible for managing our advertising
sales business. Prior to joining Spotify, Ms. Ostroff served as President of Condé Nast Entertainment, a studio and distribution
network with entertainment content across film, television, premium digital video, social, and virtual reality. She was previously
President of Entertainment for The CW broadcast network, a joint venture of CBS and Warner Bros. that she helped launch in 2006,
and before that, President of the UPN broadcast network. Ms. Ostroff holds a Bachelor of Science in Journalism from Florida
International University.
Cecilia Qvist is our Global Head of Markets. She oversees the Company’s international expansion and product localization
efforts and is focused on growth of users globally. Prior to joining Spotify in 2017, Ms. Qvist held business, sales, and product
development positions at various companies, including Ericsson, Swedbank, and Nasdaq OMX. She also brings experience in digital
strategies and multi-market growth. Since 2018, she has served as a member of the board of directors of Catena Media and a member
of the advisory board of Webrock Ventures. Ms. Qvist holds a Master of Business Administration from Heriot-Watt University.
Paul Vogel is our Chief Financial Officer. He is responsible for overseeing the Company’s financial affairs. Mr. Vogel
previously served as the Company’s Head of Financial Planning & Analysis, Treasury and Investor Relations from 2016 to January
2020. Before joining Spotify, he spent the majority of his career in the investment community as a portfolio manager and equity
research analyst, most recently serving as a Managing Director and Head of the Internet and Media Equity Research team at Barclays.
Prior to Barclays, Mr. Vogel held various roles in finance, including as a Portfolio Manager at AllianceBernstein and a Research
Analyst at Morgan Stanley and DLJ. He is a CFA Charterholder and holds a Bachelor of Arts in Economics from the University of
Pennsylvania.
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
2019. In addition to his role on our board of directors, Mr. Marshall currently serves on the boards of directors of a number of private
companies. Since 2008, he also has served as a general partner of Technology Crossover Ventures, a private equity firm. Prior to that,
Mr. Marshall spent 12 years at Trident Capital, a venture capital firm. Mr. Marshall holds a Bachelor of Arts in Economics from
Hamilton College and a Master of Business Administration from the Kellogg School of Management at Northwestern University.
Barry McCarthy is a member of our board of directors. He has been a member of our board of directors since January 8, 2020,
and his term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019. Mr.
McCarthy previously served as our Chief Financial Officer from 2015 to January 2020. Prior to joining Spotify, Mr. McCarthy was a
private investor and served as a member of the board of directors of several private companies, including for Spotify from 2014 to
2015. He also has served as a member of the board of directors of Pandora from 2011 to 2013 (Chairman of the audit committee),
Eventbrite from 2011 to 2015, and Chegg from 2010 to 2015 (Chairman of the audit committee). Since 2011, Mr. McCarthy also has
served as an Executive Adviser to Technology Crossover Ventures. From 1999 to 2010, Mr. McCarthy served as the Chief Financial
Officer and Principal Accounting Officer of Netflix. Before joining Netflix, Mr. McCarthy served in various management positions in
management consulting, investment banking, and media and entertainment. Mr. McCarthy holds a Bachelor of Arts in History from
Williams College and a Master of Business Administration in Finance from the Wharton School at the University of Pennsylvania.
Shishir Mehrotra is a member of our board of directors. He has been a member of our board of directors since June 13, 2017,
and his term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019.
Mr. Mehrotra previously served as our Strategic Advisor to the Chief Executive Officer, from December 2015 to May 2017.
Mr. Mehrotra is the CEO and Co-Founder of Coda, Inc. Mr. Mehrotra has previously served as a Vice President of Product and
Engineering at Google and Director of Program Management at Microsoft. Mr. Mehrotra holds a Bachelor of Science in Computer
Science and a Bachelor of Science in Mathematics from the Massachusetts Institute of Technology.
61
Heidi O’Neill is a member of our board of directors. She has been a member of our board of directors since December 5, 2017,
and her term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019.
Ms. O’Neill previously served as a member of the board of directors of Skullcandy, where she also was the Chair of the compensation
committee, and the Nike School Innovation Fund, of which she was a founding member. Ms. O’Neill also serves as the President of
Nike Direct, a division of Nike, Inc.
Ted Sarandos is a member of our board of directors. He has been a member of our board of directors since September 13, 2016,
and his term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019. In
addition to his role on our board of directors, Mr. Sarandos serves on the Film Advisory Board of Directors for Tribeca Film Festival,
the board of directors of American Cinematheque, and the advisory board of Film Independent. Mr. Sarandos is also an American
Film Institute trustee, an Executive Committee Member of the Academy of Television Arts & Sciences, a Henry Crown Fellow at the
Aspen Institute, and serves on the board of directors of Exploring the Arts. He also serves as the Chief Content Officer of Netflix and
has led content acquisition for Netflix since 2000.
Thomas Staggs is a member of our board of directors. He has been a member of our board of directors since June 13, 2017, and
his term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019. In addition
to his role on our board of directors, Mr. Staggs serves on the board of overseers of the University of Minnesota Carlson School of
Management and the Center for Early Education. He also serves as the Executive Chairman of Vejo, Inc. Mr. Staggs previously served
in various roles at The Walt Disney Company, including as Chief Financial Officer, Chairman of Disney Parks and Resorts, Chief
Operating Officer, and Special Advisor to the Chief Executive Officer. He also was previously a member of the board of directors at
Euro Disney SCA from 2002 until 2015. Mr. Staggs holds a Bachelor of Science in Business from the University of Minnesota and a
Master of Business Administration from the Stanford Graduate School of Business.
Cristina Stenbeck is a member of our board of directors. She has been a member of our board of directors since June 13, 2017,
and her term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019. In
addition to her role on our board of directors, Ms. Stenbeck chairs the board of directors of Zalando SE, a German-listed e-commerce
company. From 2003 through 2019, Ms. Stenbeck served on the board of directors as main shareholder of Kinnevik AB, a Swedish
listed investment group, where she also was Vice Chairman from 2003 to 2007 and Chairman from 2007 to 2016. In addition, she
serves on the board of directors of several private companies, including Omio, a Germany-based travel company, and Camshaft S.à.r.l.
and Verdere S.à.r.l., two Luxembourg-based investment companies. Ms. Stenbeck previously held board positions in Kinnevik’s
investee companies, including Millicom International Cellular S.A., Tele2 AB, Modern Times Group AB and Babylon Holdings Ltd.
She also chaired a Swedish family foundation Hugo Stenbecks Stiftelse and acted as Trustee for St. Andrew’s School in Middletown,
Delaware. She holds a Bachelor of Science in Business from Georgetown University.
Padmasree Warrior is a member of our board of directors. She has been a member of our board of directors since June 13,
2017, and her term will expire on the date of the general meeting of shareholders to be held to approve the annual accounts of 2019. In
addition to her role on our board of directors, Ms. Warrior serves on the boards of directors of Microsoft and Thorn. In addition,
Ms. Warrior was a member of the board of directors of The Gap, Inc. from 2013 to 2016 and a member of the board of directors of
Box, Inc. from 2014 to 2016. From 2008 to 2015 Ms. Warrior worked at Cisco, most recently as Chief Technology and Strategy
Officer. She served as the President and Chief Executive Officer of NIO U.S. and Chief Development Officer of NIO Group from
December 2015 to 2018. In 2019, she founded Fable Group, where she serves as President and Chief Executive Officer. She holds a
Bachelor of Technology in Chemical Engineering from the Indian Institute of Technology and a Master of Science in Chemical
Engineering from Cornell University.
Family Relationships
There are no family relationships between any of the directors. There are no family relationships between any director and any
of the senior management of our Company.
Arrangements or Understandings
Christopher Marshall was elected as a director pursuant to a shareholder arrangement pursuant to his role as a general partner of
TCMI, Inc., which manages the TCV funds. Such shareholder arrangement has since been terminated. None of our other senior
management, directors, or key employees has any arrangement or understanding with our principal shareholder, customers, suppliers,
or other persons pursuant to which such senior management, director, or key employee was selected as such.
62
B. Compensation
This section discusses the principles underlying the material components of our executive compensation program for a subset of
our executive leadership team who would be our named executive officers, as if we were a domestic issuer, and the factors relevant to
an analysis of these policies and decisions. These “named executive officers” for 2019 are:
• Daniel Ek, who is our Founder and serves as our Chief Executive Officer (“CEO”), Chairman, and Director and is our
principal executive officer;
• Barry McCarthy, who served as our Chief Financial Officer (“CFO”) and our principal financial officer until he resigned
from such position as of January 15, 2020;
• Dawn Ostroff, who serves as our Chief Content Officer;
• Gustav Söderström, who serves as our Chief Research & Development Officer; and
• Alex Norström, who serves as our Chief Premium Business Officer.
Specifically, this section provides an overview of our executive compensation philosophy, the overall objectives of our
executive compensation program, and each compensation component that we provide. In addition, we explain how and why the
remuneration committee of our board of directors arrived at specific compensation policies and decisions involving our named
executive officers during 2019.
Each of the key elements of our executive compensation program is discussed in more detail below. Our compensation
programs are designed to be flexible and complementary and to collectively serve their principles and objectives.
Executive Compensation Philosophy and Objectives
We operate in the highly competitive and dynamic digital media industry as the world’s most popular global audio streaming
subscription service. This industry is characterized by rapidly changing market requirements and the emergence of new competitors.
To succeed in this environment, we must continuously develop solutions that meet the needs of our rapidly growing user base in a
rapidly changing environment, efficiently develop and refine new and existing products and services, and demonstrate a strong return
on investment to our advertisers. To achieve these objectives, we need a highly talented and seasoned team of data scientists,
engineers, product designers, product managers, and other business professionals.
We recognize that our future success depends on our continuing ability to attract, develop, motivate, and retain highly qualified
and skilled employees, which is driven by our compensation, culture and reputation, and the strength of our brand. We strive to create
an environment that is responsive to the needs of our employees, is open towards employee communication and continual
performance feedback, encourages teamwork, and rewards commitment and performance. The principles and objectives of our
compensation and benefits programs for our executive leadership team and other employees are to:
•
•
attract, engage, and retain the best executives to work for us, with experience and managerial talent enabling us to be an
employer of choice in highly competitive and dynamic industries;
align compensation with our corporate strategies, business and financial objectives, and the long-term interests of our
shareholders;
• motivate and reward executives whose knowledge, skills, and performance ensure our continued success; and
•
ensure that our total compensation is fair, reasonable, and competitive.
We compete with many other companies in seeking to attract and retain experienced and skilled executives. To meet this
challenge, we have embraced a compensation philosophy that offers our executive leadership team competitive compensation and
benefits packages including equity grants, which are focused on long-term value creation, and that rewards our executive leadership
team for achieving our financial and strategic objectives.
63
Roles of Our Board of Directors, Remuneration Committee, and Chief Executive Officer in Compensation Decisions
The initial compensation arrangements with our executive leadership team, including the named executive officers, have been
determined in arms-length negotiations with each individual executive. Typically, our CEO has been responsible for negotiating these
arrangements, except with respect to his own compensation, with the oversight and final approval of the members of our board of
directors or the remuneration committee. The compensation arrangements have been influenced by a variety of factors, including, but
not limited to:
•
•
•
•
•
our financial condition and available resources;
our need for that particular position to be filled;
our board of directors’ evaluation of the competitive market based on the third-party data provided by Compensia, Inc.
(“Compensia”), a national compensation consulting firm, competitive pay practices for comparable positions at companies
of comparable scale and in relevant business segments, as further described below, and the experience of the members of
the remuneration committee with other companies;
the length of service of an individual; and
the compensation levels of other members of the executive leadership team, each as of the time of the applicable
compensation decision.
Following the establishment of the initial compensation arrangements, our CEO, board of directors, and remuneration
committee have been responsible for overseeing our executive compensation program, as well as determining and approving the
ongoing compensation arrangements for our CEO and other members of the executive leadership team, including the other named
executive officers. Typically, our CEO reviews the performance of the other members of the executive leadership team, including the
other named executive officers, and based on this review, along with the factors described above, make recommendations to the
remuneration committee with respect to the total compensation, including each individual component of compensation, of these
individuals for the coming year. There is no predetermined time of year for these reviews, although they are generally performed on
an annual basis coinciding with our Company-wide employee compensation review in March. Further, the remuneration committee
reviews the performance of our CEO, and based on this review and the factors described above, determines his total compensation for
the coming year.
The current compensation levels of our executive leadership team, including the named executive officers, primarily reflect the
varying roles and responsibilities of each individual.
Engagement of Compensation Consultant
The remuneration committee has engaged the services of Compensia to provide executive compensation advisory services. The
remuneration committee directed Compensia to develop a peer group of comparable companies in our sector and prepare a
competitive market analysis of our executive compensation program to assist it in determining the appropriate level of overall
compensation, as well as assess each separate component of compensation, with the goal of understanding the competitiveness of the
compensation we offer to our executive leadership team. In 2018, the remuneration committee approved the compensation peer group
(the “Peer Group”) for fiscal year 2019. The Peer Group for 2019 consisted of the following companies:
Activision Blizzard
eBay
Intuit
PayPal Holdings
Twitter
Autodesk
Electronic Arts
Lions Gate Entertainment
Sirius IX Holdings
VeriSign
Ctrip.com International
Expedia Group
Live Nation Entertainment
Snap
Zalando
Discovery
IAC/InterActiveCorp
MercadoLibre
Take-Two Interactive
Zillow Group
The remuneration committee bases its executive compensation decisions, at least in part, by reference to the compensation of the
executives holding comparable positions at this group of comparable peer companies, as it may be adjusted from time to time. In
2018, Compensia provided the remuneration committee with total cash compensation data and total compensation data (including cash
compensation and equity compensation) at various percentiles within the Peer Group. The remuneration committee considered this
data in determining the compensation levels of our named executive officers, but we did not benchmark our executive compensation
to any pre-determined target percentile of market. The remuneration committee sought to compensate our named executive officers at
a level that would allow us to successfully recruit and retain the best possible talent for our executive leadership team. Overall,
Compensia’s analysis of our Peer Group indicated that the target total cash compensation for our named executive officers was
approximately the 25th percentile of our Peer Group. Our total compensation for our named executive officers other than our CEO
(who, as we note below, did not receive any cash or equity compensation in 2019), including cash and equity compensation, was
between the 50th and 75th percentile of our Peer Group. As noted above, we rely heavily on our equity awards to incentivize our
employees, including each of our named executive officers.
64
Compensation Philosophy
We design the principal components of our executive compensation program to fulfill one or more of the principles and
objectives described above. Compensation of our named executive officers consists of the following elements:
•
•
•
•
•
base salary;
equity incentive compensation;
certain severance benefits;
retirement savings plans; and
health and welfare benefits and certain limited perquisites and other personal benefits.
We offer cash compensation in the form of base salaries that we believe appropriately reward our executive leadership team
members for their individual contributions to our business. We have opted not to offer annual cash bonuses to our executive leadership
team members, as we believe they do not incentivize the long-term growth of the Company. Instead, we incentivize our executive
leadership team members heavily through share-based compensation, which we believe fosters the long-term growth of the Company.
We have emphasized the use of equity to incentivize our executive leadership team to focus on the growth of our overall
enterprise value and, correspondingly, the creation of value for our shareholders. As a result of this compensation practice, we have
tied a greater percentage of each executive leadership team member’s total compensation to shareholders returns and kept cash
compensation at modest levels, while providing the opportunity to be well-rewarded through equity if we perform well over time.
Except as described below, we have not adopted any policy or guidelines for allocating compensation between currently-paid
and long-term compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.
Each of the primary elements of our executive compensation program is discussed in more detail below. We believe that, as a
part of our overall executive compensation policy, each individual element serves our objectives described above.
Executive Compensation Program Components
The following describes the primary components of our executive compensation program for each of our named executive
officers, the rationale for that component, and how compensation amounts are determined.
Base Salary and Bonus
Generally, each named executive officer’s initial base salaries were established through arms-length negotiation at the time the
individual was hired, taking into account his or her qualifications, experience, and prior salary level. Thereafter, the base salaries of
our executive leadership team members, including the named executive officers, are reviewed periodically by our remuneration
committee, and adjustments are made as deemed appropriate. There were no base salary increases in 2019.
As of July 1, 2017, our CEO does not receive a base salary. In 2017, he was entitled to receive a one-time bonus subject to the
fulfillment of certain milestones and/or discretionary approval by our board of directors. The board of directors decided to grant our
CEO such a bonus with respect to fiscal year 2017 in an amount up to $1,000,000, which became payable in the first quarter of 2018.
The board of directors considered whether the Company achieved (i) more than 70,000,000 Premium Subscribers in 2017, (ii) more
than 150,000,000 MAUs in 2017, and (iii) 25% in gross margin during the second half of 2017 in determining the bonus amount, but
our board of directors retained the ability to pay such bonus to Mr. Ek even if such milestones were not achieved. In February 2018,
our board of directors determined to pay Mr. Ek the full $1,000,000 bonus based on the Company’s 2017 performance though certain
performance goals were not achieved. Mr. Ek did not receive a bonus for 2018 or 2019.
As of the end of fiscal year 2019, our named executive officers were entitled to the following annual base salaries:
Named Executive Officer
Daniel Ek(1)(2)
Barry McCarthy
Dawn Ostroff
Gustav Söderström(2)
Alex Norström(2)
65
Annual Base
Salary
0
$
560,000
$
$ 1,000,000
320,514
$
333,335
$
(1)
As of July 1, 2017, Mr. Ek does not receive a base salary.
(2) Messrs. Ek, Söderström, and Norström are each paid in Swedish Krona. Such amounts are based on the exchange rate of SEK 9.36 per dollar as of December 31,
2019 as published by Reuters.
We offered Ms. Ostroff a sign-on bonus of $2,000,000 in order to incentivize her to join the Company. Pursuant to her
employment agreement, Ms. Ostroff received the first installment of her sign-on bonus in July 2018 and the second installment of her
sign-on bonus in July 2019. For further information on Ms. Ostroff’s sign-on bonus please see “—Employment Agreements” below.
None of the other named executive officers were entitled to any bonuses or cash incentive compensation for 2019.
Long-Term Incentives
Each of our named executive officers has been granted equity awards in the Company, which allow them to share in the future
appreciation of the Company, subject to certain vesting conditions, as described in more detail below. These equity awards are
designed to foster a long-term commitment to us by our named executive officers, provide a balance to the salary component of our
compensation program, align a portion of our executives’ compensation to the interests of our shareholders, promote retention, and
reinforce our pay-for-performance structure (as discussed in more detail below).
Long-term incentive awards are provided upon hire as well as during employment at the Company’s discretion.
In 2019, we established a new incentive mix program, which provides our named executive officers as well as all other
permanent employees with maximum flexibility and individual autonomy, by allowing our employees to have the ability to choose
their own composition of long-term incentive awards. Employees are informed of their intended aggregate dollar amount of long-term
incentive compensation, and they can allocate such dollar amount among at-the-money stock options, out-of-the-money stock options
with a closing price equal to 150% of the closing price per ordinary share on the grant date, RSUs, or cash. Employees can choose to
have one or two types of equity awards and/or cash and can mix their programs in portions of 25%, 50%, and 75%. The amount of any
cash award chosen will be 90% of the dollar amount the employee allocates to cash. The number of RSUs provided is equal to the
dollar amount the employee allocates to RSUs divided by the closing price per ordinary share on the grant date. The number of at-the-
money options provided is equal to four times the dollar amount the employee allocates to such stock options divided by such closing
price. The number of out-of-the-money stock options provided is equal to eight times the dollar amount the employee allocates to
stock options divided by such closing price. Each type of long-term incentive award vests on the same schedule: 3/48ths of the equity
award and/or cash payment vests on the third calendar month following the date of grant, and thereafter 1/48th of the equity award
and/or cash payment vests on the first day of each calendar month. For further information on our equity award programs please see
“—Stock Options”, “—Restricted Stock Units” and “—Cash Program” below.
In 2019, each of our named executive officers participated in the incentive mix program. The following table shows the dollar
amount of incentive compensation allocated to each named executive officer, as well as the allocations chosen by each such
individual:
Aggregate Long-
Term Incentive
Award Dollar
Value
($)
5,900,000
5,300,000
5,900,000
5,300,000
Named Executive Officer
Barry McCarthy
Dawn Ostroff
Gustav Söderström
Alex Norström
Long-Term Incentive Award Decisions
2019 At-the-
Money Stock
Option
Allocation
(#)
171,014
38,406
171,014
153,623
2019 Out-of-the-
Money Stock
Option
Allocation
(#)
2019 RSU
Allocation
(#)
2019 Cash
Allocation
($)
—
—
—
—
—
28,804
—
—
—
—
—
—
Each year our remuneration committee reviews and recommends an equity program to our board of directors for approval in
order to incentivize our employees, including our named executive officers, and directors. Our remuneration committee, in
consultation with our CEO, determines the aggregate dollar value of the long-term incentive compensation to be awarded to each
executive leadership team member. In making these decisions, the remuneration committee takes into consideration the Company’s
financial results and market conditions, as well as the factors described above.
66
Retirement Savings and Other Benefits
Our retirement programs comply with local laws and regulations. For our employees who reside in Sweden, including
Messrs. Ek, Söderström, and Norström, we participate in an occupational pension plan. Pursuant to such plan we pay a premium of
4.5% of each such employee’s monthly base salary up to an annual income ceiling and 30% of monthly base salary on amounts above
such annual income ceiling. Employees also may contribute additional amounts through a salary exchange program pursuant to which
eligible employees are given the opportunity to enhance their pension savings by choosing to exchange a portion of their base salary
for additional pension contributions. Certain legal limitations apply to the amount of contributions that may be made to the
occupational pension plan.
For our employees in the United States who satisfy certain eligibility requirements, including Mr. McCarthy and Ms. Ostroff,
we have established a 401(k) retirement savings plan. Under the 401(k) plan, eligible employees may elect to reduce their current
compensation by up to the prescribed annual limit and contribute these amounts to the 401(k) plan. The Company matches up to 50%
of the employee’s contributions up to 6% of their annual salary. Employees vest in the employer-contributions ratably over four years.
The Company does not maintain any defined benefit plans for any of its named executive officers.
Employee Benefits and Perquisites
Additional benefits received by our Swedish employees, including Messrs. Ek, Söderström, and Norström, include private
healthcare, accident insurance, life and long-term disability insurance, travel insurance, and parental leave. Additional benefits
received by our U.S. employees, including Mr. McCarthy and Ms. Ostroff, include medical, dental, and vision benefits, medical, and
dependent care flexible spending accounts, short-term and long-term disability insurance, basic life insurance coverage, and parental
leave. These benefits are provided to our named executive officers on the same general terms as they are provided to all of our full-
time employees in the applicable countries.
We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with
applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws
and practices in the competitive market.
We do not view perquisites or other personal benefits as a significant component of our executive compensation program. We
generally provide relocation assistance to all of our employees, when applicable. We provided Mr. McCarthy with relocation
assistance and tax preparation assistance in connection with his relocation. In addition, the personal safety of our employees,
including our NEOs, is of the highest importance to us and in 2019 we paid for personal security services for certain NEOs pursuant to
the Company's personal security program for senior management. Although we consider these personal security services to be
appropriate and necessary for the reasons described above, the costs related to such services are reported as other compensation to our
NEOs in the “Summary Compensation Table” below. In the future, we may provide other perquisites or other personal benefits in
limited circumstances, such as where we believe it is appropriate to assist an individual executive officer in the performance of his or
her duties, to make our executive leadership team members more efficient and effective, and for recruitment, motivation, or retention
purposes. All future practices with respect to perquisites or other personal benefits for our named executive officers will be approved
and subject to periodic review by the remuneration committee. We do not expect these perquisites to be a significant component of our
compensation program.
Severance
Each of our named executive officers is entitled to severance upon certain qualifying terminations. For further information on
such amounts please see “—Employment Agreements” below.
Employment Agreements
We have, or one of our subsidiaries has, entered into employment agreements with Messrs. Ek, McCarthy, Norström, and
Söderström, and Ms. Ostroff. We currently do not have employment agreements or other service contracts with any members of our
board of directors, except for Mr. Ek.
In 2011, Mr. Ek entered into a new employment agreement that replaced his prior agreement. The employment agreement
provides for an indefinite term that automatically expires upon Mr. Ek’s retirement at age 65. The agreement provides for a fixed
monthly salary, although the board of directors determined that, commencing July 1, 2017, Mr. Ek would no longer receive an annual
salary. The Ek Agreement also provides for a six-month notice period prior to termination, though we may terminate the agreement
with immediate effect if Mr. Ek has grossly neglected his obligations or otherwise materially breached the contract. In the event of
termination of employment by us (other than due to gross neglect), in addition to pay during the notice period, Mr. Ek also will be
67
entitled to a severance payment equal to six times his monthly salary, less any income from future employment, payable in monthly
installments following termination.
Mr. Ek’s employment agreement contains post-termination non-competition covenants that we could choose to enforce for 12
months following any type of termination of employment, except termination by us due to any reason other than breach of contract by
Mr. Ek. In consideration for the non-competition covenant, we will pay Mr. Ek, in monthly installments during his restricted period,
12 times his monthly salary, less any income from future employment, in an amount up to 60% of Mr. Ek’s monthly salary. Such
payment will not be made during any period Mr. Ek is otherwise receiving severance pay from us or if Mr. Ek’s employment ceases as
a result of retirement or termination by us due to Mr. Ek’s breach of contract. If we decide not to enforce the non-competition
covenant, the corresponding payment obligation would also cease. Mr. Ek’s employment agreement also includes employee and
customer non-solicitation clauses that will apply for 12-months post-termination and that do not require us to pay any additional
consideration.
In October 2016, Mr. McCarthy entered into a new employment agreement that replaced his prior agreement (the “McCarthy
Agreement”). The agreement provided for an indefinite employment period. The agreement also provided for a base salary,
participation in our benefit plans, and total target compensation of $5,000,000. The employment agreement provided that we could
terminate Mr. McCarthy’s employment without “Cause” (as defined in the agreement) upon three months’ notice. In addition, upon a
termination without Cause, Mr. McCarthy would have been entitled to a severance amount equal to his base salary for six months and
subsidized health benefits for six months. If Mr. McCarthy’s employment were terminated within 12 months after a change in control
of the Company, or if he were required to perform duties that are materially inconsistent with those normally performed by him or is
otherwise constructively dismissed following the change in control, he would have been entitled to receive a lump sum severance
payment of 12 months’ salary and subsidized health benefits. Mr. McCarthy also is subject to a nine-month post-termination non-
competition covenant (with such period commencing on the last day of the notice period) and a two-year post-termination non-
solicitation covenant.
Mr. McCarthy retired effective as of January 15, 2020. He did not enter into a separation agreement or any similar arrangement
in connection with his resignation.
In 2017, each of Messrs. Norström, and Söderström entered into revised employment agreements (the “2017 Agreements”) that
provide substantially similar terms to the terms described above for the McCarthy Agreement, except that the 2017 Agreements do not
provide for a specified total target compensation and their non-competition periods commence on the first day of their respective
notice periods rather than the last day.
Effective July 2018, we entered into an employment agreement with Ms. Ostroff providing for her employment as our Chief
Content Officer (the “Ostroff Agreement”). The Ostroff Agreement provides for substantially similar terms to the terms described
above for the 2017 Agreements, except that the Ostroff Agreement provides for a signing bonus of $2,000,000, payable in two equal
installments on the date Ms. Ostroff’s first base salary payment is made and on the 12-month anniversary of such date, respectively.
Payment of each installment is subject to Ms. Ostroff’s continued employment through the 12-month period following the applicable
installment payment date. If Ms. Ostroff’s employment is terminated during either such 12-month period, she will be required to repay
the amount received on the applicable installment payment date, prorated for the number of fully completed months of employment
during such 12-month period.
For further information on the post-termination treatment of our equity awards, please see “—Stock Options” and “—Restricted
Stock Units” below.
C. Board Practices
Board of Directors Structure
Our board of directors currently consists of ten directors and is composed of Class A and Class B directors. Our articles of
association provide that the board of directors must be composed of at least three members. Each director holds office for the term
decided by the general meeting of the shareholders, but not exceeding six years, or until his or her successor has been appointed. For
more information on the date of expiration of each director’s term and the length of time each director has served, see “Item 6.A.
Directors and Senior Management.” Our directors may be removed at any time, with or without cause, by a resolution of the
shareholders’ meeting. See “Item 10.B. Memorandum and Articles of Association—Board of Directors.”
68
Remuneration Committee
Our board of directors has established a remuneration committee. Our remuneration committee consists of Christopher
Marshall, Martin Lorentzon, and Shishir Mehrotra. Mr. Marshall is the chair of our remuneration committee. Our remuneration
committee has the following responsibilities, among others:
•
•
•
•
•
•
reviewing and making recommendations to our board of directors related to our incentive-compensation plans and equity-
based plans;
establishing and reviewing the overall compensation philosophy of the Company;
reviewing and approving total compensation for our chief executive officer and other executive officers;
reviewing and making recommendations regarding the compensation to be paid to our non-employee directors;
selecting and retaining a compensation consultant; and
such other matters that are specifically delegated to the remuneration committee by our board of directors from time to time.
Audit Committee
Our board of directors has established an audit committee that consists of Christopher Marshall, Thomas Staggs, and Padmasree
Warrior. Thomas Staggs is the chair of our audit committee. All audit committee members satisfy the “independence” requirements
set forth under the rules of the NYSE and in Rule 10A-3 under the Exchange Act. Our audit committee has the following
responsibilities, among others:
•
•
•
•
•
•
appointing and replacing our independent registered public accounting firm, subject to shareholder approval;
retaining, compensating, evaluating, and overseeing the work of our independent registered public accounting firm;
reviewing with our independent registered public accounting firm any difficulties or material audit issues and the
Company’s response to any management letters provided by the independent registered public accounting firm;
discussing the annual audited financial statements and quarterly financial statements with management and our
independent registered public accounting firm;
reviewing and evaluating the Company’s enterprise risk management, including the Company’s data protection and
cybersecurity programs; and
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
D. Employees
In 2019, 2018, and 2017, we had 4,405, 3,651, and 2,960 full-time employees on average, respectively. The following table
describes our average number of employees by department per fiscal year:
Content Production and Customer Service
Sales and Marketing
Research and Development
General and Administrative
December 31,
2019
2018
2017
371
1,192
2,094
748
236
1,016
1,846
553
206
865
1,463
426
% Change
2019 vs.
2018
2018 vs.
2017
57 %
17 %
13 %
35 %
15 %
17 %
26 %
30 %
The following table describes our average number of employees by geographic location:
United States
Sweden
United Kingdom
2019
December 31,
2018
2,121
1,437
353
1,708
1,280
273
2017
1,348
1,087
217
Additionally, for the years ended December 31, 2019, 2018, and 2017, we had an average of approximately 494, 390, and 308
employees, respectively, in the aggregate in Argentina, Australia, Belgium, Brazil, Canada, Colombia, Denmark, Finland, France,
Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Norway, Poland, Russia, Singapore, Spain, Taiwan, Turkey, and
69
United Arab Emirates. From time to time, we have engaged temporary employees to fill open positions. We are not a signatory to any
labor union collective bargaining agreement. As of December 31, 2019, 42 employees of Gimlet, a wholly-owned indirect subsidiary
of the Company, were represented by the Writer’s Guild of America-East labor union. Collective bargaining has commenced, but an
agreement has not been reached.
E. Share Ownership
The following table provides information regarding share ownership by our officers and directors as of December 31, 2019.
Number of
Shares
Owned
32,079,648
—
22,375,278
168,069
—
—
—
—
14,424
—
—
1,640
—
—
—
—
—
—
—
—
5,920
—
—
—
—
25,989
—
102,326
2,126
7,426
—
33,836
2,766
2,766
Approximate
Percentage of
Outstanding
Ordinary
Shares
Number of
Shares
Underlying
Options
Option
Exercise
Price ($)
Option
Expiration
Date
Restricted
Stock
Units
Subscription
Price ($)
17.4 %
—
12.1 %
—
65,480 $
—
42.18 3/31/2021
—
18,602 $ 219.33 6/28/2024
43.73 3/31/2020
* 530,600 $
41.20 3/31/2021
— 200,960 $
50.70 3/31/2022
90,080 $
—
— 145,360 $ 123.13 3/31/2023
— 171,014 $ 138.00
3/1/2024
56,400 $
*
50.70 3/31/2022
43,600 $ 123.13 3/31/2023
—
—
3/1/2024
32,609 $ 138.00
* 225,600 $
50.70 3/31/2022
— 130,800 $ 123.13 3/31/2023
3/1/2024
— 153,623 $ 138.00
* 133,745 $ 180.12 3/31/2023
—
3/1/2024
38,406 $ 138.00
33,000 $
*
78.25 3/31/2022
12,000 $ 123.13 3/31/2023
—
3/1/2024
32,609 $ 138.00
—
21,739 $ 207.00
—
3/1/2024
42.48 3/31/2020
*
25,240 $
42.18 3/31/2021
35,560 $
—
— 193,280 $
50.70 3/31/2022
— 145,360 $ 123.13 3/31/2023
— 171,014 $ 138.00
3/1/2024
4,651 $ 146.22 6/28/2024
*
9,301 $ 219.33 6/28/2024
—
13,952 $ 219.33 6/28/2024
*
2,325 $ 146.22 6/28/2024
*
4,651 $ 146.22 6/28/2024
*
9,301 $ 219.33 6/28/2024
—
7,386 $ 146.22 6/28/2024
*
4,651 $ 219.33 6/28/2024
*
4,651 $ 219.33 6/28/2024
*
Warrants
— 1,600,000
— 800,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,617
—
—
—
—
—
6,624
—
—
—
—
—
23,403
—
—
—
—
—
—
—
—
—
—
5,377
—
4,198
4,721
5,417
—
4,322
5,361
3,617
89.73
190.09
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Name of Beneficial Owner
Daniel Ek(1)
Martin Lorentzon(2)
Barry McCarthy(3)
Katarina Berg
Alex Norström
Dawn Ostroff
Cecilia Qvist
Gustav Söderström
Christopher Marshall(4)
Shishir Mehrotra
Heidi O’Neill
Ted Sarandos
Thomas Staggs(5)
Cristina Stenbeck
Padmasree Warrior
*
(1)
Represents beneficial ownership of less than 1%.
Includes 15,447,679 ordinary shares held by D.G.E. Investments Limited (“D.G.E. Investments”). Mr. Ek is the sole shareholder of D.G.E. Holding Limited
(“D.G.E. Holding”), which is the sole shareholder of D.G.E. Investments. Also includes 4,276,200 ordinary shares held by Tencent Music Entertainment Hong
Kong Limited (“TME Hong Kong”), 9,076,240 ordinary shares held by Image Frame Investment (HK) Limted (“Image Frame”), 3,227,920 ordinary shares held
by Tencent Mobility Limited, and 51,609 ordinary shares held by Distribution Pool Limited. Mr. Ek exercises voting power over the ordinary shares held by TME
Hong Kong, Image Frame, Tencent Mobility Limited, and Distribution Pool Limited through his indirect ownership of D.G.E. Investments, which holds an
irrevocable proxy with regard to these ordinary shares. As such, Mr. Ek may be deemed to share beneficial ownership of the ordinary shares held by TME Hong
Kong, Image Frame, Tencent Mobility Limited, and Distribution Pool Limited. Additionally, each of D.G.E. Holding and Mr. Ek may be deemed to share
70
(2)
(3)
(4)
(5)
beneficial ownership of the ordinary shares held by D.G.E. Investments. The business address of D.G.E. Holding is Office 101, Omega Business Center, 18
Stratigou Temagia Avenue, 6047 Larnaca, Cyprus.
Includes 22,372,512 ordinary shares held by Rosello Company Limited (“Rosello”). Mr. Lorentzon is the sole shareholder of Amaltea S.à r.l. (“Amaltea”), which
is the sole shareholder of Rosello. As such, each of Amaltea and Mr. Lorentzon may be deemed to share beneficial ownership of the ordinary shares held by
Rosello. The business address of Rosello is 22 Stasikratous Street, Office 001, 1065 Nicosia, Cyprus.
Includes 142,680 ordinary shares held by Rivers Cross Trust, an entity wholly owned by Mr. McCarthy. The business address of Rivers Cross Trust is 3875
Woodside Rd, Woodside, CA 94062.
Includes (i) 12,707 ordinary shares held by Marshall Carroll 2000 Trust; (ii) 173 ordinary shares held by Marshall Partners; (iii) 13,109 shares of stock held by
Mr. Marshall for the benefit of TCV VII Management, L.L.C. (“TCV VII Management”) and TCV VIII Management, L.L.C. (“TCV VIII Management”); (iv)
13,952 non-qualified stock options held by Mr. Marshall for the benefit of TCV VII Management and TCV VIII Management; and (v) 5,377 ordinary shares
issuable upon vesting of RSUs held by Mr. Marshall for the benefit of TCV VII Management and TCV VIII Management. Mr. Marshall is a trustee of the
Marshall Carroll 2000 Trust and a general partner of Marshall Partners. Mr. Marshall disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. Mr. Marshall and the other members of TCV VII Management and TCV VIII Management (collectively, the “Management Members”)
may be deemed to have the shared power to dispose or direct the disposition of the 13,109 ordinary shares, the 13,952 non-qualified stock options, and the 5,377
ordinary shares issuable upon vesting of the RSUs held by Mr. Marshall. The Management Members disclaim beneficial ownership of the ordinary shares and the
ordinary shares issuable upon vesting of non-qualified stock options and RSUs, except to the extent of their respective pecuniary interest therein.
Includes 31,040 ordinary shares held by the Staggs Trust, a revocable inter-vivos trust established by Mr. Staggs and his spouse. The business address of the
Staggs Trust is 9665 Wilshire Blvd., Suite 525, Beverly Hills, CA 90212.
Stock Options
As noted above, we have granted stock options to our employees, including as part of the incentive mix program implemented in
2019. Each stock option represents the right to purchase one of our ordinary shares. Each year, we adopt a new stock option program
for a one-year term; however, in 2019, we adopted two stock option programs, an interim 2019 plan (the “Interim 2019 Plan”) and the
2019 plan (the “2019 Plan”). Pursuant to the recent stock option programs, each participant is granted a stock option at a specified
exercise price. Since January 1, 2016, the exercise prices have been set at fair market value. Of each grant made prior to 2019 and
each grant made pursuant to the Interim 2019 Plan, 3/16ths of the total number of options granted vests on the first of any of March 1,
June 1, September 1, or December 1 falling more than three months from the date of grant (except for grants made prior to 2017 in
Australia for which 5/16 vests on the first of March 1, June 1, September 1, or December 1 after 12 months from the date of grant),
and thereafter 1/16 vests on each March 1, June 1, September 1, and December 1 thereafter, subject to continued employment. As
noted above, of each grant made pursuant to the 2019 Plan as part of the incentive mix program, 3/48ths of the total number of options
granted vested on the third calendar month following the date of grant, and thereafter 1/48th of the total number of options granted
vests on the first day of each calendar month thereafter, subject to continued employment. The options granted prior to 2019 and
granted pursuant to the Interim 2019 Plan expire on March 31 of the fifth year following the date of grant. The options granted under
the 2019 Plan expire on the fifth anniversary of the date of grant. Initially, vested options were only exercisable annually during a 30-
day exercise window, for a period of time immediately following the optionee’s termination and upon the expiration of the term of the
option. In 2016, we amended our stock option program to provide that vested options could be exercised during each March, June,
September, and December prior to the expiration of the term of the option. We later further amended our stock option program in 2017
to provide that vested options may be exercised at any time prior to the expiration of the option term. For our employees in certain
countries, upon the exercise of a stock option, the Company is required to pay a social security contribution in an amount equal to the
spread value of the option multiplied by the applicable tax rate.
Upon the termination of an optionee’s employment for any reason, all unvested options held by the optionee will generally be
immediately forfeited. However, for certain employees, including the named executive officers, upon termination of an optionee’s
employment (i) by the Company for any reason other than Cause or (ii) by the optionee due to the Company’s material breach of the
optionee’s employment agreement, a portion of unvested options will immediately vest. The portion of unvested options that will
accelerate and vest ranges from six to twelve months’ worth of unvested options, depending on the optionee. If the optionee resigns; if
we terminate the optionee’s employment other than as a result of death, disability or “Cause” (as defined in the applicable option
plan); or if the optionee retires, the optionee’s vested options will remain exercisable for 90 days following such termination. If the
optionee’s termination of employment occurs due to death or disability, the vested options will remain exercisable for 194 days
following termination. In either case, the option will no longer be exercisable after the expiration date. Upon termination for Cause,
vested options will immediately be forfeited. We also may cancel an optionee’s options upon the optionee’s commission of a material
breach of the terms and conditions governing the options.
The board of directors may provide for a new exercise period upon a change in control. If the board of directors sets a new
exercise period, 50% of each holder’s unvested options will accelerate and vest. Following such acceleration, the board of directors
may choose to allow the unvested options to continue to vest or lapse. For the plans prior to 2018 and the Interim 2019 Plan, if the
board allows the unvested options to continue vesting, 1/8th of the unvested options will vest on the first cliff vesting date as described
above, and 1/32nd of the remaining options will vest each quarter thereafter. For the 2019 Plan, if the board allows the unvested
options to continue vesting, 3/96th of the unvested options will vest after the first cliff vesting date as described above, and 1/96th of
the remaining options will vest on each subsequent regularly scheduled vesting occasion. If we or our successor terminates an
optionee’s employment without Cause within six months following a transaction constituting a change in control, any unvested stock
71
options held by the optionee will vest as of such termination. In addition, for certain employees, including the named executive
officers, if within six months following a change in control, such employee (i) resigns because he or she is required to perform duties
that are materially inconsistent with the ones normally performed by someone in such position or (ii) otherwise experiences a
constructive termination, any unvested stock options held by the employee will vest as of such resignation. The plans provide for other
potential adjustments to the stock options in the event of corporate transactions.
We also maintain an option program for former employees of The Echo Nest Corporation who are not members of the executive
leadership team, which options we assumed in connection with the acquisition of The Echo Nest Corporation.
Restricted Stock Units
As noted above, we have granted RSUs to our employees, including as part of the incentive mix program implemented in 2019.
Each RSU represents the right to receive one of our ordinary shares. With respect to RSUs granted prior to 2018, one-fifth of each
grant of RSUs time-vests on each September 1, commencing on the September 1 falling more than three months from the date of grant
and subject to the holder’s continued employment with us. In addition to time-vesting, one of the following events or dates also has to
occur in order for such RSUs granted prior to 2018 to fully vest: (i) the six-month anniversary of an initial public offering, (ii) a
change in control, and (iii) September 1 of the third year following the date of grant, subject to the holder’s continued employment
through such date. If one of such events or dates occurs prior to final time-vesting of an award of RSUs, then the RSUs will continue
to be subject to time-vesting following such event or date, and will fully vest upon the final time-vesting date. RSUs granted in 2018
fully vest on each of the first five anniversaries of the date of grant, subject to the holder’s continued employment with us. As
described above, for RSUs granted in 2019 as part of the incentive mix program, 3/48ths of the total number of RSUs granted vested
on the third calendar month following the date of grant, and thereafter 1/48th of the total number of RSUs granted vests on the first
day of each calendar month thereafter, subject to continued employment. For certain employees, including the named executive
officers, upon termination of an optionee’s employment (i) by the Company for any reason other than Cause or (ii) by the optionee
due to the Company’s material breach of the optionee’s employment agreement, a portion of the individual’s unvested RSUs will
immediately vest. The portion of unvested RSUs that will accelerate and vest will be equal to the number of such RSUs that would
have otherwise vested between six and 12 months following the termination, depending on the optionee. In addition, for certain
employees, including the named executive officers, if within six months following a change in control, the individual (i) resigns
because he or she is required to perform duties that are materially inconsistent with the ones normally performed by someone in such
position or (ii) otherwise experiences a constructive termination, all of the individual’s outstanding unvested RSUs will accelerate and
vest.
For our employees in certain countries, upon vesting of an RSU, the Company is required to pay a social security contribution in
an amount equal to the profit an employee realizes upon vesting multiplied by the applicable tax rate. The RSUs are settled in ordinary
shares on or as soon as reasonably practicable (but no later than 30 days) following full vesting.
The plans provide for other potential adjustments to the RSUs in the event of corporate transactions. If the holder commits a
material breach of the terms and conditions governing RSUs, we may cancel the unvested RSUs. All unvested RSUs will be forfeited
upon any termination of employment.
On certain occasions we also grant RSUs to individuals who become employees through acquisitions, with varying vesting
schedules.
Cash Program
As noted above, we also offer cash retention awards as part of our incentive mix program to all permanent employees. Pursuant
to the cash alternative of the incentive mix program, the named executive officers who choose to include cash in their incentive mix
composition will receive a fixed cash payment upon each vesting date. As noted above, for the cash awards granted in 2019, 3/48ths
of the cash payment vested on the third calendar month following the date of grant, and thereafter 1/48th of the cash payment granted
vests on the first day of each calendar month thereafter, subject to continued employment.
Restricted Stock
In connection with an acquisition in 2017, we issued restricted stock to certain employees of the target. Of each such grant of
restricted stock, one-third vested in 2019, on the second anniversary of the closing of such transaction, and the remaining two-thirds
will vest on the third anniversary of such closing, subject, in each case, to the employee’s continued employment through such vesting
date. The award agreement provides for potential adjustments to the restricted stock in the event of corporate transactions. Upon
certain terminations prior to an applicable vesting date, we have the right, but not the obligation, to acquire the unvested restricted
stock at an agreed upon price per share.
72
Other Contingently Issuable Shares
In connection with an acquisition in 2019, we issued equity instruments to certain employees of the target. Of each such grant of
equity instruments, one-fourth will vest on each anniversary of the closing of such transaction until fully vested, subject, in each case,
to the employee’s continued employment through such vesting date. The agreement provides for potential adjustments to the equity
instrument in the event of corporate transactions.
Warrants
On October 17, 2016, Mr. Ek purchased, through D.G.E. Investments, an entity indirectly wholly owned by him, 3,200,000 non-
compensatory warrants in the Company, pursuant to a subscription agreement. Each warrant was purchased for $5.76. The terms and
conditions for the warrants provide that D.G.E. Investments may purchase the ordinary shares underlying the warrants for $50.61 per
share at any time prior to October 17, 2019. On October 4, 2019, the Company issued 1,600,000 ordinary shares and 16,000,000
beneficiary certificates to Mr. Ek, through D.G.E. Investments, upon the exercise of 1,600,000 warrants that were granted on October
17, 2016, for cash of €74 million. On October 17, 2019, the Company issued 905,285 ordinary shares and 9,052,850 beneficiary
certificates to Mr. Ek, through D.G.E. Investments, upon the effective net settlement of the remaining 1,600,000 warrants that were
granted on October 17, 2016.
On July 13, 2017, Mr. Ek purchased, through D.G.E. Investments, 1,600,000 non-compensatory warrants in the Company,
pursuant to a subscription agreement. Each warrant was purchased for $6.23, the then-current fair market value per share. The terms
and conditions for the warrants provide that D.G.E. Investments may purchase the ordinary shares underlying the warrants for $89.73
per share at any time prior to July 13, 2020.
On July 1, 2019, Mr. Ek purchased, through D.G.E. Investments, 800,000 non-compensatory warrants in the Company, pursuant
to a subscription agreement. Each warrant was purchased for $20.61, the then current fair market value per share. The terms and
conditions for the warrants provide that D.G.E. Investments may purchase the ordinary shares underlying the warrants for $190.09 per
share at any time prior to July 1, 2022.
The warrants are subject to adjustment upon certain corporate events.
Compensation Tables
The following table sets forth information concerning the compensation of our named executive officers for the years ended
December 31, 2019, 2018 and 2017.
Summary Compensation Table
Name and Principal Position
Daniel Ek (CEO)
Barry McCarthy (CFO)
Dawn Ostroff (Chief Content Officer)
Gustav Söderström (Chief Research &
Development Officer)
Alex Norström (Chief Premium
Business Officer)
Year
Salary
($)
Bonus
($)
Option
Awards
($)(1)
Stock
Awards
($)
— (3)
— (3)
— (3)
2019
— (3)
2018
2017 440,281 (3)(4) 1,000,000 (3)
2019 560,000
2018 560,000
2017 560,000
2019 1,000,000
2018 420,513 (7)
—
—
—
— 6,682,200
— 5,000,341
— 4,272,107
—
—
—
—
—
—
1,500,679 3,974,952 (5)
—
6,499,650
1,000,000
1,000,000
Total
($)
All Other
Compensation
($)
336,462 (2) 336,462
2,220
2,220
95,321
1,535,602
8,400
7,250,600
2,220
5,562,561
88,465
4,920,572
8,400 (6) 7,484,031
10,470
7,930,633
— 6,682,200
— 5,000,341
— 4,272,107
— 6,002,664
— 4,499,406
— 3,417,692
—
—
—
—
—
—
113,494 (8) 7,116,208
90,949
5,424,253
98,007
4,760,461
91,379 (9) 6,427,378
96,889
4,942,577
102,457
3,909,484
2019 320,514 (4)
2018 332,963 (4)
2017 390,347 (4)
2019 333,335 (4)
2018 346,282 (4)
2017 389,335 (4)
73
(1) Amounts reflect the grant-date Black-Scholes value of the stock options granted to our named executive officers, computed in accordance with IFRS 2, rather than
(2)
(3)
the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all option awards made
to executive officers in “Operating and Financial Review and Prospects” and in Note 18 of the consolidated financial statements included elsewhere in this 20-F.
Amount reflects $336,462 for home security services.
As of July 1, 2017, Mr. Ek ceased being entitled to receive a base salary. In 2017, Mr. Ek was eligible to receive a one-time bonus subject to the fulfillment of
certain milestones and/or discretionary approval of our board of directors. For further information on such bonus, please see “—Executive Compensation Program
Components—Base Salary and Bonus.”
(4) Messrs. Ek, Söderström, and Norström were each paid in Swedish Krona in 2017, 2018 and 2019. The 2017 dollar amounts are based on a currency translation of
SEK 8.20 per dollar as published by Reuters on December 31, 2017, and the 2018 dollar amounts are based on a currency translation of SEK 9.01 per dollar as
published by Reuters on December 31, 2018. The 2019 dollar amounts are based on a currency translation of SEK 9.36 per dollar as published by Reuters on
December 31, 2019. The amounts include vacation pay received by Messrs. Ek, Söderström, and Norström pursuant to Swedish standards. The amount shown in
2017 for Mr. Ek reflects his salary earned with respect to the first half of 2017, as further explained in footnote (3).
Amounts reflect the grant-date fair value of the RSUs granted to Ms. Ostroff, computed in accordance with IFRS 2, rather than the amounts paid to or realized by
her.
Amount reflects Company matching contributions to the 401(k) plan.
(5)
(6)
(7) Ms. Ostroff’s service as the Company’s Chief Content Officer commenced July 31, 2018. Amount reflects the actual base salary paid to Ms. Ostroff during fiscal
year 2018.
(8) Amount includes $91,666 in contributions to the Swedish retirement plan and $21,828 for home security services.
(9) Amount includes $91,379 in contributions to the Swedish retirement plan.
The following table sets forth information regarding grants of plan-based awards made to our named executive officers during
the year ended December 31, 2019:
Grants of Plan-Based Awards in 2019
Name
Barry McCarthy
Dawn Ostroff
Gustav Söderström
Alex Norström
All Other
Stock
Awards:
Number of
Shares of
Stocks or
Units (#
shares)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(# shares)
Grant Date
03/01/2019
03/01/2019
03/01/2019 28,804
03/01/2019
03/01/2019
— 171,014
— 38,406
—
— 171,014
— 153,623
Grant Date
Fair Value
of Stock and
Option
Awards
($)(1)
Exercise or
Base Price
of Option
Awards Per
Ordinary Share
($)
138.00 6,682,200 (1)
138.00 1,500,679 (1)
— 3,974,952 (2)
138.00 6,682,200 (1)
138.00 6,002,664 (1)
(1) Amounts reflect the grant-date Black-Scholes value of the stock options granted during 2019 computed in accordance IFRS 2, rather than the amounts paid to or
realized by the named individual. We provide information regarding the assumptions used to calculate the value of all option awards made to executive officers in
“Operating and Financial Review and Prospects” and in Note 18 of the consolidated financial statements included elsewhere in this 20-F.
Amounts reflect the grant-date fair value of the RSUs granted to Ms. Ostroff, rather than the amounts paid to or realized by the named individual.
(2)
74
The following table summarizes the number of ordinary shares underlying outstanding equity incentive plan awards for each
named executive officer as of December 31, 2019:
Outstanding Equity Awards at 2019 Fiscal Year-End
Option Awards
Ordinary Share Awards
Name
Daniel Ek
Barry McCarthy
Dawn Ostroff
Gustav Söderström
Alex Norström
Number
of
Securities
Underlying
Unexercised
Options
(#)
Grant
Exercisable
Date
09/12/2016
—
07/06/2015 530,600
03/01/2016 200,960
03/01/2017 17,600
03/01/2018 72,680
03/01/2019 32,065
08/01/2018 58,514
03/01/2019
7,201
03/01/2019
—
12/01/2015 25,240
10/06/2016 26,680
03/01/2017 122,760
03/01/2018 72,680
03/01/2019 32,065
03/01/2017 169,200
03/01/2018 65,400
03/01/2019 28,804
Number
Of Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Number
Of
Ordinary
Shares
That
Have
Not
Vested
(#)
Market
Value of
Ordinary
Shares
That Have
Not
Vested
($)(3)
Option
Exercise
Price
($)
Option
Expiration
Date
—
—
65,480 (1) 42.18 03/31/2021
43.73 03/31/2020
41.20 03/31/2021
72,480 (1) 50.70 03/31/2022
72,680 (1) 123.13 03/31/2023
138,949 (2) 138.00 03/01/2024
75,231 (1) 180.12 03/31/2023
31,205 (2) 138.00 03/01/2024
—
—
—
42.48 03/31/2020
8,880 (1) 42.18 03/31/2021
70,520 (1) 50.70 03/31/2022
72,680 (1) 123.13 03/31/2023
138,949 (2) 138.00 03/01/2024
56,400 (1) 50.70 03/31/2022
65,400 (1) 123.13 03/31/2023
124,819 (2) 138.00 03/01/2024
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 23,403 (4) 3,499,919
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Of each option grant, 3/16ths of the total number of options granted vested on the first day of any of March 1, June 1, September 1, or December 1 falling more
than three months from the grant date and thereafter 1/16th vests on each March 1, June 1, September 1, and December 1 thereafter, subject to continued
employment.
(2) Of each option grant, 3/48ths of the total number of options granted vested on the third calendar month following the date of grant, and thereafter 1/48th of the
total number of options granted vests on the first day of each calendar month thereafter, subject to continued employment.
(3) Values were calculated based on a $149.55 closing price of our ordinary shares, as reported on the NYSE on December 31, 2019.
(4)
3/48ths of Ms. Ostroff’s RSU grant vested on June 1, 2019 and thereafter 1/48th vests on the first day of each calendar month thereafter, subject to continued
employment.
The following table summarizes stock option exercises by and vesting of stock applicable to our named executive officers
during the year ended December 31, 2019:
2019 Option Exercises and Stock Vested
Option Awards
Stock Awards
Number of Ordinary
Shares
Acquired on Exercise
(#)
Value Realized on
Exercise
($)(1)
Number of Ordinary
Shares
Acquired on Vesting
(#)
Value Realized on
Vesting
($)(2)
Name
Daniel Ek
Barry McCarthy
Dawn Ostroff
Gustav Söderström
Alex Norström
(1)
—
—
728,874
798,904
226,716
Represents the difference between the market value per share of the shares acquired on exercise, as determined based on the closing price of our ordinary shares as
reported on the NYSE on the date of exercise, and the exercise price of the option.
34,793,136
79,840,386
—
6,707,949
4,643,542
352,880
835,280
—
65,120
45,000
—
—
5,401 (3)
5,920 (4)
1,680 (5)
(2) Value realized is calculated based on the closing price of our ordinary shares as reported on the NYSE on the date of vesting.
75
(3)
(4)
(5)
Includes 2,519 RSUs which the Company retained as part of a net share settlement to satisfy the applicable tax withholding liability of Ms. Ostroff related to the
vesting of such shares.
Includes 2,960 RSUs which the Company retained as part of a net share settlement to satisfy the applicable tax withholding liability of Mr. Söderström related to
the vesting of such shares.
Includes 840 RSUs which the Company retained as part of a net share settlement to satisfy the applicable tax withholding liability of Mr. Norström related to the
vesting of such shares.
Non-Employee Director Compensation
Similarly to our executive compensation decisions, the remuneration committee bases its decisions regarding non-employee
director compensation, at least in part, by reference to the compensation of the non-employee directors in the Peer Group (as described
above in “—Engagement of Compensation Consultant”). Our non-employee directors are also eligible to participate in our new
incentive mix program, which provides our non-employee directors with maximum flexibility and individual autonomy, by allowing
our non-employee directors to have the ability to choose their own composition of long-term incentive awards each year. For further
information on our new incentive mix program, please see “—Long Term Incentives” above. Each such grant generally vests ratably
over four years. The non-employee director RSUs will fully vest upon the occurrence of a change in control. Like employee RSUs, the
RSUs are settled within 30 days following vesting, subject to payment by the holder of the nominal value per ordinary share, and
unvested RSUs are forfeited on termination of service. The plans provide for certain potential adjustments in the event of corporate
transactions.
In 2019, each of our non-employee directors participated in the incentive mix program. The following table shows the dollar
amount of incentive compensation allocated to each named executive officer, as well as the allocations chosen by each such
individual:
Name
Martin Lorentzon
Christopher Marshall
Shishir Mehrotra
Heidi O’Neill
Ted Sarandos
Thomas Staggs
Cristina Stenbeck
Padmasree Warrior
Aggregate Long-
Term Incentive
Award Dollar
Value
($)
340,000
340,000
340,000
340,000
340,000
360,000
340,000
340,000
2019 At-the-
Money Stock
Option
Allocation
(#)
2019 Out-of-the-
Money Stock
Option
Allocation
(#)
—
4,651
—
2,325
4,651
7,386
—
—
18,602
9,301
13,952
—
9,301
—
4,651
4,651
2019 RSU
Allocation
(#)
2019 Cash
Allocation
($)
—
—
581
1,744
—
616
1,744
—
—
—
—
—
—
—
—
229,500
On October 17, 2019, the Company issued 1,086,342 ordinary shares and 10,863,420 beneficiary certificates to Martin
Lorentzon, a member of the board of directors of the Company, through Rosello, an entity indirectly wholly owned by him, upon the
effective net settlement of 1,920,000 non-compensatory warrants that were granted on October 17, 2016.
2019 Director Compensation
The following table sets forth information concerning the compensation of our non-employee directors during the year ended
December 31, 2019:
Name(1)
Martin Lorentzon
Christopher Marshall
Shishir Mehrotra
Heidi O’Neill
Ted Sarandos
Thomas Staggs
Cristina Stenbeck
Padmasree Warrior
Fees Earned
or Paid in
Cash
($)
Stock
Awards
($) (2)
Stock
Options
($) (3)
Total
($) (4)
—
—
—
— 255,008
—
—
— 255,008
—
— 390,176 390,176
— 367,762 367,762
84,954 292,643 377,597
86,318 341,326
— 367,762 367,762
90,072 274,221 364,293
97,553 352,561
97,553 327,053
229,500
76
(1) Mr. Ek serves on our board of directors. His compensation is fully reflected in the Summary Compensation Table.
(2)
Amounts reflect the aggregate grant-date fair value of the RSUs computed in accordance with IFRS 2, rather than the amounts paid to or realized by the named
individual.
Amounts reflect the aggregate grant-date Black-Scholes value of the stock options granted during 2019 computed in accordance IFRS 2, rather than the amounts
paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all option awards made to executive
officers in “Operating and Financial Review and Prospects” and in Note 18 of the consolidated financial statements included elsewhere in this 20-F.
The table below shows the aggregate numbers of stock awards and stock options held as of December 31, 2019 by each non-employee director who was serving
as of December 31, 2019.
(3)
(4)
Name
Martin Lorentzon
Christopher Marshall
Shishir Mehrotra
Heidi O’Neill
Ted Sarandos
Thomas Staggs
Cristina Stenbeck
Padmasree Warrior
Restricted
Stock Units
Outstanding
at Fiscal
Year End
Stock
Options
Outstanding
at Fiscal
Year End
18,602
13,952
13,952
2,325
13,952
7,386
4,651
4,651
3,617
5,377
4,198
4,721
5,417
4,322
5,361
3,617
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders
The following table sets forth, as of December 31, 2019 (except where noted), the number of our ordinary shares and
beneficiary certificates held by each person we know to be the beneficial owner of more than 5% of our ordinary shares and
beneficiary certificates, respectively, and the percentage of total votes held by each such person. The voting rights of our major
shareholders are the same as the voting rights of holders of our ordinary shares and beneficiary certificates who are not our major
shareholders. As of December 31, 2019, the registrar and transfer agent for our Company reported that 124,577,402 of our ordinary
shares were held by 142 record holders in the United States and none of our beneficiary certificates were held by record holders in the
United States.
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and
includes the ordinary shares issuable pursuant to options, warrants, and RSUs that are exercisable or settled within 60 days of December
31, 2019. Ordinary shares issuable pursuant to options, warrants, and RSUs are deemed outstanding for computing the percentage of the
class beneficially owned by the person holding such options, warrants, and RSUs but are not deemed outstanding for computing the
percentage of the class beneficially owned by any other person. The percentage of beneficial ownership for the following table is based
on 184,325,957 total ordinary shares and 378,201,910 total beneficiary certificates outstanding as of December 31, 2019.
Name
Daniel Ek(1)(5)
Martin Lorentzon(2)
Baillie Gifford & Co(3)
Tencent(4)
Ordinary Shares
Percent
Number
34,512,368
22,380,375
21,720,001
16,631,969
Beneficiary Certificates(5)
Percent
Number
Percent
of
Total
Voting Power
18.5 % 154,476,790
12.1 % 223,725,120
—
11.8 %
—
9.0 %
40.8 %
59.2 %
—
—
33.6 %
43.8 %
3.9 %
* (6)
77
(1)
(2)
(3)
(4)
Includes 15,447,679 ordinary shares that are held by D.G.E. Investments. Also includes 2,400,000 ordinary shares issuable pursuant to warrants that are held of
record by D.G.E. Investments and 32,720 ordinary shares issuable pursuant to options that are held of record by Daniel Ek that, in each case, are exercisable or
settled within 60 days of December 31, 2019. Mr. Ek is the sole shareholder of D.G.E. Holding, which is the sole shareholder of D.G.E. Investments. Mr. Ek
exercises voting power over the ordinary shares held of record by TME Hong Kong, Image Frame, Tencent Mobility Limited, and Distribution Pool Limited
through his indirect ownership of D.G.E. Investments, which holds an irrevocable proxy with regard to these ordinary shares. As such, Mr. Ek may be deemed to
share beneficial ownership of the ordinary shares held of record by TME Hong Kong, Image Frame, Tencent Mobility Limited, and Distribution Pool Limited.
Additionally, each of D.G.E. Holding and Mr. Ek may be deemed to share beneficial ownership of the ordinary shares held of record by D.G.E. Investments. The
business address of D.G.E. Holding and D.G.E. Investments is Office 101, Omega Business Center, 18 Stratigou Temagia Avenue, 6047 Larnaca, Cyprus. The
business address of Mr. Ek is c/o Spotify AB Regeringsgatan 19, 111 53 Stockholm, Sweden.
Includes 22,372,512 ordinary shares held by Rosello. Also includes 4,651 ordinary shares issuable pursuant to options and 446 ordinary shares issuable pursuant
to RSUs that are held of record by Mr. Lorentzon that, in each case, are exercisable or settled within 60 days of December 31, 2019. Mr. Lorentzon is the sole
shareholder of Amaltea, which is the sole shareholder of Rosello. As such, each of Amaltea and Mr. Lorentzon may be deemed to share beneficial ownership of
the shares held of record by Rosello. The business address of Rosello is 22 Stasikratous Street, Office 001, 1065 Nicosia, Cyprus.
Based on information reported on Schedule 13G, as filed by Baillie Gifford & Co (Scottish partnership) (“Baillie Gifford”) with the SEC on January 22, 2020,
Baillie Gifford has the following powers with respect to our ordinary shares: (i) sole voting power: 15,815,869; (ii) shared voting power: 0; (c) sole dispositive
power: 21,720,001; and (iv) shared dispositive power: 0. The business address for Baillie Gifford is Carlton Square, 1 Greenside Row, Edinburgh EH1 3AN,
Scotland, UK.
Includes 4,276,200 ordinary shares held of record by TME Hong Kong, 9,076,240 ordinary shares held of record by Image Frame, 3,227,920 ordinary shares held
of record by Tencent Mobility Limited, and 51,609 ordinary shares held by Distribution Pool Limited received in connection with a distribution in kind of the
Company’s ordinary shares by a fund in which Distribution Pool Limited is a limited partner. Tencent is also the majority equity holder of TME, which is the sole
shareholder of TME Hong Kong. Each of Image Frame, Tencent Mobility Limited, and Distribution Pool Limited is wholly owned by Tencent. As such, Tencent
may be deemed to share beneficial ownership of the ordinary shares held of record by each of TME Hong Kong, Image Frame, Tencent Mobility Limited, and
Distribution Pool Limited. The address for Tencent is Level 29, Three Pacific Place, 1 Queen’s Road East, Wanchai, Hong Kong.
(5) Our shareholders have authorized the issuance of up to 1,400,000,000 beneficiary certificates to shareholders of the Company without reserving to our existing
shareholders a preemptive right to subscribe for the beneficiary certificates issued in the future. Pursuant to our articles of association, our beneficiary certificates
may be issued at a ratio of between one and 20 beneficiary certificates per ordinary share as determined by our board of directors or its delegate at the time of
issuance. We have issued ten beneficiary certificates per ordinary share held of record to entities beneficially owned by our founders, Daniel Ek and Martin
Lorentzon, for a total of 378,201,910 beneficiary certificates outstanding as of December 31, 2019. The beneficiary certificates carry no economic rights and are
issued to provide the holders of such certificates additional voting rights. Each beneficiary certificate entitles its holder to one vote. The beneficiary certificates,
subject to certain exceptions, are non-transferable and shall be automatically canceled for no consideration in the case of sale or transfer of the ordinary share to
which they are linked. See “Item 10.B. Memorandum and Articles of Association.”
(6) Mr. Ek exercises voting power over the ordinary shares held of record by TME Hong Kong, Image Frame, Tencent Mobility Limited, and Distribution Pool
Limited through his indirect ownership of D.G.E. Investments, which holds an irrevocable proxy with regard to these ordinary shares.
Change in Control Arrangements
None applicable.
B. Related Party Transactions
Luxembourg law prescribes certain procedures for related party transactions with directors, and our articles of association mandate
that directors with a direct or indirect personal interest in any transaction that conflicts with the Company’s interest shall make that
interest known and recorded in the board minutes and shall not participate in discussing or voting on such transaction. In addition, our
articles of association provide that any such conflict of interest must be reported to the next general meeting of shareholders of the
Company prior to any resolution taking place at such meeting. Below is a summary of our related-party transactions since the beginning
of our last full fiscal year on January 1, 2019.
Please see “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Warrants” and Note 25 to the
consolidated financial statements for a description of the transactions relating to the warrants purchased by Messrs. Ek and Lorentzon.
We have entered into an indemnification agreement with each of our directors, senior management, and certain other employees.
The indemnification agreements and our articles of association require us to indemnify our directors and officers to the fullest extent
permitted by Luxembourg law.
Related Party Transaction Policy
Our board of directors has adopted the Related Party Transaction Policy, which requires that any material transaction between
us and any related party, including our directors and senior management as well as their family members, be reviewed and approved
by the audit committee to ensure that the transaction is on terms comparable to those that could be obtained in arm’s length dealings
with an unrelated third party.
C. Interests of Experts and Counsel
Not applicable
78
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Refer to “Item 18. Financial Statements” for our consolidated financial statements and report of our independent registered
public accounting firm included elsewhere in this document.
Export Sales
Refer to “Item 4.B. Business Overview” for a discussion of our sales and distribution channels.
Legal or arbitration proceedings
Refer to Notes 22 and 24 of the consolidated financial statements included elsewhere in this report for information regarding
provisions made for legal proceedings.
Dividend Policy
We have never declared or paid any cash dividends on our share capital, and we do not expect to pay dividends or other
distributions on our ordinary shares in the foreseeable future. There are no legislative or other legal provisions currently in force in
Luxembourg or arising under our articles of association that restrict the payment of dividends or distributions to holders of our
ordinary shares not resident in Luxembourg, except for regulations restricting the remittance of dividends, distributions, and other
payments in compliance with United Nations and EU sanctions. We currently intend to retain any future earnings for working capital
and general corporate purposes. Under Luxembourg law, the amount and payment of dividends or other distributions is determined by
a simple majority vote at a general shareholders’ meeting based on the recommendation of our board of directors, except in certain
limited circumstances. Pursuant to our articles of association, the board of directors has the power to pay interim dividends or make
other distributions in accordance with applicable Luxembourg law. Distributions may be lawfully declared and paid if our net profits
and/or distributable reserves are sufficient under Luxembourg law. All of our ordinary shares rank pari passu with respect to the
payment of dividends or other distributions unless the right to dividends or other distributions has been suspended in accordance with
our articles of association or applicable law. Holders of beneficiary certificates are not entitled to receive any dividend payments with
respect to such beneficiary certificates.
Under Luxembourg law, at least 5% of our net profits per year must be allocated to the creation of a legal reserve until such
reserve has reached an amount equal to 10% of our issued share capital. The allocation to the legal reserve becomes compulsory again
when the legal reserve no longer represents 10% of our issued share capital. The legal reserve is not available for distribution.
We are a holding company and have no material assets other than our indirect ownership of ordinary shares in our operating
subsidiaries. Our ability to generate income and pay dividends is dependent on the ability of our subsidiaries to declare and pay
dividends or lend funds to us.
The registrar and transfer agent for Spotify’s ordinary shares is Computershare Trust Company, N.A.
B. Significant Changes
There have been no significant changes since the approval date of the financial statements included elsewhere in this annual
report. Please see Note 27 of the consolidated financial statements elsewhere in this annual report for details of events after the
reporting period.
Item 9. The Offer and Listing
A. Offer and Listing Details
Our ordinary shares are listed on the NYSE under the symbol “SPOT”.
B. Plan of Distribution
Not applicable
C. Markets
Our ordinary shares are listed and traded on the NYSE.
79
D. Selling Shareholders
Not applicable
E. Dilution
Not applicable
F. Expenses of the Issue
Not applicable
Item 10. Additional Information
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
We are registered with the Luxembourg Trade and Companies’ Register under number B.123.052. Our corporate purpose, as
stated in Article 3 of our articles of association, is the acquisition and holding of direct or indirect interests in Luxembourg and/or in
foreign undertakings, as well as the administration, development, and management of our holdings. We may provide any financial
assistance to subsidiaries, affiliated companies, or other companies forming part of the group of which we belong, including, but not
limited to, the providing of loans and the granting of guarantees or securities in any kind or form. We also may use our funds to invest
in real estate, intellectual property rights, or any other movable or immovable assets in any kind or form. We may borrow in any kind
or form and privately issue bonds or notes. In general, we may carry out any commercial, industrial, or financial operation that we
may deem useful in the accomplishment and development of our purposes.
Issuance of Ordinary Shares and Preemptive Rights
Pursuant to Luxembourg law, the issuance of our ordinary shares requires approval by a quorum of the general meeting of
shareholders, and a majority is required for the amendment of articles of association. The general meeting of shareholders may
approve an authorized share capital and authorize the board of directors to issue ordinary shares up to the maximum amount of such
authorized share capital for a maximum period of five years after the date that the minutes of the relevant general meeting approving
such authorization are published in the Luxembourg official gazette (Recueil électronique des Sociétés et Associations, as applicable).
The general meeting may amend, renew, or extend such authorized share capital and such authorization to the board of directors to
issue ordinary shares. Our articles of association provide that no fractional ordinary shares shall be issued.
The board of directors resolves on the issuance of ordinary shares out of the authorized share capital (capital autorisé) in
accordance with the quorum and voting thresholds set forth in the articles of association. The board of directors also resolves on the
applicable procedures and timelines to which such issuance will be subjected. If the proposal of the board of directors to issue new
ordinary shares exceeds the limits of our authorized share capital, the board of directors must then convene the shareholders to an
extraordinary general meeting to be held in the presence of a Luxembourg notary for the purpose of increasing the issued share capital.
Such meeting will be subject to the quorum and majority requirements required for amending the articles of association. If the capital
call proposed by the board of directors consists of an increase in the shareholders’ commitments, the board of directors must convene
the shareholders to an extraordinary general meeting to be held in the presence of a Luxembourg notary for such purpose. Such
meeting will be subject to the unanimous consent of the shareholders.
Under Luxembourg law, existing shareholders benefit from a preemptive subscription right on the issuance of ordinary shares
for cash consideration. However, our shareholders have, in accordance with Luxembourg law, authorized the board of directors to
suppress, waive, or limit any preemptive subscription rights of shareholders provided by law to the extent that the board of directors
deems such suppression, waiver, or limitation advisable for any issuance or issuances of ordinary shares within the scope of our
authorized share capital. The general meeting of shareholders duly convened to consider an amendment to the articles of association
also may, by two-thirds majority vote, limit, waive, or cancel such preemptive rights or renew, amend, or extend them, in each case
for a period not to exceed five years. Such ordinary shares may be issued above, at, or below market value, but in any event not below
the nominal value or below the accounting par value per ordinary share. The ordinary shares also may be issued by way of
incorporation of available reserves, including share premium.
Repurchase of Ordinary Shares
80
Spotify Technology S.A. cannot subscribe for its own ordinary shares. Spotify Technology S.A. may, however, repurchase
issued ordinary shares or have another person repurchase issued ordinary shares for its account, subject to the following conditions:
• prior authorization by a simple majority vote at an ordinary general meeting of shareholders, which authorization sets forth:
•
the terms and conditions of the proposed repurchase and in particular the maximum number of ordinary shares to be
repurchased;
•
•
the duration of the period for which the authorization is given, which may not exceed five years; and
in the case of repurchase for consideration, the minimum and maximum consideration per share, provided that the
prior authorization shall not apply in the case of ordinary shares acquired by either Spotify Technology S.A., or by a
person acting in his or her own name on its behalf, for the distribution thereof to its staff or to the staff of a company
with which it is in a control relationship;
• only fully paid-up ordinary shares may be repurchased;
• the voting and dividend rights attached to the repurchased shares will be suspended as long as the repurchased ordinary
shares are held by Spotify Technology S.A.; and
• the acquisition offer must be made on the same terms and conditions to all the shareholders who are in the same position,
except for acquisitions which were unanimously decided by a general meeting at which all the shareholders were present or
represented. In addition, listed companies may repurchase their own shares on the stock exchange without an acquisition
offer having to be made to our shareholders.
The authorization will be valid for a period ending on the earlier of five years from the date of such shareholder authorization
and the date of its renewal by a subsequent general meeting of shareholders. Pursuant to such authorization, the board of directors is
authorized to acquire and sell Spotify Technology S.A.’s ordinary shares under the conditions set forth in Article 430-15 of the
Luxembourg Company Law. Such purchases and sales may be carried out for any authorized purpose or any purpose that is authorized
by the laws and regulations in force. The purchase price per ordinary share to be determined by the board of directors or its delegate
shall represent (i) not less than the par value, and (ii) not more than the fair market value of such ordinary share.
The general meeting of shareholders of the Company held on April 21, 2016 authorized the board of directors of the Company
to repurchase up to 10 million ordinary shares during a period of five years, for a redemption price to be determined by the board of
directors within the following limits: at least the par value and at the most recent fair market value. That authorization to repurchase
will expire on April 21, 2021 unless renewed by decision of a general meeting of shareholders of the Company. Pursuant to that
authorization, in November 2018, the board of directors approved a share repurchase program up to the amount of $1 billion. See
“Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers” for more information.
In addition, pursuant to Luxembourg law, Spotify Technology S.A. may directly or indirectly repurchase ordinary shares by
resolution of its board of directors without the prior approval of the general meeting of shareholders if such repurchase is deemed by
the board of directors to be necessary to prevent serious and imminent harm to Spotify Technology S.A., or if the acquisition of
ordinary shares has been made with the intent of distribution to its employees and/or the employees of any entity having a controlling
relationship with it (i.e., its subsidiaries or controlling shareholder).
Form and Transfer of Ordinary Shares
Our ordinary shares are issued in registered form only and are freely transferable under Luxembourg law and our articles of
association. Our board of directors may, however, impose transfer restrictions for ordinary shares that are registered, listed, quoted,
dealt in, or that have been placed in certain jurisdictions in compliance with the requirements applicable therein. Luxembourg law
does not impose any limitations on the rights of Luxembourg or non-Luxembourg residents to hold or vote our ordinary shares.
Under Luxembourg law, the ownership of registered ordinary shares is prima facie established by the inscription of the name of
the shareholder and the number of ordinary shares held by him or her in the shareholders’ register.
Without prejudice to the conditions for transfer by book entry where ordinary shares are recorded in the shareholders’ register
on behalf of one or more persons in the name of a depository, each transfer of ordinary shares shall be effected by written declaration
of transfer to be recorded in the shareholders’ register, with such declaration to be dated and signed by the transferor and the transferee
or by their duly appointed agents. We may accept and enter into the shareholders’ register any transfer effected pursuant to an
agreement or agreements between the transferor and the transferee, true and complete copies of which have been delivered to us.
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Our articles of association provide that we may appoint registrars in different jurisdictions, each of whom may maintain a
separate register for the ordinary shares entered in such register, and that the holders of ordinary shares shall be entered into one of the
registers. Shareholders may elect to be entered into one of these registers and to transfer their ordinary shares to another register so
maintained. Entries in these registers will be reflected in the shareholders’ register maintained at our registered office.
Our ordinary shares are listed on the NYSE and the laws of the State of New York apply to the property law aspects of the
ordinary shares reflected in the register administered by our transfer agent.
In addition, a shareholders’ register will be maintained by us at our registered office in Luxembourg. Transfer of record
ownership of ordinary shares is effected by a written deed of transfer acknowledged by us or by our transfer agent and registrar acting
as our agent on our behalf.
Liquidation Rights and Dissolution
In the event of our dissolution, liquidation, or winding-up, any surplus of the assets remaining after allowing for the payment of
all of our liabilities will be paid out to the shareholders pro rata according to their respective shareholdings. The decisions to dissolve,
liquidate, or wind-up require approval by an extraordinary general meeting of our shareholders.
Merger and De-Merger
A merger by absorption whereby one Luxembourg company, after its dissolution without liquidation, transfers all of its assets
and liabilities to another company in exchange for the issuance of ordinary shares in the acquiring company to the shareholders of the
company being acquired, or a merger effected by transfer of assets to a newly incorporated company, must, in principle, be approved
at an extraordinary general meeting of shareholders of the Luxembourg company, enacted in front of a Luxembourg notary. Similarly,
a de-merger of a subsidiary of a Luxembourg company is generally subject to the approval by an extraordinary general meeting of
shareholders, enacted in front of a Luxembourg notary.
No Appraisal Rights
Neither Luxembourg law nor our articles of association provide for appraisal rights of dissenting shareholders.
General Meeting of Shareholders
Any regularly constituted general meeting of shareholders represents the entire body of our shareholders.
Any holder of our share capital is entitled to attend our general meeting of shareholders, either in person or by proxy, to address
the general meeting of shareholders and to exercise voting rights, subject to the provisions of our articles of association. Each ordinary
share entitles the holder to one vote at a general meeting of shareholders, unless such holder has a beneficiary certificate. Our articles
of association provide that our board of directors may determine all other conditions that must be fulfilled in order to take part in the
general meeting of shareholders.
When convening a general meeting of shareholders, we will send a convening notice by registered mail to the registered address
of each shareholder at least eight days before the meeting. The convening notices for every general meeting shall contain the agenda
and shall take the form of announcements filed with the register of commerce and companies, published on the Luxembourg official
gazette (Recueil Electronique des Sociétés et Associations), and published in a Luxembourg newspaper at least 15 days before the
meeting. No proof is required that this formality has been complied with. As all our Ordinary Shares are in registered form we may
decide to send the convening notice only by registered mail to the registered address of each shareholder at least eight days before the
meeting. In that case, the legal requirements regarding the publication of the convening notice in the Luxembourg official gazette
(Recueil Electronique des Sociétés et Associations) and in a Luxembourg newspaper do not apply.
Our articles of association provide that the general meeting also will be convened in accordance with the publicity requirements
of any regulated market on which our ordinary shares are listed.
A shareholder may participate in general meetings of shareholders by appointing another person as his or her proxy, the
appointment of which shall be in writing. Our articles of association also provide that, in the case of ordinary shares held through the
operator of a securities settlement system or depository, a holder of such ordinary shares wishing to attend a general meeting of
shareholders should receive from such operator or depository a certificate certifying the number of ordinary shares recorded in the
relevant account on the record date. Such certificates, as well as any proxy forms, should be submitted to us no later than three
business days before the date of the general meeting unless our board of directors provides for a different period.
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The annual general shareholder meeting must be held within six months from the end of the respective financial year at our
registered office or in any other place in Luxembourg as notified to the shareholders.
Luxembourg law provides that the board of directors is obliged to convene a general meeting of shareholders if shareholders
representing, in the aggregate, 10% of the issued share capital so request in writing with an indication of the meeting agenda. In such
case, the general meeting of shareholders must be held within one month of the request. If the requested general meeting of
shareholders is not held within one month, shareholders representing, in the aggregate, 10% of the issued share capital may petition
the competent president of the district court in Luxembourg to have a court appointee convene the meeting. Luxembourg law provides
that shareholders representing, in the aggregate, 10% of the issued share capital may request that additional items be added to the
agenda of a general meeting of shareholders. That request must be made by registered mail sent to our registered office at least five
days before the general meeting of shareholders.
Voting Rights
Each ordinary share entitles the holder thereof to one vote. Additionally, each beneficiary certificate entitles its holder to one
vote. Pursuant to our articles of association, our beneficiary certificates may be issued at a ratio of between one and 20 beneficiary
certificates per ordinary share as determined by our board of directors or its delegate at the time of issuance. The beneficiary
certificates carry no economic rights and are issued to provide the holders of such beneficiary certificates additional voting rights. The
beneficiary certificates, subject to certain exceptions, are non-transferable and shall automatically be canceled for no consideration in
case of sale or transfer of the ordinary share to which they are linked. However, exceptions to transfers of beneficiary certificates or to
their cancellation upon sale or transfer of the respective underlying ordinary shares to which they are linked may be made by the board
of directors on a case-by-case basis and in its absolute discretion, at which time the board of directors may also recalculate the ratio
described above and, if applicable, re-allocate any such non-cancelled beneficiary certificates to the remaining applicable ordinary
shares (which are already linked to other beneficiary certificates) on a pro rata basis. Additionally, our articles of association state that
all the beneficiary certificates shall be automatically canceled if the number of ordinary shares held by entities wholly owned by our
founders, in the aggregate, falls under 7,564,400 ordinary shares. Our founders, who exercise substantial control over the Company
and are members of the board of directors, are currently the sole recipients of beneficiary certificates.
Neither Luxembourg law nor our articles of association contain any restrictions as to the voting of our ordinary shares by non-
Luxembourg residents.
As described further below, Luxembourg law distinguishes general meetings of shareholders and extraordinary general meetings
of shareholders with respect to voting rights.
Ordinary General Meeting. At an ordinary general meeting, there is no quorum requirement and resolutions are adopted by a
simple majority of validly cast votes. Abstentions are not considered “votes.”
Extraordinary General Meeting. Extraordinary resolutions are required for any of the following matters, among others: (i) an
increase or decrease of the authorized or issued capital, (ii) a limitation or exclusion of preemptive rights, (iii) approval of a statutory
merger or de-merger (scission), (iv) our dissolution and liquidation, and (v) any and all amendments to our articles of association.
Pursuant to our articles of association, for any resolutions to be considered at an extraordinary general meeting of shareholders, the
quorum shall be at least one half (50%) of our issued share capital unless otherwise mandatorily required by law. If the said quorum is
not present, a second meeting may be convened, for which Luxembourg law does not prescribe a quorum. Any extraordinary
resolution shall be adopted at a quorate general meeting, except otherwise provided by law, by at least a two-thirds majority of the
votes validly cast on such resolution by shareholders and holders of beneficiary certificates. When the resolution of the general
meeting of shareholders changes the respective rights attached to the beneficiary certificates, the resolution must, in order to be valid,
fulfill the above-mentioned conditions as to attendance and majority with respect to the holders of beneficiary certificates. Abstentions
are not considered “votes.”
Minority Action Right. Luxembourg law provides for a provision whereby the shareholders and/or holders of the beneficiary
certificates holding, in the aggregate, 10% of the securities who have a right to vote at the general meeting may act on our behalf to
discharge the members of the board of directors for misconduct against our interests, a violation of the law, or a violation of the
articles of association.
Dividend Rights
In case of a dividend payment, each shareholder is entitled to receive a dividend right pro rata according to his or her respective
shareholding. The dividend entitlement lapses upon the expiration of a five-year prescription period from the date of the dividend
distribution. The unclaimed dividends return to our accounts. Holders of beneficiary certificates shall not be entitled to receive any
dividend payments with respect to such beneficiary certificate.
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Board of Directors
The board of directors will be composed of Class A directors and Class B directors who need not be shareholders. Our Class A
directors are Daniel Ek, Martin Lorentzon, and Shishir Mehrotra. Our Class B directors are Christopher Marshall, Barry McCarthy,
Ted Sarandos, Thomas Staggs, Padmasree Warrior, Cristina Stenbeck, and Heidi O’Neill. The board of directors may appoint a
chairman from among its members. It also may appoint a secretary, who need not be a director and who will be responsible for
keeping the minutes of the meetings of the board of directors and of the shareholders. The board of directors will meet upon call by
the chairman. A meeting must be convened if any of two directors so require. The chairman will preside at all meetings of the board of
directors and, if required, of the shareholders, except that in his or her absence the board of directors may appoint another director as
chairman and the general meeting of shareholders may appoint another person as chairman, in each case pro tempore by vote of the
majority present or represented at such meeting.
A quorum of the board of directors shall be either one Class A director and one Class B director present at the meeting or, in the
event that no Class A or Class B directors have been appointed, three directors holding office, and resolutions are adopted by the
simple majority vote of members of the board of directors present or represented. No valid decision of the board of directors may be
taken if the necessary quorum has not been reached. In case of an equality of votes, the chairman shall have the right to cast the
deciding vote. Such casting vote shall be personal to the appointed chairman and will not transfer to any other director acting as
chairman of a meeting of the board of directors in the absence of the appointed chairman. The board of directors also may take
decisions by means of resolutions in writing signed by all directors. Each director has one vote.
The general shareholders’ meeting elects directors and decides their respective terms. Under Luxembourg law, directors may be
reelected, but the term of their office may not exceed six years. The general shareholders’ meeting may dismiss one or more directors
at any time, with or without cause, by a simple majority of votes cast at a general meeting of shareholders. If the board of directors has
a vacancy, the remaining directors have the right to fill such vacancy on a temporary basis pursuant to the affirmative vote of a
majority of the remaining directors. The term of a temporary director elected to fill a vacancy expires at the end of the term of office
of the replaced director, provided, however, that the next general shareholders’ meeting shall be requested definitively to elect any
temporary director. For a discussion of the differences in shareholders’ rights under Luxembourg law and Delaware law, see “—
Differences in Corporate Law.”
Within the limits provided for by Luxembourg law, our board of directors may delegate our daily management and the authority
to represent us to one or more persons. The delegation to a member of the board of directors shall entail the obligation for the board of
directors to report each year to the ordinary general meeting on the salary, fees, and any advantages granted to the delegate. In
addition, once granted an authorization from the general meeting of shareholders, our board of directors may set up an executive
committee and entrust the latter with any powers of the board of directors, with the exception of (i) our general strategic direction, and
(ii) those acts reserved to the board of directors by Luxembourg law. For a discussion of the differences in directors’ fiduciary duties
under Luxembourg law and Delaware law, see “—Differences in Corporate Law.”
No director, solely as a result of being a director, shall be prevented from contracting with us with regard to his tenure in any
office or place of profit, or as vendor, purchaser, or in any other manner whatsoever. No contract in which any director is in any way
interested shall be voided solely on account of his position as director and no director who is so interested shall account to us or the
shareholders for any remuneration, profit, or other benefit realized by the contract solely by reason of the director holding that office
or of the fiduciary relationship thereby established.
Any director having a direct or indirect personal and financial interest in a transaction submitted for approval to the board of
directors may not participate in the deliberations and vote thereon, if the transaction is not in the ordinary course of our business and
conflicts with our interest, in which case the director shall be obliged to advise the board of directors thereof and to cause a record of
his statement to be included in the minutes of the meeting. He or she may not take part in these deliberations or vote on such a
transaction. At the next general meeting, before any other resolution is put to a vote, a special report shall be made on any transactions
in which any of the directors may have had an interest that conflicts with our interest.
Our articles of association provide that directors and officers, past and present, will be entitled to indemnification from us to the
fullest extent permitted by Luxemburg law against liability and all expenses reasonably incurred or paid by him or her in connection
with any claim, action, suit, or proceeding in which he or she would be involved by virtue of his or her being or having been a director
or officer and against amounts paid or incurred by him or her in the settlement thereof. However, no indemnification will be provided
against any liability to our directors or officers (i) by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties of a director or officer, (ii) with respect to any matter as to which any director or officer shall have been finally
adjudicated to have acted in bad faith and not in our interest, or (iii) in the event of a settlement, unless approved by a court of
competent jurisdiction or the board of directors.
There is no mandatory retirement age for directors under Luxembourg law and no minimum shareholding requirement for
directors.
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Amendment of Articles of Association
Shareholder Approval Requirements. Luxembourg law requires an extraordinary general meeting of shareholders to resolve
upon an amendment of the articles of association to be made by extraordinary resolution. The agenda of the extraordinary general
meeting of shareholders must indicate the proposed amendments to the articles of association. An extraordinary general meeting of
shareholders convened for the purposes of amending the articles of association must have a quorum of at least 50% of our issued share
capital. If the said quorum is not present, a second meeting may be convened at which Luxembourg law does not prescribe a quorum.
Irrespective of whether the proposed amendments will be subject to a vote at any duly convened extraordinary general shareholders’
meeting, the amendment is subject to the approval of at least two-thirds of the votes cast at such extraordinary general meeting of
shareholders by shareholders and holders of beneficiary certificates. When the resolution of the general meeting of shareholders is to
change the respective rights attached to the beneficiary certificates, the resolution must, in order to be valid, fulfill the above-
mentioned conditions as to attendance and majority with respect to the holders of beneficiary certificates.
Formalities. Any resolutions to amend our articles of association must be taken before a Luxembourg notary, and such
amendments must be published in accordance with Luxembourg law.
Differences in Corporate Law
We are incorporated under the laws of Luxembourg. Please see “Description of Share Capital and Articles of Association—
Differences in Corporate Law” in the registration statement on Form F-1 originally filed with the SEC on February 28, 2018 and that
became effective on March 23, 2018 for a discussion summarizing certain material differences between the rights of holders of our
ordinary shares and the rights of holders of the ordinary shares of a typical corporation incorporated under the laws of the state of
Delaware, which result from differences in governing documents and the laws of Luxembourg and Delaware.
C. Material Contracts
The following is a summary of each material agreement, other than material agreements entered into in the ordinary course of
business, to which we are or have been a party for the two years immediately preceding the date of this report:
• Subscription Agreement by and among TME, TME Hong Kong, Spotify Technology S.A., and Spotify AB, dated as of
December 8, 2017.
• Investor Agreement by and among Spotify Technology S.A., TME, TME Hong Kong, Tencent, Image Frame, and with
respect to certain sections only, D.G.E. Investments and Rosello, dated as of December 15, 2017.
D. Exchange Controls
We are not aware of any governmental laws, decrees, regulations or other legislation in Luxembourg that restrict the export or
import of capital, including the availability of cash and cash equivalents for use by our affiliated companies, or that affect the
remittance of dividends, interest or other payments to non-resident holders of our securities, except for regulations restricting the
remittance of dividends, distributions, and other payments in compliance with United Nations and EU sanctions.
E. Taxation
Luxembourg Tax Considerations
The following is an overview of certain material Luxembourg tax consequences of purchasing, owning, and disposing of the
ordinary shares issued by us. It does not purport to be a complete analysis of all possible tax situations that may be relevant to a
decision to purchase, own, or deposit our ordinary shares. It is included herein solely for preliminary information purposes and is not
intended to be, nor should it construed to be, legal or tax advice. Prospective purchasers of our ordinary shares should consult their
own tax advisers as to the applicable tax consequences of the ownership of our ordinary shares, based on their particular
circumstances. The following description of Luxembourg tax law is based upon Luxembourg law and regulations as in effect and as
interpreted by the Luxembourg tax authorities as of the date of this annual report and is subject to any amendments in law (or in
interpretation) later introduced, whether or not on a retroactive basis. Please be aware that the residence concept used under the
respective headings below applies for Luxembourg tax assessment purposes only. Any reference in this section to a tax, duty, levy
impost or other charge or withholding of a similar nature refers to Luxembourg tax laws and/or concepts only. Also, please note that a
reference to Luxembourg income tax encompasses corporate income tax (impôt sur le revenu des collectivités), municipal business tax
(impôt commercial communal), a solidarity surcharge (contribution au fonds pour l’emploi), and personal income tax (impôt sur le
revenu) generally. Corporate taxpayers may further be subject to net worth tax (impôt sur la fortune), as well as other duties, levies or
taxes. Corporate income tax, municipal business tax, as well as the solidarity surcharge invariably applies to most corporate taxpayers
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resident of Luxembourg for tax purposes. Individual taxpayers are generally subject to personal income tax and to the solidarity
surcharge. Under certain circumstances, where an individual taxpayer acts in the course of the management of a professional or
business undertaking, municipal business tax may apply as well.
Taxation of the Company
Income Tax
As the Company is a fully-taxable Luxembourg company, its net taxable profit is as a rule subject to corporate income tax
(“CIT”) and municipal business tax (“MBT”) at ordinary rates in Luxembourg.
The taxable profit as determined for CIT purposes is applicable, with minor adjustments, for MBT purposes. CIT is levied at an
effective maximum rate of 18.19% as from 2019 (inclusive of the 7% surcharge for the employment fund). MBT is levied at a variable
rate according to the municipality in which the Company is located (6.75% in the City of Luxembourg in 2019). The maximum
aggregate CIT and MBT rate consequently amounts to 24.94% as from 2019 for companies located in the City of Luxembourg.
Dividends and other payments derived from ordinary shares by the Company are subject to income taxes, unless the conditions
of the participation exemption regime, as described below, are satisfied. A tax credit is generally granted for withholding taxes levied
at source within the limit of the tax payable in Luxembourg on such income, whereby any excess withholding tax is not refundable.
Under the participation exemption regime (subject to the relevant anti-abuse rules), dividends derived from ordinary shares may
be exempt from income tax if (i) the distributing company is a qualified subsidiary (“Qualified Subsidiary”), and (ii) at the time the
dividend is put at the company’s disposal, the company has held or commits itself to hold for an uninterrupted period of at least 12
months’ shares representing a direct participation in the share capital of the Qualified Subsidiary (a) of at least 10%, or (b) of an
acquisition price of at least €1.2 million (or an equivalent amount in another currency). A Qualified Subsidiary means (i) a
Luxembourg resident fully-taxable company limited by share capital (société de capitaux), (ii) a company covered by Article 2 of the
Council Directive 2011/96/EU of November 30, 2011 (the “EU Parent-Subsidiary Directive”), or (iii) a non-resident company limited
by share capital (société de capitaux) liable to a tax corresponding to Luxembourg CIT.
Liquidation proceeds are assimilated to a received dividend and may be exempt under the same conditions. If the conditions of
the participation exemption regime are not met, dividends derived by the Company from Qualified Subsidiaries may be exempt for
50% of their gross amount.
Capital gains realized by the Company on shares are subject to CIT and MBT at ordinary rates, unless the conditions of the
participation exemption regime, as described below, are satisfied. Under the participation exemption regime, capital gains realized on
shares of a Qualified Subsidiary may be exempt from CIT and MBT at the level of the Company if at the time the capital gain is
realized, the Company has held or commits itself to hold for an uninterrupted period of at least 12 months’ shares representing a direct
participation in the share capital of the Qualified Subsidiary (i) of at least 10%, or (ii) of an acquisition price of at least €6 million (or
an equivalent amount in another currency). Taxable gains are defined as the difference between the price for which shares have been
disposed of and the lower of their cost or book value.
Withholding Tax
Dividends paid by us to the holders of our ordinary shares are as a rule subject to a 15% withholding tax in Luxembourg, unless
a reduced withholding tax rate applies pursuant to an applicable double tax treaty or an exemption pursuant to the application of the
withholding tax exemption, and, to the extent withholding tax applies, we are responsible for withholding amounts corresponding to
such taxation at its source.
If the Company and a U.S. relevant holder are eligible for the benefits of the tax treaty concluded between the United States and
Luxembourg (the “Treaty”), the rate of withholding on distributions shall not exceed 15%, or 5% if the U.S. relevant holder is a
qualified resident company as defined in Article 24 of the Treaty that owns at least 10% of our Company’s voting stock.
An exemption may apply under the withholding tax exemption (subject to the relevant anti-abuse rules) if cumulatively (i) the
holder of our ordinary shares is an eligible parent (“Eligible Parent”), and (ii) at the time the income is made available, the holder of
our ordinary shares has held or commits itself to hold for an uninterrupted period of at least 12 months a direct participation of at least
10% of our share capital or a direct participation of an acquisition price of at least €1.2 million (or an equivalent amount in another
currency). Holding a participation through an entity treated as tax transparent from a Luxembourg income tax perspective is deemed to
be a direct participation in proportion to the net assets held in this entity. An Eligible Parent includes (i) a company covered by Article
2 of the EU Parent-Subsidiary Directive or a Luxembourg permanent establishment thereof, (ii) a fully-taxable company limited by
share capital (société de capitaux) resident in Luxembourg, (iii) a company resident in a State having a double tax treaty with
Luxembourg and subject to a tax corresponding to Luxembourg CIT or a Luxembourg permanent establishment thereof, (iv) a
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company limited by share capital (société de capitaux) or a cooperative society (société coopérative) resident in the European
Economic Area other than an EU Member State and liable to a tax corresponding to Luxembourg CIT or a Luxembourg permanent
establishment thereof, or (v) a Swiss company limited by share capital (société de capitaux) which is effectively subject to corporate
income tax in Switzerland without benefiting from an exemption.
No withholding tax is levied on capital gains and liquidation proceeds.
Net Wealth Tax
The Company is as a rule subject to Luxembourg net wealth tax (“NWT”) on its net assets as determined for net wealth tax
purposes. NWT is levied at the rate of 0.5% on net assets not exceeding €500 million and at the rate of 0.05% on the portion of the net
assets exceeding €500 million. Net worth is referred to as the unitary value (valeur unitaire), as determined at January 1 of each year.
The unitary value is in principle calculated as the difference between (i) assets estimated at their fair market value (valeur estimée de
réalisation), and (ii) liabilities vis-à-vis third parties.
Under the participation exemption regime, a qualified shareholding held by the Company in a Qualified Subsidiary is exempt
for net wealth tax purposes.
A minimum net wealth tax (“MNWT”) is levied on companies having their statutory seat or central administration in
Luxembourg. For entities for which the sum of fixed financial assets, receivables against related companies, transferable securities,
and cash at bank exceeds 90% of their total balance sheet and €350,000, the MNWT is set at €4,815. For all other companies having
their statutory seat or central administration in Luxembourg which do not fall within the scope of the €4,815 MNWT, the MNWT
ranges from €535 to €32,100, depending on the company’s total balance sheet.
Other Taxes
The issuance of our ordinary shares and any other amendment of our articles of association are currently subject to a €75 fixed
registration duty. The disposal of our ordinary shares is not subject to a Luxembourg registration tax or stamp duty, unless recorded in
a Luxembourg notarial deed or otherwise registered in Luxembourg.
Taxation of the Holders of Ordinary Shares
Luxembourg Tax Residency of the Holders of Our Ordinary Shares
A holder of our ordinary shares will not become resident, nor be deemed to be resident, in Luxembourg by reason only of the
holding and/or disposing of our ordinary shares or the execution, performance, or enforcement of his/her rights thereunder.
Income Tax—Luxembourg Resident Holders
Luxembourg Individual Residents. Dividends and other payments derived from our ordinary shares by resident individual
holders of our ordinary shares, who act in the course of the management of either their private wealth or their professional or business
activity, are subject to income tax at the ordinary progressive rates. A tax credit is generally granted for withholding taxes levied at
source within the limit of the tax payable in Luxembourg on such income, whereby any excess withholding tax is not refundable. 50%
of the gross amount of dividends received from the Company by resident individual holders of our ordinary shares are exempt from
income tax.
Capital gains realized on the disposal of our ordinary shares by resident individual holders of our ordinary shares, who act in the
course of the management of their private wealth, are not subject to income tax, unless said capital gains qualify either as speculative
gains or as gains on a substantial participation. Capital gains are deemed to be speculative and are subject to income tax at ordinary
rates if our ordinary shares are disposed of within six months after their acquisition or if their disposal precedes their acquisition.
Speculative gains are subject to income tax as miscellaneous income at ordinary rates. A participation is deemed to be substantial
where a resident individual holder of our ordinary shares holds or has held, either alone or together with his/her spouse or partner
and/or minor children, directly or indirectly at any time within the five years preceding the disposal, more than 10% of the share
capital of the Company whose ordinary shares are being disposed of. A holder of our ordinary shares also is deemed to alienate a
substantial participation if he acquired free of charge, within the five years preceding the transfer, a participation that was constituting
a substantial participation in the hands of the alienator (or the alienators in case of successive transfers free of charge within the same
five-year period). Capital gains realized on a substantial participation more than six months after the acquisition thereof are taxed
according to the half-global rate method, (i.e., the average rate applicable to the total income is calculated according to progressive
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income tax rates and half of the average rate is applied to the capital gains realized on the substantial participation). A disposal may
include a sale, an exchange, a contribution or any other kind of alienation of the participation.
Capital gains realized on the disposal of our ordinary shares by resident individual holders of our ordinary shares, who act in the
course of their professional or business activity, are subject to income tax at ordinary rates. Taxable gains are determined as the
difference between the price for which our ordinary shares have been disposed of and the lower of their cost or book value.
Luxembourg Fully-taxable Corporate Residents. Dividends and other payments derived from our ordinary shares by
Luxembourg resident fully-taxable companies are subject to CIT and MBT, unless the conditions of the participation exemption
regime, as described below, are satisfied. A tax credit is generally granted for withholding taxes levied at source within the limit of the
tax payable in Luxembourg on such income, whereby any excess withholding tax is not refundable. If the conditions of the
participation exemption regime are not met, 50% of the gross amount of dividends received by Luxembourg resident, fully-taxable
companies from our ordinary shares are exempt from CIT and MBT.
Under the participation exemption regime (subject to the relevant anti-abuse rules), dividends derived from our ordinary shares
may be exempt from CIT and MBT at the level of the holder of our ordinary shares if cumulatively (i) the holder of our ordinary
shares is an Eligible Parent, and (ii) at the time the dividend is put at the holder of our ordinary shares’ disposal, the holder of our
ordinary shares has held or commits itself to hold for an uninterrupted period of at least 12 months a qualified shareholding
(“Qualified Shareholding”). A Qualified Shareholding means ordinary shares representing a direct participation of at least 10% in the
share capital of the Company or a direct participation in the Company of an acquisition price of at least €1.2 million (or an equivalent
amount in another currency). Liquidation proceeds are assimilated to a received dividend and may be exempt under the same
conditions. If the conditions of the participation exemption regime are not met, dividends derived by the Company from Qualified
Subsidiaries may be exempt for 50% of their gross amount. Ordinary shares held through a tax-transparent entity are considered as
being a direct participation proportionally to the percentage held in the net assets of the transparent entity.
Capital gains realized by a Luxembourg resident fully-taxable company on our ordinary shares are subject to CIT and MBT at
ordinary rates, unless the conditions of the participation exemption regime, as described below, are satisfied. Under the participation
exemption regime, capital gains realized on our ordinary shares may be exempt from CIT and MBT at the level of the holder of our
ordinary shares if cumulatively (i) the holder of our ordinary shares is an Eligible Parent, and (ii) at the time the capital gain is
realized, the holder of our ordinary shares has held or commits itself to hold for an uninterrupted period of at least 12 months our
ordinary shares representing a direct participation in the share capital of the Company of at least 10% or a direct participation in the
Company of an acquisition price of at least €6 million (or an equivalent amount in another currency). Taxable gains are determined as
the difference between the price for which our ordinary shares have been disposed of and the lower of their cost or book value.
Luxembourg Residents Benefiting from a Special Tax Regime. Holders of our ordinary shares who are either (i) an undertaking
for collective investment governed by the amended law of December 17, 2010, (ii) a specialized investment fund governed by the
amended law of February 13, 2007, (iii) a family wealth management company governed by the amended law of May 11, 2007, or
(iv) a reserved alternative investment fund treated as a specialized investment fund for Luxembourg tax purposes governed by the
amended law of July 23, 2016, are exempt from income tax in Luxembourg. Dividends derived from and capital gains realized on our
ordinary shares are thus not subject to Luxembourg income tax in their hands.
Income Tax—Luxembourg Non-Resident Holders
Non-resident holders of our ordinary shares who have neither a permanent establishment nor a permanent representative in
Luxembourg to which or whom our ordinary shares are attributable, are not liable to any Luxembourg income tax on income and gains
derived from our ordinary shares except capital gains realized on (i) a substantial participation before the acquisition or within the first
six months of the acquisition thereof, or (ii) a substantial participation more than six months after the acquisition thereof by a holder of
our ordinary shares who has been a former Luxembourg resident for more than 15 years and has become a non-resident, at the time of
transfer, less than five years ago. A participation is deemed to be substantial where a shareholder holds or has held, either alone or, in
case of an individual shareholder, together with his/her spouse or partner and/or minor children, directly or indirectly at any time
within the five years preceding the disposal, more than 10% of the share capital of the Company whose ordinary shares are being
disposed of. A shareholder also is deemed to alienate a substantial participation if he acquired free of charge, within the five years
preceding the transfer, a participation that was constituting a substantial participation in the hands of the alienator (or the alienators in
case of successive transfers free of charge within the same five-year period).
If the Company and a U.S. relevant holder are eligible for the benefits of the Treaty, such U.S. relevant holder generally should
not be subject to Luxembourg tax on the gain from the disposal of such ordinary shares unless such gain is attributable to a permanent
establishment of such U.S. relevant holder in Luxembourg.
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Non-resident holders of our ordinary shares which have a permanent establishment or a permanent representative in
Luxembourg to which or whom our ordinary shares are attributable, must include any income received, as well as any gain realized,
on the sale, disposal or redemption of our ordinary shares, in their taxable income for Luxembourg tax assessment purposes, unless the
conditions of the participation exemption regime, as described below, are satisfied. If the conditions of the participation exemption
regime are not fulfilled, 50% of the gross amount of dividends received by a Luxembourg permanent establishment or permanent
representative may be, however, exempt from income tax. Taxable gains are determined as the difference between the price for which
the ordinary shares have been disposed of and the lower of their cost or book value.
Under the participation exemption regime (subject to relevant anti-abuse rules), dividends derived from our ordinary shares may
be exempt from income tax if cumulatively (i) our ordinary shares are attributable to a qualified permanent establishment (“Qualified
Permanent Establishment”), and (ii) at the time the dividend is put at the disposal of the Qualified Permanent Establishment, it has
held or commits itself to hold a Qualified Shareholding for an uninterrupted period of at least 12 months. A Qualified Permanent
Establishment means (i) a Luxembourg permanent establishment of a company covered by Article 2 of the EU Parent-Subsidiary
Directive, (ii) a Luxembourg permanent establishment of a company limited by share capital (société de capitaux) resident in a State
having a tax treaty with Luxembourg, and (iii) a Luxembourg permanent establishment of a company limited by share capital (société
de capitaux) or a cooperative society (société coopérative) resident in the European Economic Area other than a EU Member State.
Liquidation proceeds are assimilated to a received dividend and may be exempt under the same conditions. Ordinary shares held
through a tax transparent entity are considered as being a direct participation proportionally to the percentage held in the net assets of
the transparent entity.
Under the participation exemption regime, capital gains realized on our ordinary shares may be exempt from income tax if
(i) our ordinary shares are attributable to a Qualified Permanent Establishment, and (ii) at the time the capital gain is realized, the
Qualified Permanent Establishment has held or commits itself to hold, for an uninterrupted period of at least 12 months, our ordinary
shares representing a direct participation in the share capital of the Company of at least 10% or a direct participation in the Company
of an acquisition price of at least €6 million (or an equivalent amount in another currency). Taxable gains are determined as the
difference between the price for which our ordinary shares have been disposed of and the lower of their cost or book value.
Net Wealth Tax
Luxembourg resident holders of our ordinary shares, as well as non-resident holders of our ordinary shares who have a
permanent establishment or a permanent representative in Luxembourg to which or whom our ordinary shares are attributable, are
subject to Luxembourg NWT on our ordinary shares, except if the holder is (i) a resident or non-resident individual taxpayer, (ii) a
securitization company governed by the amended law of March 22, 2004 on securitization, (iii) a company governed by the amended
law of June 15, 2004 on venture capital vehicles, (iv) a professional pension institution governed by the amended law of July 13, 2005,
(v) a specialized investment fund governed by the amended law of February 13, 2007, (vi) a family wealth management company
governed by the amended law of May 11, 2007, (vii) an undertaking for collective investment governed by the amended law of
December 17, 2010, or (viii) a reserved alternative investment fund governed by the amended law of July 23, 2016. However, (i) a
securitization company governed by the amended law of March 22, 2004 on securitization, (ii) a company governed by the amended
law of June 15, 2004 on venture capital vehicles, (iii) a professional pension institution governed by the amended law of July 13,
2005, and (iv) a reserved alternative investment fund treated as a venture capital vehicle for Luxembourg tax purposes and governed
by the amended law of July 23, 2016, remain subject to MNWT.
Under the participation exemption, a Qualified Shareholding held in the Company by an Eligible Parent or attributable to a
Qualified Permanent Establishment may be exempt. The net wealth tax exemption for a Qualified Shareholding does not require the
completion of the 12-month holding period.
Other Taxes
Under Luxembourg tax law, where an individual holder of our ordinary shares is a resident of Luxembourg for inheritance tax
purposes at the time of his or her death, our ordinary shares are included in his or her taxable basis for inheritance tax purposes. On the
contrary, no inheritance tax is levied on the transfer of our ordinary shares upon the death of an individual holder in cases where the
deceased was not a resident of Luxembourg for inheritance purposes.
Gift tax may be due on a gift or donation of our ordinary shares, if the gift is recorded in a Luxembourg notarial deed or
otherwise registered in Luxembourg.
U.S. Federal Income Tax Considerations
The following summary describes certain U.S. federal income tax considerations generally applicable to U.S. Holders (as
defined below) of our ordinary shares. This summary deals only with our ordinary shares held as capital assets within the meaning of
89
Section 1221 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). This summary also does not address
the tax consequences that may be relevant to holders in special tax situations including, without limitation, dealers in securities, traders
that elect to use a mark-to-market method of accounting, holders that own our ordinary shares as part of a “straddle,” “hedge,”
“conversion transaction,” or other integrated investment, banks or other financial institutions, individual retirement accounts and other
tax-deferred accounts, insurance companies, tax-exempt organizations, U.S. expatriates, holders whose functional currency is not the
U.S. dollar, holders subject to the alternative minimum tax, holders that acquired our ordinary shares in a compensatory transaction,
holders subject to special tax accounting rules as a result of any item of gross income with respect to the ordinary shares being taken
into account in an applicable financial statement, or holders that actually or constructively own 10% or more of the total voting power
or value of our ordinary shares.
This summary is based upon the Internal Revenue Code, applicable U.S. Treasury regulations, administrative pronouncements
and judicial decisions, in each case as in effect on the date hereof, all of which are subject to change (possibly with retroactive effect).
No ruling will be requested from the Internal Revenue Service (the “IRS”) regarding the tax consequences of the initial listing, and
there can be no assurance that the IRS will agree with the discussion set out below. This summary does not address any U.S. federal
tax consequences other than U.S. federal income tax consequences (such as the estate and gift tax or the Medicare tax on net
investment income).
As used herein, the term “U.S. Holder” means a beneficial owner of our ordinary shares that is, for U.S. federal income tax
purposes, (i) a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation created or organized
under the laws of the United States or any state thereof or therein or the District of Columbia, (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a trust (a) that is subject to the supervision of a court within the
United States and the control of one or more United States persons as described in Internal Revenue Code Section 7701(a)(30), or
(b) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.
If an entity or other arrangement treated as a partnership for U.S. federal income tax purposes acquires our ordinary shares, the
tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership.
Partners of a partnership considering an investment in our ordinary shares should consult their tax advisers regarding the U.S. federal
income tax consequences of acquiring, owning, and disposing of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL
INFORMATION ONLY. ALL PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OUR ORDINARY SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS AND POSSIBLE CHANGES IN TAX
LAW.
Dividends
Subject to the discussion below under “—Passive Foreign Investment Company,” the amount of dividends paid to a U.S. Holder
with respect to our ordinary shares generally will be included in the U.S. Holder’s gross income as ordinary income from foreign
sources to the extent paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes).
Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s
adjusted tax basis in our ordinary shares and thereafter as capital gain. However, we do not intend to calculate our earnings and profits
under U.S. federal income tax principles. Therefore, U.S. Holders should expect that a distribution will generally be treated as a
dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules
described above. The amount of any distribution paid in foreign currency will be equal to the U.S. dollar value of such currency,
translated at the spot rate of exchange on the date such distribution is received, regardless of whether the payment is in fact converted
into U.S. dollars at that time.
Foreign withholding tax (if any) paid on dividends on our ordinary shares at the rate applicable to a U.S. Holder (taking into
account any applicable income tax treaty) will, subject to limitations and conditions, be treated as foreign income tax eligible for credit
against such holder’s U.S. federal income tax liability or, at such holder’s election, eligible for deduction in computing such holder’s
U.S. federal taxable income. Dividends paid on our ordinary shares generally will constitute “passive category income” for purposes
of the foreign tax credit. However, if we are a “United States-owned foreign corporation,” solely for foreign tax credit purposes, a
portion of the dividends allocable to our U.S. source earnings and profits may be recharacterized as U.S. source. A “United States-
owned foreign corporation” is any foreign corporation in which United States persons own, directly or indirectly, 50% or more (by
vote or by value) of the stock. In general, United States-owned foreign corporations with less than 10% of earnings and profits
attributable to sources within the United States are excepted from these rules. Although we don’t believe we are currently a “United
States-owned foreign corporation,” we may become one in the future. In such case, if 10% or more of our earnings and profits are
attributable to sources within the United States, a portion of the dividends paid on our ordinary shares allocable to our U.S. source
90
earnings and profits will be treated as U.S. source, and, as such, a U.S. Holder may not offset any foreign tax withheld as a credit
against U.S. federal income tax imposed on that portion of dividends. The rules governing the treatment of foreign taxes imposed on a
U.S. Holder and foreign tax credits are complex, and U.S. Holders should consult their tax advisors about the impact of these rules in
their particular situations.
Dividends paid to a non-corporate U.S. Holder by a “qualified foreign corporation” may be subject to reduced rates of taxation
if certain holding period and other requirements are met. “Qualified foreign corporation” generally includes a foreign corporation
(other than a foreign corporation that is a PFIC (as defined below) with respect to the relevant U.S. Holder for the taxable year in
which the dividends are paid or for the preceding taxable year) (i) whose ordinary shares are readily tradable on an established
securities market in the United States, or (ii) which is eligible for benefits under a comprehensive U.S. income tax treaty that includes
an exchange of information program and which the U.S. Treasury Department has determined is satisfactory for these purposes. Our
ordinary shares are expected to be readily tradable on the NYSE, an established securities market. U.S. Holders should consult their
own tax advisors regarding the availability of the reduced tax rate on dividends in light of their particular circumstances. The
dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from
other U.S. corporations.
Disposition of Our Ordinary Shares
Subject to the discussion below under “—Passive Foreign Investment Company,” a U.S. Holder generally will recognize capital
gain or loss for U.S. federal income tax purposes on the sale or other taxable disposition of our ordinary shares equal to the difference,
if any, between the amount realized and the U.S. Holder’s adjusted tax basis in shares. In general, capital gains recognized by a non-
corporate U.S. Holder, including an individual, are subject to a lower rate under current law if such U.S. Holder held shares for more
than one year. The deductibility of capital losses is subject to limitations. Any such gain or loss generally will be treated as U.S.
source income or loss for purposes of the foreign tax credit. A U.S. Holder’s initial tax basis in shares generally will equal the cost of
such shares.
If the consideration received upon the sale or other taxable disposition of our ordinary shares is paid in foreign currency, the
amount realized will be the U.S. dollar value of the payment received, translated at the spot rate of exchange on the date of taxable
disposition. If our ordinary shares are treated as traded on an established securities market, a cash basis U.S. Holder and an accrual
basis U.S. Holder who has made a special election (which must be applied consistently from year to year and cannot be changed
without the consent of the IRS) will determine the U.S. dollar value of the amount realized in foreign currency by translating the
amount received at the spot rate of exchange on the settlement date of the sale. An accrual basis U.S. Holder that does not make the
special election will recognize exchange gain or loss to the extent attributable to the difference between the exchange rates on the sale
date and the settlement date, and such exchange gain or loss generally will constitute ordinary income or loss.
Passive Foreign Investment Company
In general, a non-U.S. corporation will be classified as a PFIC for any taxable year if at least (i) 75% of its gross income is
classified as “passive income,” or (ii) 50% of its assets (determined on the basis of a quarterly average) produce or are held for the
production of passive income. For these purposes, cash is considered a passive asset. In making this determination, the non-U.S.
corporation is treated as earning its proportionate share of any income and owning its proportionate share of any assets of any
corporation in which it holds a 25% or greater interest. Based on our historic and expected operations, composition of assets and
market capitalization, we do not expect to be classified as a PFIC for the current table year or for the foreseeable future. However, the
determination of whether we are a PFIC is made annually. Moreover, the value of our assets for purposes of the PFIC determination
will generally be determined by reference to the public price of our ordinary shares, which may fluctuate significantly. Therefore,
there is no assurance that we would not be classified as a PFIC in the future due to, for example, changes in the composition of our
assets or income, as well as changes in our market capitalization. Under the PFIC rules, if we were considered a PFIC at any time that
a U.S. Holder holds our ordinary shares, we would continue to be treated as a PFIC with respect to such holder’s investment unless
(i) we cease to be a PFIC, and (ii) the U.S. Holder has made a “deemed sale” election under the PFIC rules.
If we are considered a PFIC for any taxable year that a U.S. Holder holds our ordinary shares, any gain recognized by the U.S.
Holder on a sale or other disposition of our ordinary shares would be allocated pro-rata over the U.S. Holder’s holding period for the
ordinary shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC
would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in
effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed. Further, to the
extent that any distribution received by a U.S. Holder on our ordinary shares exceeds 125% of the average of the annual distributions
on the ordinary shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that
distribution would be subject to taxation in the same manner as gain on the sale or other disposition of ordinary shares if we were a
PFIC, described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market
91
treatment) of the ordinary shares. If we are treated as a PFIC with respect to a U.S. Holder for any taxable year, the U.S. Holder will
be deemed to own shares in any of our subsidiaries that also are PFICs. A timely election to treat us as a qualified electing fund under
the Internal Revenue Code would result in an alternative treatment. However, we do not intend to prepare or provide the information
that would enable U.S. Holders to make a qualified electing fund election. If we are considered a PFIC, a U.S. Holder also will be
subject to annual information reporting requirements. U.S. Holders should consult their own tax adviser about the potential application
of the PFIC rules to an investment in the ordinary shares.
Information Reporting and Backup Withholding
Dividend payments and proceeds paid from the sale or other taxable disposition of ordinary shares may be subject to
information reporting to the IRS. In addition, a U.S. Holder (other than exempt holders who establish their exempt status if required)
may be subject to backup withholding on cash payments received in connection with dividend payments and proceeds from the sale or
other taxable disposition of our ordinary shares made within the United States or through certain U.S.-related financial intermediaries.
Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number, makes
other required certification and otherwise complies with the applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax. Rather, any amount withheld under the backup withholding rules will be creditable or refundable
against the U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Foreign Financial Asset Reporting
Certain U.S. Holders are required to report their holdings of certain foreign financial assets, including equity of foreign entities,
if the aggregate value of all of these assets exceeds certain threshold amounts. The ordinary shares are expected to constitute foreign
financial assets subject to these requirements unless the ordinary shares are held in an account at certain financial institutions. U.S.
Holders should consult their tax advisors regarding the application of these reporting requirements.
FATCA
Provisions under Sections 1471 through 1474 of the Internal Revenue Code and applicable U.S. Treasury regulations commonly
referred to as “FATCA” generally impose 30% withholding on certain “withholdable payments” and, in the future, may impose such
withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Internal Revenue Code)
that has entered into an agreement with the IRS to perform certain diligence and reporting obligations with respect to the foreign
financial institution’s U.S.-owned accounts. The United States has entered into an intergovernmental agreement, or IGA, with
Luxembourg, implemented by the Luxembourg law dated July 24, 2015, which modifies the FATCA withholding regime described
above. It is not yet clear how foreign passthru payments will be addressed under FATCA. Under proposed regulations, any
withholding on foreign passthru payments would apply to passthru payments made on or after the date that is two years after the date
of publication in the Federal Register of applicable final regulations defining foreign passthru payments. Although these recent
regulations are not final, taxpayers generally may rely on them until final regulations are issued. Prospective investors should consult
their tax advisors regarding the potential impact of FATCA, the Luxembourg IGA and any non-U.S. legislation implementing FATCA
on the investment in our ordinary shares.
F. Dividends and Paying Agents
Not applicable
G. Statements by Experts
Not applicable
H. Documents on Display
Our SEC filings are available to you on the SEC’s website at http://www.sec.gov. This site contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC. The information on that website
is not part of this report.
We also make available on the Investors section of our website, free of charge, our annual reports on Form 20-F and the text of
our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as reasonably
92
practicable after they are electronically filed with or furnished to the SEC. Our website address is www.spotify.com. The information
on that website is not part of this report.
I. Subsidiary Information
Not applicable
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of market risks. Our primary market risk exposures relate to currency, interest rate, share
price and investment risks. To manage these risks and our exposure to the unpredictability of financial markets, we seek to minimize
potential adverse effects on our financial performance and capital.
Financial risk management
The Group’s operations are exposed to financial risks. To manage these risks efficiently, the Group has established guidelines
in the form of a treasury policy that serves as a framework for the daily financial operations. The treasury policy stipulates the rules
and limitations for the management of financial risks.
Financial risk management is centralized within Treasury who are responsible for the management of financial risks.
Treasury manages and executes the financial management activities, including monitoring the exposure of financial risks, cash
management, and maintaining a liquidity reserve, and it provides certain financial services to the Group’s entities. Treasury operates
within the limits and policies authorized by the board of directors.
Currency Risk
Currency risk manifests itself in transaction exposure, which relates to business transactions denominated in foreign currency
required by operations (purchasing and selling) and/or financing (interest and amortization). Our general policy is to hedge transaction
exposure on a case-by-case basis. Translation exposure relates to net investments in foreign operations. We do not conduct translation
risk hedging.
The Group will be subject to deferred tax in future periods as a result of foreign exchange movements between USD, EUR, and
SEK, primarily related to its investment in TME.
Transaction Exposure Sensitivity
In most cases, our customers are billed in their respective local currency. Major payments, such as salaries, consultancy fees,
and rental fees are settled in local currencies. Royalty payments are primarily settled in Euros and U.S. dollars. Hence, the operational
need to net purchase foreign currency is due primarily to a deficit from such settlements.
The table below shows the immediate impact on net income before tax of a 10% strengthening in the closing exchange rate of
significant currencies to which we have transaction exposure at December 31, 2019. The sensitivity associated with a 10% weakening
of a particular currency would be equal and opposite. This assumes that each currency moves in isolation.
2019
(Increase)/decrease in loss before tax
Translation Exposure Sensitivity
SEK
USD
(in € millions)
(13 )
121
The impact on our equity would be approximately €50 million if the Euro weakened by 10% against all translation exposure
currencies, based on the exposure at December 31, 2019.
Interest Rate Risk
Interest rate risk is the risk that changes in interest rates will have a negative impact on earnings and cash flow.
Our exposure to interest rate risk is related to our interest-bearing assets, primarily our short term debt securities. Fluctuations in
interest rates impact the yield of the investment. The sensitivity analysis considered the historical volatility of short term interest rates
93
and determined that it was reasonably possible that a change of 100 basis points could be experienced in the near term. A hypothetical
100 basis point increase in interest rates would have impacted interest income by €6 million for the year ended December 31, 2019.
Share Price Risk
Share price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in the
fair value of the Company’s ordinary share price. Our exposure to this risk relates primarily to the outstanding warrants.
The impact on the fair value of the warrants with an increase or decrease in the Company’s ordinary share price of 10% would
have resulted in a range of €127 million to €75 million at December 31, 2019.
The impact on the accrual for social costs on outstanding share-based payment awards of an increase or decrease in the
Company’s ordinary share price of 10% would have resulted in a change of €14 million at December 31, 2019.
Investment Risk
We are exposed to investment risk as it relates to changes in the market value of our long term investments, due primarily to
volatility in the share price used to measure the investment and exchange rates. The majority of our long term investments relate to
TME. The impact on the fair value of the Group’s long term investment in TME using reasonably possible alternative assumptions
with an increase or decrease of TME’s share price used to value our equity interest of 10% results in a range of €1,333 million to
€1,629 million at December 31, 2019.
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
94
Item 13. Defaults, Dividend Arrearages and Delinquencies
None
PART II
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None
Item 15. Controls and Procedures
A. Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 20-F.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2019, our
disclosure controls and procedures were effective at the reasonable assurance level.
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating and implementing possible controls and procedures.
B. Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). Based on our
assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2019. The
effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young AB, an
independent registered public accounting firm, as stated in their report that is included herein.
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate
misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not
absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but
cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
C. Attestation report of the registered public accounting firm
Please see the report of Ernst & Young AB, an independent registered public accounting firm, included in “Item 18. Financial
Statements.”
D. Changes in internal control over financial reporting
We previously identified a material weakness in our internal control over financial reporting that related to accounting for rights
holder liabilities. During 2019, we took a number of actions designed to remediate this material weakness, including the hiring of
additional accounting, finance, system engineers, and data analysts, and the implementation of new controls, processes, and
technologies over the calculation, processing, reconciliations, and analysis of right holder liabilities. Based on the testing of the
operating effectiveness of these controls completed to date, as of December 31, 2019, the previously identified material weakness has
been remediated.
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Other than the changes described above, there were no changes to our internal control over financial reporting during the year
ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Thomas Staggs is an “audit committee financial expert,” as defined in Item 16A
of Form 20-F. All audit committee members satisfy the independence requirements set forth under the rules of the NYSE and in Rule
10A-3 under the Exchange Act.
Item 16B. Code of Ethics
We have adopted the Spotify Code of Conduct and Ethics, which applies to all of directors, officers, employees, consultants and
others working on our behalf, and is intended to meet the definition of “code of ethics” under Item 16B of Form 20-F. The Spotify
Code of Conduct and Ethics is available on our website at investors.spotify.com. We intend to disclose on our website any
amendments to or waivers of the Spotify Code of Conduct and Ethics.
Item 16C. Principal Accountant Fees and Services
Ernst & Young AB have acted as our principal accountants for the years ended December 31, 2019 and 2018, respectively. The
following table summarizes the charge for professional fees rendered in those periods:
Audit fees
Audit-related fees
Tax fees
All other fees
Total
2019
2018
(in € thousands)
4,920
425
82
—
5,427
3,900
58
50
92
4,100
“Audit fees” are the aggregate fees earned by the Ernst & Young entities for the audit of our consolidated annual financial
statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and
regulatory filings or engagements. “Audit-related fees” are fees charged by the Ernst & Young entities for assurance and related
services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under
“Audit fees.” This category comprises fees for internal control reviews, agreed-upon procedure engagements and other attestation
services subject to regulatory requirements. “Tax Fees” include fees billed for tax compliance, tax advice and tax planning services.
“All other fees” are the fees for products and services other than those in the above three categories.
The Company’s audit committee approves all auditing services and permitted non-audit services performed for the Company by
its independent auditor in advance of an engagement. All auditing services and permitted non-audit services to be performed for the
Company by its independent auditor must be approved by the Committee in advance to ensure that such engagements do not impair
the independence of our independent registered public accounting firm. All audit-related service fees and tax fees were approved by
the Audit Committee.
Item 16D. Exemptions from the Listing Standards for Audit Committees
None
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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2018, the board of directors approved a share repurchase program of the Company’s ordinary shares up to the
amount of $1.0 billion. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized by the Company’s general
meeting of shareholders on April 21, 2016. The repurchase program will expire on April 21, 2021. The timing and actual number of
shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative
investment opportunities. The repurchase program will be executed consistent with the Company's capital allocation strategy of
prioritizing investment to grow the business over the long term.
2019
January
February
March
April
May
June
July
August
September
October
November
December
Total
Total Number
of
Shares
Purchased
Average Price
Paid per
Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs(1)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
Maximum
Value of Shares
that May Yet
Be Purchased
Under the Plans
or Programs
431,941 $
349,646 $
237,822 $
— $
718,935 $
653,961 $
67,820 $
— $
1,062,805 $
156,226 $
— $
— $
3,679,156 $
126.74
142.00
142.19
—
131.25
141.52
145.17
—
431,941 8,880,788 $ 857,966,803
349,646 8,531,142 $ 808,317,006
237,822 8,293,320 $ 774,500,558
— 8,293,320 $ 774,500,558
718,935 7,574,385 $ 680,140,410
653,961 6,920,424 $ 587,594,128
67,820 6,852,604 $ 577,748,703
— 6,852,604 $ 577,748,703
124.44 1,062,805 5,789,799 $ 445,488,432
156,226 5,633,573 $ 427,748,748
113.55
— 5,633,573 $ 427,748,748
—
— 5,633,573 $ 427,748,748
—
131.81 3,679,156 5,633,573 $ 427,748,748
(1) The column includes all the shares repurchased as a part of the repurchase program announced on November 5, 2018, as further described above. As of
December 31, 2019, we had repurchased a total of approximately $572 million under the share repurchase program.
During the year ended December 31, 2019, the average price paid per share for share repurchases was €117.69, translated into
Euro from U.S. Dollars at the exchange rates as published by Reuters on the respective transaction dates. As of December 31, 2019,
the maximum value of shares that may yet be purchased under the share repurchase program is approximately €382 million, translated
into Euro from U.S. Dollars at the exchange rate as published by Reuters on December 31, 2019.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Our common shares are listed on the NYSE. For purposes of NYSE rules, so long as we are a foreign private issuer, we are
eligible to take advantage of certain exemptions from NYSE corporate governance requirements provided in the NYSE rules. We are
required to disclose the significant ways in which our corporate governance practices differ from those that apply to U.S. companies
under NYSE listing standards. Set forth below is a summary of these differences:
Board Committees—The NYSE rules require domestic companies to have a compensation committee and a nominating and
corporate governance committee composed entirely of independent directors, but as a foreign private issuer we are exempt from these
requirements. We have a remuneration committee comprised of three members, and we believe that two of the committee members
satisfy the “independence” requirements of the NYSE rules. We do not have a nominating and corporate governance committee.
Item 16H. Mine Safety Disclosure
Not applicable.
97
PART III
Item 17. Financial Statements
See Item 18.
Item 18. Financial Statements
The audited Consolidated Financial Statements as required under Item 18 are attached hereto starting on page F-1 of this
Form 20-F.
Item 19. Exhibits
The following are filed as exhibits hereto:
1.1
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Amended and Restated Articles of Association of Spotify Technology S.A. (English Translation), as currently in effect.
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
Form of Terms and Conditions for Warrants 2019 in Spotify Technology S.A.
Form of Terms and Conditions for Warrants 2017 in Spotify Technology S.A. (filed as Exhibit 10.2 to Spotify
Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and incorporated herein by reference).
Form of Terms and Conditions for Warrants 2016 in Spotify Technology S.A. (filed as Exhibit 10.1 to Spotify
Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2020/2025 in Spotify Technology S.A., dated January 1,
2020 (filed as Exhibit 99.1 to Spotify Technology S.A.’s Form S-8 filed on December 30, 2019, File No. 333-235746,
and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2019/2024 in Spotify Technology S.A., dated January 1,
2019 (filed as Exhibit 4.3 to Spotify Technology S.A.’s Annual Report on Form 20-F filed on February 12, 2019, File
No. 001-38438, and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2019/2024 Interim in Spotify Technology S.A., dated
January 1, 2019 (filed as Exhibit 4.4 to Spotify Technology S.A.’s Annual Report on Form 20-F filed on February 12,
2019, File No. 001-38438, and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2018/2023 in Spotify Technology S.A., dated January 1,
2018 (filed as Exhibit 10.3 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300,
and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2017/2022 in Spotify Technology S.A., dated December 2,
2016 (filed as Exhibit 10.4 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300,
and incorporated herein by reference).
Terms and Conditions Governing Employee Stock Options 2016/2021 in Spotify Technology S.A., dated January 1,
2016 (filed as Exhibit 10.5 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300,
and incorporated herein by reference).
4.10
Terms and Conditions Governing Employee Stock Options 2015/2020 in Spotify Technology S.A., dated March 1,
2015 (filed as Exhibit 10.6 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300,
and incorporated herein by reference).
98
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
Terms and Conditions Governing Employee Stock Options 2014/2019 in Spotify Technology S.A., dated March 1,
2014 (filed as Exhibit 10.7 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300,
and incorporated herein by reference).
Terms and Conditions Governing Employee Restricted Stock Units 2020/2025 in Spotify Technology S.A., dated
January 1, 2020 (filed as Exhibit 99.2 to Spotify Technology S.A.’s Form S-8 filed on December 30, 2019, File No.
333-235746, and incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2019/2024 in Spotify Technology S.A., dated January 1, 2019
(filed as Exhibit 4.10 to Spotify Technology S.A.’s Annual Report on Form 20-F filed on February 12, 2019, File No.
001-38438, and incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2018/2023 in Spotify Technology S.A., dated January 1, 2018
(filed as Exhibit 10.8 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2017/2022 in Spotify Technology S.A., dated June 1, 2017
(filed as Exhibit 10.9 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2016/2021 in Spotify Technology S.A., dated June 1, 2016
(filed as Exhibit 10.10 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2015/2020 in Spotify Technology S.A., dated June 1, 2015
(filed as Exhibit 10.11 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units 2014/2019 in Spotify Technology S.A., dated October 1, 2014
(filed as Exhibit 10.12 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
Terms and Conditions Governing Director Stock Options 2019/2023 in Spotify Technology S.A., dated April 19, 2019
(filed as Exhibit 99.1 to Spotify Technology S.A.’s Form S-8 filed on April 29, 2019, File No. 333-231102, and
incorporated herein by reference).
Terms and Conditions Governing Director Restricted Stock Units 2019/2023 in Spotify Technology S.A., dated April
19, 2019 (filed as Exhibit 99.2 to Spotify Technology S.A.’s Form S-8 filed on April 29, 2019, File No. 333-231102,
and incorporated herein by reference).
Terms and Conditions Governing Director Restricted Stock Units 2018/2022 in Spotify Technology S.A., dated
February 28, 2018 (filed as Exhibit 10.13 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No.
333-223300, and incorporated herein by reference).
Terms and Conditions Governing Director Restricted Stock Units 2017/2021 in Spotify Technology S.A., dated June
30, 2017 (filed as Exhibit 10.14 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-
223300, and incorporated herein by reference).
Terms and Conditions Governing Director Restricted Stock Units 2016/2020 in Spotify Technology S.A., dated
September 30, 2016 (filed as Exhibit 10.15 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No.
333-223300, and incorporated herein by reference).
The Echo Nest Corporation 2007 Stock Option and Grant Plan (filed as Exhibit 10.16 to Spotify Technology S.A.’s
Form F-1 filed on February 28, 2018, File No. 333-223300, and incorporated herein by reference).
Form of Incentive Stock Option Agreement under The Echo Nest Corporation 2007 Stock Option and Grant Plan, by
and between The Echo Nest Corporation and optionees (filed as Exhibit 10.17 to Spotify Technology S.A.’s Form F-1
filed on February 28, 2018, File No. 333-223300, and incorporated herein by reference).
99
4.26
4.27
4.28
4.27
Terms and Conditions Governing Stock Options for Consultants 2020/2025 in Spotify Technology S.A. (filed as
Exhibit 99.3 to Spotify Technology S.A.’s Form S-8 filed on December 30, 2019, File No. 333-235746, and
incorporated herein by reference).
Terms and Conditions Governing Restricted Stock Units for Consultants 2020/2025 in Spotify Technology S.A. (filed
as Exhibit 99.4 to Spotify Technology S.A.’s Form S-8 filed on December 30, 2019, File No. 333-235746, and
incorporated herein by reference).
Form of Notice of Conversion of Echo Nest Stock Options, by and between Spotify Technology S.A. and certain
employees (filed as Exhibit 10.18 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-
223300, and incorporated herein by reference).
Form of Restricted Consideration Agreement, by and between Spotify Technology S.A. and restricted sellers (filed as
Exhibit 10.19 to Spotify Technology S.A.’s Form F-1 filed on February 28, 2018, File No. 333-223300, and
incorporated herein by reference).
8.1
List of Subsidiaries.
12.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
12.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
13.1
Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
13.2
Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
15.1
Consent of Ernst & Young AB.
101
Interactive Data Files.
100
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Spotify Technology S.A.
/s/ Paul Vogel
By:
Name: Paul Vogel
Title: Chief Financial Officer
Date: February 12, 2020
***
101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ..................................................................................................
Consolidated statement of operations for the years ended December 31, 2019, 2018, and 2017 ............................................
Consolidated statement of comprehensive (loss)/income for the years ended December 31, 2019, 2018, and 2017................
Consolidated statement of financial position as of December 31, 2019 and 2018 ..................................................................
Consolidated statement of changes in equity/(deficit) for the years ended December 31, 2019, 2018, and 2017 ....................
Consolidated statement of cash flows for the years ended December 31, 2019, 2018, and 2017 ............................................
Page
F-2
F-5
F-6
F-7
F-8
F-9
Notes to consolidated financial statements for the year ended December 31, 2019 ...............................................................
F-10
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Spotify Technology S.A.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Spotify Technology S.A. (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss)/income, changes in
equity/(deficit) and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2019 and 2018 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated February 12, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Cost of revenue and rights holder liabilities
Description of the
Matter
For the year ended December 31, 2019, the Company’s cost of revenue was €5,042 million, trade payables was
€377 million and accrued fees to rights holders was €1,153 million. As explained in Note 2 in the consolidated
financial statements, cost of revenue and rights holder liabilities consist predominantly of royalty and
distribution costs related to content streaming. Royalties are typically calculated using negotiated rates and are
based on revenue, user/usage measures, or a combination of these. Calculation variables include the country,
product, license holder and size of user base.
Auditing cost of revenue and rights holder liabilities was complex due to the nature of the calculation and
variables used to determine royalties. There was significant auditor judgment when assessing management’s
estimates and assumptions in circumstances where rights holders have several years to claim royalties for
musical compositions.
F-2
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s processes to determine cost of revenue and rights holder liabilities. For example, we tested controls
specific to the calculation of royalties, calculation variables, and estimates and assumptions used to determine
royalties claimed by rights holders where rights holders have several years to claim.
We performed the following audit procedures, among others, related to cost of revenue and rights holder
liabilities: recalculated royalty cost amounts, vouched royalty cost variables, tested claim data and performed
sensitivity analyses. Additionally, we developed an independent expectation and evaluated the appropriateness
and consistency of management’s estimates and assumptions used to determine royalties where rights holders
have several years to claim.
/s/ Ernst & Young AB
We have served as the Company’s auditor since 2015.
Stockholm, Sweden
February 12, 2020
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Spotify Technology S.A.
Opinion on Internal Control Over Financial Reporting
We have audited Spotify Technology S.A.’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Spotify Technology S.A. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive (loss)/income, changes in equity/(deficit) and cash flows for each of the three
years in the period ended December 31, 2019, and the related notes and our report dated February 12, 2020 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young AB
Stockholm, Sweden
February 12, 2020
F-4
Consolidated statement of operations
for the year ended December 31
(in € millions, except share and per share data)
Revenue
Cost of revenue
Gross profit
Research and development
Sales and marketing
General and administrative
Operating loss
Finance income
Finance costs
Share in (losses)/earnings of associate
Finance income/(costs) - net
Loss before tax
Income tax expense/(benefit)
Net loss attributable to owners of the parent
Net loss per share attributable to owners of the parent
Basic
Diluted
Weighted-average ordinary shares outstanding
Basic
Diluted
Note
4
9
9
10
11
11
11
11
2019
2018
2017
6,764
5,042
1,722
615
826
354
1,795
(73 )
275
(333 )
—
(58 )
(131 )
55
(186 )
(1.03 )
(1.03 )
5,259
3,906
1,353
493
620
283
1,396
(43 )
455
(584 )
(1 )
(130 )
(173 )
(95 )
(78 )
(0.44 )
(0.51 )
4,090
3,241
849
396
567
264
1,227
(378 )
118
(974 )
1
(855 )
(1,233 )
2
(1,235 )
(8.14 )
(8.14 )
180,960,579 177,154,405 151,668,769
180,960,579 181,210,292 151,668,769
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Consolidated statement of comprehensive (loss)/income
for the year ended December 31
(in € millions)
Note
2019
2018
2017
Net loss attributable to owners of the parent
Other comprehensive (loss)/income:
Items that may be subsequently reclassified to consolidated
statement of operations (net of tax):
Change in net unrealized gain or loss on short term investments
17, 23
Change in net unrealized gain or loss on cash flow hedging instruments 17, 23
Exchange differences on translation of foreign operations
Items not to be subsequently reclassified to consolidated statement
of operations (net of tax):
(Loss)/gain in the fair value of long term investments
Other comprehensive (loss)/income for the year (net of tax)
Total comprehensive (loss)/income for the year attributable
to owners of the parent
17, 23
(186 )
(78 )
(1,235 )
5
(3 )
4
1
(1 )
(8 )
(117 )
(111 )
572
564
(1 )
—
(3 )
(11 )
(15 )
(297 )
486
(1,250 )
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Consolidated statement of financial position
As at December 31
(in € millions)
Assets
Non-current assets
Lease right-of-use assets
Property and equipment
Goodwill
Intangible assets
Long term investments
Restricted cash and other non-current assets
Deferred tax assets
Current assets
Trade and other receivables
Income tax receivable
Short term investments
Cash and cash equivalents
Other current assets
Total assets
Equity and liabilities
Equity
Share capital
Other paid in capital
Treasury shares
Other reserves
Accumulated deficit
Equity attributable to owners of the parent
Non-current liabilities
Lease liabilities
Accrued expenses and other liabilities
Provisions
Deferred tax liabilities
Current liabilities
Trade and other payables
Income tax payable
Deferred revenue
Accrued expenses and other liabilities
Provisions
Derivative liabilities
Total liabilities
Total equity and liabilities
Note
2019
2018
12
13
14
14
23
15
10
16
10
23
23
17
17
17
17
12
21
22
10
20
10
4
21
22
23
489
291
478
58
1,497
69
9
2,891
402
4
692
1,065
68
2,231
5,122
—
4,192
(370 )
924
(2,709 )
2,037
622
20
2
2
646
549
9
319
1,438
13
111
2,439
3,085
5,122
—
197
146
28
1,646
65
8
2,090
400
2
915
891
38
2,246
4,336
—
3,801
(77 )
875
(2,505 )
2,094
—
85
6
2
93
427
7
258
1,076
42
339
2,149
2,242
4,336
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Consolidated statement of changes in equity/(deficit)
(in € millions, except share data)
Balance at January 1, 2017
Loss for the year
Other comprehensive loss
Issuance of shares upon exercise of stock options
and restricted stock units
Issuance of shares related to business
combinations
Issuance of restricted share awards related to
business combination
Issuance of shares upon exchange of Convertible
Notes
Issuance of shares in exchange for long term
investment
Share-based payments
Income tax impact associated with share-based
payments
Balance at December 31, 2017
Loss for the year
Other comprehensive income
Issuance of ordinary shares
Repurchases of ordinary shares
Issuance of shares upon exercise of stock options
and restricted stock units
Restricted stock units withheld for
employee taxes
Issuance of shares upon exchange of Convertible
Notes
Share-based payments
Income tax impact associated with share-based
payments
Balance at December 31, 2018
Cumulative effect adjustment in connection with
the adoption of IFRS 16
Balance at January 1, 2019
Loss for the year
Other comprehensive loss
Repurchases of ordinary shares
Issuance of shares upon exercise of stock options
and restricted stock units
Issuance of shares upon exercise of, or net
settlement of, warrants
Issuance of share-based payments in
conjunction with business combinations
Restricted stock units withheld for
employee taxes
Share-based payments
Income tax impact associated with share-based
payments
Balance at December 31, 2019
Note
Number of
ordinary
shares
outstanding
149,924,000
—
—
Share
capital
—
—
—
Treasury
shares
—
—
—
Other
paid in
capital
830
—
—
Other
reserves
122
—
(15 )
Equity/
(Deficit)
attributable to
owners of the
parent
Accumulated
deficit
(1,192 )
(1,235 )
—
(240 )
(1,235 )
(15 )
17 1,723,080
—
—
29
—
5
5
442,040
—
—
33
—
61,880
—
—
—
—
23 6,554,960
—
—
686
—
23 8,552,440
—
18
10
—
167,258,400
—
—
5,776,920
17 (6,427,271 )
—
—
—
—
—
—
—
—
—
—
910
—
—
67
—
—
— 2,488
—
—
—
—
—
4
—
(77 )
3
177
—
564
—
—
17 4,816,072
—
—
163
—
—
—
—
—
(2 )
—
—
—
—
—
—
—
(2,427 )
(78 )
—
—
—
—
—
—
—
23 9,431,960
—
18
10
—
180,856,081
12
—
180,856,081
—
—
17 (3,679,156 )
—
—
—
—
—
—
—
—
—
— 1,146
—
—
—
88
—
—
(77 ) 3,801
48
875
—
(2,505 )
—
—
(77 ) 3,801
—
—
—
—
—
(433 )
—
875
—
(111 )
—
(18 )
(2,523 )
(186 )
—
—
17 3,557,405
—
140
14
—
23 3,591,627
—
—
377
—
5
—
—
—
—
13
18
—
—
—
—
—
—
—
—
(6 )
127
—
—
—
—
—
29
33
—
686
910
67
3
238
(78 )
564
4
(77 )
163
(2 )
1,146
88
48
2,094
(18 )
2,076
(186 )
(111 )
(433 )
154
377
13
(6 )
127
10
—
184,325,957
—
—
—
—
(370 ) 4,192
26
924
—
(2,709 )
26
2,037
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Consolidated statement of cash flows
for the year ended December 31
(in € millions)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash flows
Depreciation of property and equipment and lease
right-of-use assets
Amortization of intangible assets
Share-based payments expense
Finance income
Finance costs
Income tax expense/(benefit)
Other
Changes in working capital:
Increase in trade receivables and other assets
Increase in trade and other liabilities
Increase in deferred revenue
(Decrease)/Increase in provisions
Interest paid on lease liabilities
Interest received
Income tax (paid)/received
Net cash flows from operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Purchases of short term investments
Sales and maturities of short term investments
Change in restricted cash
Other
Net cash flows used in investing activities
Financing activities
Payments of lease liabilities
Lease incentives received
Repurchases of ordinary shares
Proceeds from exercise of stock options
Proceeds from exercise of warrants
Proceeds from issuance of warrants
Other
Net cash flows (used in)/from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Net foreign exchange gains/(losses) on cash and cash equivalents
Cash and cash equivalents at December 31
Supplemental disclosure of cash flow information
Non-cash investing and financing activities
Issuance of shares for business combinations
Lease right-of-use assets obtained in exchange for lease liabilities
Purchases of property and equipment in trade and other payables
Issuance of shares upon exercise of, or net settlement of, warrants
Issuance of shares upon exchange of Convertible Notes
Issuance of shares in exchange for long term investment
Note
2019
2018
2017
(186 )
(78 )
(1,235 )
12, 13
14
18
9
9
10
5
13
23
23
15
12
12
17
18
23
23
23
23
12
13
23
23
23
71
16
122
(275 )
333
55
13
(27 )
454
59
(35 )
(37 )
14
(4 )
573
(331 )
(135 )
(901 )
1,163
2
(16 )
(218 )
(17 )
15
(438 )
154
74
15
(6 )
(203 )
152
891
22
1,065
—
136
14
303
—
—
21
11
88
(455 )
584
(95 )
8
(61 )
291
38
(17 )
—
18
(9 )
344
(9 )
(125 )
(1,069 )
1,226
(10 )
(35 )
(22 )
—
—
(72 )
163
—
—
1
92
414
477
—
891
—
—
23
—
1,145
—
46
8
65
(118 )
974
2
(4 )
(112 )
447
77
8
—
19
2
179
(49 )
(36 )
(1,386 )
1,080
(34 )
(10 )
(435 )
—
—
—
29
—
9
(4 )
34
(222 )
755
(56 )
477
33
—
5
—
686
910
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Notes to the 2019 consolidated financial statements
1. Corporate information
Spotify Technology S.A. (the “Company” or “parent”) is a public limited company incorporated and domiciled in Luxembourg.
The Company’s registered office is 42-44 avenue de la Gare, L1610, Luxembourg, Grand Duchy of Luxembourg.
The principal activity of the Company and its subsidiaries (the “Group”) is audio streaming. The Group’s premium service
(“Premium Service”) provides users with unlimited online and offline high-quality streaming access to its catalog of music and
podcasts. The Premium Service offers a music listening experience without commercial breaks. The Group’s ad-supported service
(“Ad-Supported Service,” and together with the Premium Service, the “Service”) has no subscription fees and generally provides users
with limited on-demand online access to the catalog of music and unlimited online access to the catalog of podcasts. The Group
depends on securing content licenses from a number of major and minor content owners and other rights holders in order to provide its
service.
2.
Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented, unless otherwise stated.
(a) Basis of preparation
The consolidated financial statements of Spotify Technology S.A. comply with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and have been prepared on a historical cost basis,
except for securities, long term investments, convertible senior notes (“Convertible Notes”), derivative financial instruments, and
contingent consideration, which have been measured at fair value, and lease liabilities, which are measured at present value.
The preparation of the consolidated financial statements in conformity with IFRS requires the application of certain critical
accounting estimates and assumptions. It also requires management to exercise its judgment in the process of applying the accounting
policies. The areas involving a greater degree of judgment or complexity, or areas in which assumptions and estimates are significant
to the consolidated financial statements, are disclosed in Note 3.
The consolidated financial statements provide comparative information in respect of the previous periods. On January 1, 2019,
the Group adopted IFRS 16, Leases, using the modified retrospective approach. See Note 12 for further information on comparability
following the adoption.
(b) Basis of consolidation
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has
rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the
entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date
that control ceases.
(c) Foreign currency translation
Functional and reporting currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary
economic environment in which the entity operates. The consolidated financial statements are presented in Euro, which is the Group’s
reporting currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of
monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in the consolidated
statement of operations within finance income or finance costs.
F-10
Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation
currency are translated into Euro as follows:
• Assets and liabilities are translated at the closing rate at the reporting date;
•
Income and expenses for each statement of operation are translated at average exchange rates; and
• All resulting exchange differences are recognized in other comprehensive income/(loss).
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the
operation and translated at the closing rate at each reporting date.
(d) Revenue recognition
Premium revenue
The Group generates subscription revenue from the sale of the Premium Service in which customers can listen on-demand and
offline. Premium Services are sold directly to end users and through partners who are generally telecommunications companies that
bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. The
Group satisfies its performance obligation, and revenue from these services is recognized, on a straight-line basis over the subscription
period. Typically, Premium Services are paid for monthly in advance.
Premium partner subscription revenue is based on a per-subscriber rate in a negotiated partner agreement. Under these
arrangements, a premium partner may bundle the Premium Service with its existing product offerings or offer the Premium Service as
an add-on. Payment is remitted to the Group through the premium partner. The Group assesses the facts and circumstances, including
whether the partner is acting as a principal or agent, of all partner revenue arrangements and then recognizes revenues either gross or
net. Premium partner services, whether recognized gross or net, have one material performance obligation, that being the delivery of
the Premium Service.
Additionally, the Group bundles the Premium Service with third-party services and products. In bundle arrangements where the
Group has multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative
stand-alone selling price. The Group generally determines stand-alone selling prices based on the prices charged to customers. For
each performance obligation within the bundle, revenue is recognized either on a straight-line basis over the subscription period or at a
point in time when control of the service or product is transferred to the customer.
Ad-Supported revenue
The Group’s advertising revenue is primarily generated through display, audio, and video advertising delivered through
advertising impressions and podcast downloads. The Group enters into arrangements with advertising agencies that purchase
advertising on its platform on behalf of the agencies’ clients. These advertising arrangements are typically sold on a cost-per-thousand
basis and are evidenced by an Insertion Order (“IO”) that specifies the terms of the arrangement such as the type of ad product,
pricing, insertion dates, and number of impressions in a stated period. Revenue is recognized over time based on the number of
impressions delivered. The Group also may offer cash rebates to advertising agencies based on the volume of advertising inventory
purchased. These rebates are estimated based on expected performance and historical data and result in a reduction of revenue
recognized.
Additionally, the Group generates Ad-Supported revenue through arrangements with certain advertising exchange platforms to
distribute advertising inventory for purchase on a cost-per-thousand basis through their automated exchange. Revenue is recognized
over time when impressions are delivered on the platform.
(e) Advertising credits
Advertising credits that are not transferable are issued to certain rights holders and allow them to include advertisement on the
Ad-Supported Service that promote their artists and the Spotify service, such as the availability of a new single or album on Spotify.
These are issued in conjunction with the Group’s royalty arrangements for nil consideration. There is no revenue recognized as the
advertising credits are mutually beneficial to both the rights holders and the Group and do not meet the definition of a revenue contract
under IFRS 15, Revenue from Contracts with Customers.
F-11
(f) Business combinations
Business combinations are accounted for using the acquisition method. Identifiable assets acquired and liabilities assumed are
measured initially at their fair values at the acquisition date. The excess of the consideration transferred, and the acquisition-date fair
value of any previous equity interest in the acquiree, over the fair value of the identifiable net assets acquired is recognized as
goodwill.
In some business combinations, the Group will replace awards held by the employees of the acquiree with its share-based
payment awards, whereby the vesting of the Group’s replacement awards is contingent on continued employment with the Group.
Replacements of share-based payment awards are accounted for as modifications of the acquiree’s existing share-based payment
awards. The value of the replaced acquiree award at acquisition date that relates to pre-combination service is accounted for as part of
the consideration transferred. The excess of the value of the Group’s replacement award over the amount attributed to pre-combination
services is recognized in the consolidated statement of operations, together with a corresponding credit to other reserves in equity,
over the period in which the service conditions are fulfilled.
Acquisition-related costs, other than those incurred for the issuance of debt or equity instruments, are charged to the
consolidated statement of operations as they are incurred.
(g) Cost of revenue
Cost of revenue consists predominantly of royalty and distribution costs related to content streaming. The Group incurs royalty
costs paid to certain music record labels, music publishers, and other rights holders for the right to stream music to the Group’s users.
Royalties are typically calculated using negotiated rates in accordance with license agreements and are based on either subscription
and advertising revenue earned, user/usage measures, or a combination of these. The determination of the amount of the rights
holders’ liability is complex and subject to a number of variables, including the revenue recognized, the type of content streamed and
the country in which it is streamed, the product tier such content is streamed on, identification of the appropriate license holder, size of
user base, ratio of Ad-Supported Users to Premium Subscribers, and any applicable advertising fees and discounts, among other
variables. Some rights holders have allowed the use of their content on the platform while negotiations of the terms and conditions are
ongoing. In such situations, royalties are calculated using estimated rates. In certain jurisdictions, rights holders have several years to
claim royalties for musical compositions and therefore estimates of the royalties payable are made until payments are made. The
Group has certain arrangements whereby royalty costs are paid in advance or are subject to minimum guaranteed amounts. An accrual
is established when actual royalty costs to be incurred during a contractual period are expected to fall short of the minimum
guaranteed amounts. For minimum guarantee arrangements, for which the Group cannot reliably predict the underlying expense, the
Group will expense the minimum guarantee on a straight-line basis over the term of the arrangement. The Group also has certain
royalty arrangements where the Group would have to make additional payments if the royalty rates were below those paid to other
similar licensors (most favored nation clauses). For rights holders with this clause, a comparison is done of royalties incurred to date
plus estimated royalties payable for the remainder of the period to estimates of the royalties payables to other appropriate rights
holders, and the shortfall, if any, is recognized on a straight-line basis over the period of the applicable most favored nation clause. An
accrual and expense is recognized when it is probable that the Group will make additional royalty payments under these terms. The
expense related to these accruals is recognized in cost of revenue. Cost of revenue also includes credit card and payment processing
fees for subscription revenue, customer service, certain employee compensation and benefits, cloud computing, streaming, facility,
and equipment costs, as well as amounts incurred to produce content for the service. Direct costs incurred to acquire or develop
podcasts are recognized as current assets. Cost of revenue includes the consumption of these assets over their useful economic life,
which starts at the release of each episode. In most cases, consumption is on an accelerated basis.
(h) Research and development expenses
Research and development expenses are primarily comprised of costs incurred for development of products related to the
Group’s platform and service, as well as new advertising products and improvements to the Group’s mobile app, desktop, and
streaming services. The costs incurred include related employee compensation and benefits, facility costs, IT costs and consulting
costs.
(i)
Sales and marketing expenses
Sales and marketing expenses are primarily comprised of employee compensation and benefits, public relations, branding,
consulting expenses, customer acquisition costs, advertising, live events and trade shows, amortization of trade name intangible assets,
the cost of working with record labels and artists to promote the availability of new releases on the Group’s platform, and the costs of
providing free trials of the Premium Service. Expenses included in the costs of providing free trials are primarily derived from per user
royalty fees determined in accordance with the rights holder agreements.
F-12
(j) General and administrative expenses
General and administrative expenses are comprised primarily of employee compensation and benefits for functions such as
finance, accounting, analytics, legal, human resources, consulting fees, and other costs including facility and equipment costs,
officers’ liability insurance, director fees, and fair value adjustments on contingent consideration.
(k)
Income tax
The tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statement of operations
except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
(i) Current tax
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any
adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively
enacted at the reporting date.
(ii) Deferred tax
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:
• Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss;
• Temporary differences related to investments in subsidiaries, and associates to the extent that the Group is
able to control the timing of the reversal of the temporary differences, and it is probable that they will not
reverse in the foreseeable future; and
• Taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax assets are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the
extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using
tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax
consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the
carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset only if certain criteria are met.
(iii) Uncertain tax positions
In determining the amount of current and deferred income tax, the Group takes into account the impact of uncertain tax
positions and whether additional taxes, interest or penalties may be due. This assessment relies on estimates and
assumptions and may involve a series of judgments about future events. New information may become available that
causes the Group to change its judgment regarding the adequacy of existing tax liabilities. Such changes to tax liabilities
will impact tax expense in the period that such a determination is made.
(l) Leases
Policy applicable before January 1, 2019
At inception of an arrangement, the Group determines whether the arrangement is or contains a lease. The Group leases certain
items of property and equipment. Leases in which substantially all the risks and rewards of ownership are not transferred to the Group
as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are
charged to the consolidated statement of operations on a straight-line basis over the period of the leases.
Leases of property and equipment where the Group has substantially all the risks and rewards of ownership are classified as
finance leases. Finance leases are capitalized at the lease’s commencement at lower of the fair value of the leased property and the
present value of the minimum lease payments. Each lease payment is allocated between the repayment of the liability and finance
F-13
charges. The corresponding lease obligations, net of finance charges, are included in borrowings. The interest element of the finance
cost is charged to the consolidated statement of operations over the lease period so as to produce a constant periodic rate of interest on
the remaining balance of the liability for each period. The property and equipment acquired under finance leases is depreciated over
the shorter of the useful life of the asset and the lease term.
Policy applicable from January 1, 2019
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether
a contract conveys the right to control the use of an identified asset, the Group assesses whether:
- The contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically
distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution
right, then the asset is not identified;
- The Group has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of
use; and
- The Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are
most relevant to changing how and for what purpose the asset is used.
At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the
contract to each lease component on the basis of their relative stand-alone prices.
As a Lessee
The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to
restore the underlying asset or the site on which it is located, less any lease incentives received prior to the commencement date. Any
costs related to the removal and restoration of leasehold improvements, which meet the definition of property, plant and equipment
under IAS 16 Property Plant and Equipment are assessed under IAS 37 and are not within the scope of IFRS 16.
The lease term is determined based on the non-cancellable period for which the Group has the right to use an underlying asset.
The lease term is adjusted, if applicable, for periods covered by extension and termination options to the extent that the Group is
reasonably certain to exercise them.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the
lease term, which is considered the appropriate useful life of these assets. In addition, the right-of-use asset is reduced by impairment
losses, if any, and adjusted for certain remeasurements of the lease liability, to the extent necessary.
The lease liability is initially measured at the present value of the lease payments, net of lease incentives receivable, that are not
paid at the commencement date, discounted using an incremental borrowing rate if the rate implicit in the lease arrangement is not
readily determinable.
Lease payments included in the measurement of the lease liability comprise fixed payments, including in-substance fixed
payments and variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the
commencement date.
The lease liability is subsequently increased to reflect accretion of interest and reduced for lease payments made. It is
remeasured when there is a change in future lease payments arising from a change in an index or rate, lease term, or if the Group
changes its assessment of whether it will exercise an extension or termination option. When the lease liability is remeasured in this
way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying
amount of the right-of-use asset has been reduced to zero.
The Group leases certain properties under non-cancellable lease agreements that relate to office space. The expected lease terms
are between one and fifteen years.
The Group does not currently act in the capacity of a lessor.
Short-term leases and lease of low-value assets
F-14
The Group has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12
months or less and leases of low-value assets, including certain IT Equipment. The Group recognizes the lease payments associated
with these leases as an expense on a straight-line basis over the lease term.
(m) Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses.
Historical cost includes any expenditure that is directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by the Group.
The Group adds to the carrying amount of an item of property and equipment the cost of replacing parts of such an item if the
replacement part is expected to provide incremental future benefits to the Group. All repairs and maintenance are charged to the
consolidated statement of operations during the period in which they are incurred.
After assets are placed into service, depreciation is charged so as to allocate the cost of assets less their residual value over their
estimated useful lives, using the straight-line method as follows:
•
•
Property and equipment: 3 to 5 years
Leasehold improvements: shorter of the lease term or useful life
The assets’ residual values, useful lives, and depreciation methods are reviewed annually and adjusted prospectively if there is
an indication of a significant change. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s
carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the
consolidated statement of operations when the asset is derecognized.
(n)
Intangible assets
Acquired intangible assets other than goodwill comprise acquired developed technology, trade names, and patents. At initial
recognition, intangible assets acquired in a business combination are recognized at their fair value as of the date of acquisition.
Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses.
The Group recognizes internal development costs as intangible assets only when the following criteria are met: the technical
feasibility of completing the intangible asset exists, there is an intent to complete and an ability to use or sell the intangible asset, the
intangible asset will generate probable future economic benefits, there are adequate resources available to complete the development
and to use or sell the intangible asset, and there is the ability to reliably measure the expenditure attributable to the intangible asset
during its development.
Intangible assets with finite lives are typically amortized on a straight-line basis over their estimated useful lives, typically 3 to 5
years for technology and 3 to 8 years for trade names and trademarks and are assessed for impairment whenever there is an indication
that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at
least annually. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the
asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting
estimates. The amortization of intangible assets is recognized in the consolidated statement of operations in the expense category
consistent with the function of the intangible assets.
(o) Goodwill
Goodwill is the excess of the consideration transferred over the net identifiable assets acquired and liabilities assumed. Goodwill
is tested annually for impairment, or more regularly if certain indicators are present. For the purpose of impairment testing, goodwill
acquired in a business combination is allocated to each of the operating segments that are expected to benefit from the synergies of the
combination and represent the lowest level at which the goodwill is monitored for internal management purposes. Goodwill is
evaluated for impairment by comparing the recoverable amount of the Group’s operating segments to the carrying amount of the
operating segments to which the goodwill relates. If the recoverable amount is less than the carrying amount an impairment charge is
determined.
F-15
The recoverable amount of the operating segments is based on fair value less costs of disposal. The Group determines the fair
value of the operating segments using a combination of a discounted cash flow analysis and a market-based approach.
The Group believes reasonable estimates and judgments have been used in assessing the recoverable amounts.
(p)
Impairment of non-financial assets
Assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized in the consolidated statement
of operations consistent with the function of the assets, for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of
assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows. Prior impairments
of non-financial assets (other than goodwill) are reviewed for possible reversal each reporting period.
(q) Financial instruments
(i) Financial assets
Initial recognition and measurement
The Group’s financial assets are comprised of cash and cash equivalents, short term investments, trade and other receivables,
derivative assets, long term investments, restricted cash, and other non-current assets. All financial assets are recognized initially
at fair value plus transaction costs that are attributable to the acquisition of the financial asset. Purchases and sales of financial
assets are recognized on the settlement date; the date that the Group receives or delivers the asset. Receivables are non-
derivative financial assets, other than short term and long term investments described below, with fixed or determinable
payments that are not quoted in an active market. They are included in current assets except for those with maturities greater
than 12 months after the reporting period.
For more information on receivables, refer to Note 16.
Short term investments are primarily comprised of debt instruments carried at fair value through other comprehensive income.
The securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in
response to needs for liquidity or in response to changes in the market conditions (therefore not recognized at amortized cost).
These meet both the hold to collect and sell business model and solely payments of principal and interest contractual cash flows
tests under IFRS 9 Financial Instruments. These are classified as current assets.
Long term investments are comprised of equity instruments carried at fair value through other comprehensive income based on
the irrevocable election made at initial recognition under IFRS 9 Financial Instruments. The securities within this category are
intended to be held for an indefinite period of time and for strategic investment purposes. These are neither held for trading nor
contingent consideration recognized by an acquirer in a business combination. These are classified as non-current assets. The
Group’s primary long term investment is its equity investment in Tencent Music Entertainment Group (“TME”).
Subsequent measurement
After initial measurement, short term investments are measured at fair value with unrealized gains or losses recognized in other
comprehensive income and credited in other reserves within equity until the investment is derecognized, at which time, the
cumulative gain or loss is recognized in finance income/costs, or the investment is determined to be impaired, when the
cumulative loss is reclassified from the short term investments reserve to the consolidated statement of operations in finance
costs. Interest earned whilst holding the short term investments is reported as interest income using the effective interest method.
Interest income and foreign exchange revaluation are recognized in the statement of operations in the same manner as all other
financial assets.
After initial measurement, long term investments are measured at fair value with unrealized gains or losses, including any
related foreign exchange impacts, recognized in other comprehensive income and credited in other reserves within equity
without recognizing fair value changes to profit and loss upon derecognition. Dividends received are recognized in the
consolidated statement of operations in finance income.
Derecognition
Financial assets are derecognized when the rights to receive cash flows from the asset have expired.
F-16
Impairment of financial assets
The Group assesses at each reporting date whether there is any evidence that a financial asset or a group of financial assets is
impaired, primarily its trade receivables and short term investments. The Group assesses impairment for its financial assets,
excluding trade receivables, using the general expected credit losses model. Under this model, the Group calculates the
allowance for credit losses by considering on a discounted basis, the cash shortfalls it would incur in various default scenarios
for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring. The allowance on the
financial asset is the sum of these probability-weighted outcomes.
For the Group’s short term investments, the Group applies the low credit risk simplification as it does not believe there to be any
credit risk related to these assets given the credit quality ratings required by the Group’s investment policy. At every reporting
date, the Group evaluates whether a particular debt instrument is considered to have low credit risk using all supportable
information.
The Group’s long term investments are not assessed for impairment due to the irrevocable election made under IFRS 9
Financial Instruments as stated above.
The Group uses the simplified approach for measuring impairment for its trade receivables as these financial assets do not have
a significant financing component as defined under IFRS 15, Revenue from Contracts with Customers. Therefore, the Group
does not determine if the credit risk for these instruments has increased significantly since initial recognition. Instead, a loss
allowance is recognized based on lifetime expected credit losses at each reporting date. Impairment losses and subsequent
reversals are recognized in profit or loss and is the amount required to adjust the loss allowance at the reporting date to the
amount that is required to be recognized based on the aforementioned policy. The Group has established a provision matrix that
is based on its historical credit loss experiences, adjusted for forward-looking factors specific to the debtors and the economic
environment. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is
recognized in the consolidated statement of operations.
(ii) Financial liabilities
Initial recognition and measurement
The Group’s financial liabilities are comprised of trade and other payables, lease liabilities, derivative liabilities (warrants and
instruments designated for hedging), and other liabilities, including contingent consideration, Prior to April 3, 2018, financial
liabilities also included Convertible Notes and contingent options. All financial liabilities except lease liabilities are recognized
initially at fair value and, in the case of Convertible Notes, net of directly attributable transaction costs.
The Group accounted for the Convertible Notes in accordance with IAS 39, Financial Instruments: Recognition and
Measurement, ‘fair value option’ and IFRS 9 Financial Instruments as fair value through profit and loss. Under these
approaches, the Convertible Notes were accounted for in their entirety at fair value, with any change in fair value after initial
measurement being recorded in the consolidated statement of operations and the transaction costs were effectively immediately
expensed.
The Group accounts for the warrants as a financial liability measured at fair value through profit or loss. In accordance with IAS
32, Financial Instruments: Presentation, the Group determined that the warrants were precluded from equity classification,
because while they contain no contractual obligation to deliver cash or other financial instruments to the holders other than the
Company’s own shares, the exercise prices of the warrants are in US$ and not the Company’s functional currency and the
Group allows for net settlement, which enables settlement for a variable number of the Company’s ordinary shares. Therefore,
the warrants do not meet the requirements that they be settled by the issuer exchanging a fixed amount of cash or another
financial asset for a fixed number of its own equity instruments.
The group accounts for contingent consideration as a financial liability measured at fair value through profit or loss. The fair
value of the contingent consideration is presented as a component of accrued expenses and other liabilities on the consolidated
statement of financial position. Changes to the fair value of the contingent consideration are recorded as operating expenses
within general and administrative expenses.
F-17
Subsequent measurements
Other financial liabilities
After initial recognition, payables are subsequently measured at amortized cost using the effective interest method. The effective
interest method amortization is included in finance costs in the consolidated statement of operations. Gains and losses are
recognized in the consolidated statement of operations when the liabilities are derecognized.
Payables are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at
least 12 months after the reporting date.
Financial liabilities at fair value through profit or loss
After initial recognition, financial liabilities at fair value through the profit or loss are subsequently re-measured at fair value at
the end of each reporting period with changes in fair value recognized in finance income or finance costs in the consolidated
statement of operations.
Derecognition
Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled, or expires.
(iii) Fair value measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Group would receive to
sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the
absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market
observable data and, in the absence of such data, internal information that is consistent with what market participants would use
in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Group’s market assumptions. All assets and liabilities for which fair
value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, are
described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
• Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
• Level 2: other techniques for which inputs are based on quoted prices for identical or similar instruments in
markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation
techniques for which all significant assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the asset or liability;
• Level 3: techniques which use inputs that have a significant effect on the recognized fair value that require the
Group to use its own assumptions about market participant assumptions.
The Group maintains policies and procedures to determine the fair value of financial assets and liabilities using what it considers
to be the most relevant and reliable market participant data available. It is the Group’s policy to maximize the use of observable
inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Group
utilizes unobservable inputs based upon the assumptions market participants would use in valuing the asset or liability. In
determining the fair value of financial assets and liabilities employing Level 3 inputs, the Group considers such factors as the
current interest rate, equity market, currency and credit environments, expected future cash flows, the probability of certain
future events occurring, and other published data. The Group performs a variety of procedures to assess the reasonableness of its
fair value determinations including the use of third parties.
(iv) Foreign exchange forward contracts
The Group designates certain foreign exchange forward contracts as cash flow hedges when all the requirements in IFRS 9
Financial Instruments are met. The Group recognizes the activities from these cash flow hedges as either assets or liabilities on
the statement of financial position and are measured at fair value at each reporting period. Assets and liabilities are offset and
the net amount is presented in the statement of financial position when the Group has a legally enforceable right to set off the
recognized amounts and intends to settle on a net basis. The asset and liability positions of the foreign exchange forward
contracts are included in other current assets and derivative liabilities on the consolidated statement of financial position,
respectively. The Group reflects the gain or loss on the effective portion of a cash flow hedge as a component of equity and
subsequently reclassifies cumulative gains and losses to revenues or cost of revenues, depending on the risk hedged, when the
F-18
hedged transactions are settled. If the hedged transactions become probable of not occurring, the corresponding amounts in other
reserves are immediately reclassified to finance income or costs. Foreign exchange forward contracts that do not meet the
requirements in IFRS 9 Financial Instruments to be designated as a cash flow hedge, are classified as derivative instruments not
designated for hedging. The Group measures these instruments at fair value with changes in fair value recognized in finance
income or costs. Refer to Note 23.
(r) Cash and cash equivalents and restricted cash
Cash and cash equivalents comprise cash on deposit at banks and on hand and highly liquid investments with maturities of three
months or less at the date of purchase that are not subject to restrictions. Cash deposits that have restrictions governing their use are
classified as restricted cash, current or non-current, based on the remaining length of the restriction.
(s)
Short term investments
The Group invests in a variety of instruments, such as commercial paper, corporate debt securities, collateralized reverse
purchase agreements, and government and agency debt securities. Part of these investments are held in short duration fixed income
portfolios. The average duration of these instruments is less than two years. All investments are governed by an investment policy and
are held in highly-rated counterparties. Separate credit limits are assigned to each counterparty in order to minimize risk concentration.
These investments are classified as debt instruments and are carried at fair value with the unrealized gains and losses reported as
a component of equity. Management determines the appropriate classification of investments at the time of purchase and re-evaluates
whether the investments pass both the hold to collect and sell and solely payments of principal and interest tests. The short term
investments with maturities greater than twelve months are classified as short term when they are intended for use in current
operations. The cost basis for investments sold is based upon the specific identification method.
(t) Long term investments
Long term investments consist of non-controlling equity interests in public and private companies where the Group does not
exercise significant influence. The investments are classified as equity instruments carried at fair value through other comprehensive
income. Refer to Note 23.
(u) Share capital
Ordinary shares are classified as equity.
Equity instruments are initially measured at the fair value of the cash or other resources received or receivable, net of the direct
costs of issuing the equity instruments.
In 2018, the Group began repurchasing its ordinary shares. The cost of treasury shares repurchased is shown as a reduction to
equity, within treasury shares, on the statement of financial position. When treasury shares are sold, reissued, or retired, the amount
received is reflected as an increase to equity based on a weighted average cost, with any surplus or deficit recorded within Other paid
in capital.
(v) Share-based payments
Employees of the Group receive remuneration in the form of share-based payment transactions, whereby employees render
services in consideration for equity instruments.
The cost of equity-settled transactions with employees is determined by the fair value at the date of grant using an appropriate
valuation model. The cost is recognized in the consolidated statement of operations, together with a corresponding credit to other
reserves in equity, over the period in which the performance and service conditions are fulfilled.
The cumulative expense recognized for equity-settled transactions with employees at each reporting date until the vesting date
reflects the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense for a period represents the
movement in cumulative expense recognized at the beginning and end of that period, and is recognized in employee share-based
payments. When the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if
the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for modifications that
F-19
increase the total fair value of the share-based payment transaction or are otherwise beneficial to the grantee as measured at the date of
modification. There were no material modifications to any share-based payment transactions during 2019, 2018, and 2017.
Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation. Social costs
in connection with granted options and restricted stock units are accrued over the vesting period based on the intrinsic value of the
award that has been earned at the end of each reporting period. The amount of the liability reflects the amortization of the award and
the impact of expected forfeitures. The social cost rate at which the accrual is made generally follows the tax domicile within which
other compensation charges for a grantee are recognized.
The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 18.
In many jurisdictions, tax authorities levy taxes on share-based payment transactions with employees that give rise to a personal
tax liability for the employee. In some cases, the Group is required to withhold the tax due and to settle it with the tax authority on
behalf of the employees. To fulfil this obligation, the terms of the Group’s restricted stock unit arrangements permit the Group to
withhold the number of shares that are equal to the monetary value of the employee’s tax obligation from the total number of shares
that otherwise would have been issued to the employee upon vesting of the restricted stock unit. The monetary value of the
employee’s tax obligation is recorded as a deduction from Other reserves for the shares withheld.
(w) Employee benefits
The Group provides defined contribution plans to its employees. The Group pays contributions to publicly and privately
administered pension insurance plans on a mandatory or contractual basis. The Group has no further payment obligations once the
contributions have been paid. Contributions to defined contribution plans are expensed when employees provide services. The
Group’s post-employment schemes do not include any defined benefit plans.
(x) Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation.
New and amended standards and interpretations adopted by the Group
On January 1, 2019, the Group adopted IFRS 16, Leases, using the modified retrospective approach and recognized the
cumulative effect of initially applying the standard as an adjustment to accumulated deficit. The group elected the available practical
expedients on adoption. The most significant change is related to the recognition of right-of-use assets and lease liabilities on the
consolidated statement of financial position for real estate operating leases, along with the net impact on transition recorded to
accumulated deficit, and deferred tax assets, potentially unrecognized, resulting from the aforementioned changes. The Group’s
statement of operations after adoption reflects additional depreciation expense due to the right-of use assets and an increase in finance
costs for effective interest expense on its lease liabilities which are partially offset by a reduction in rental expenses. Refer to above
and Note 12 for further information.
On January 1, 2019, the Group adopted International Financial Reporting Interpretations Committee (“IFRIC”) Interpretation
23, Uncertainty over Income Tax Treatments. The Group has concluded that its current accounting policies for estimating uncertain
tax positions is in line with IFRIC Interpretation 23. The impact on adoption did not have any material impact on the consolidated
financial statements.
New standards and interpretations issued not yet effective
There are no IFRS or IFRIC interpretations that are not effective that are expected to have a material impact.
3. Critical accounting estimates and judgments
The preparation of the consolidated financial statements requires management to make judgments, estimates, and assumptions
that affect the reported amounts of revenues, expenses, assets, liabilities, and equity in the consolidated financial statements and the
accompanying disclosures. Estimates and judgments are continually evaluated and are based on historical experience and other
factors, including expectations of future events.
F-20
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
The areas where assumptions and estimates are significant to the consolidated financial statements are:
(i)
The Group measures the cost of equity-settled transactions with employees and non-employees by reference to the fair
value of the equity instruments at the date at which they are granted. Prior to April 3, 2018, the fair value was estimated
using a model, which required the determination of the appropriate inputs, specifically ordinary share price. Subsequent to
the Group’s direct listing, ordinary share price is no longer based on significant assumptions and estimates. The
assumptions and models used for estimating the fair value of share-based payment transactions are disclosed in Note 18.
(ii) Prior to April 3, 2018, the fair value of the Group’s Convertible Notes, warrants, contingent options, and long term
investments were estimated using valuation techniques using inputs based on management’s judgment and conditions that
existed at each reporting date. On April 3, 2018, the Group derecognized the Convertible Notes and contingent options.
Subsequent to December 12, 2018, the fair value of the Group’s investment in TME is based on inputs within Level 1 of
the fair value hierarchy as disclosed in Note 2. The assumptions and models used for estimating the fair value of the
instruments are disclosed in Note 23.
(iii) The Group has fiscal loss carry-forwards. At period end, the Group investigates the possibility of recognizing deferred tax
assets with regard to the loss carry-forwards. Deferred tax assets related to loss carry-forwards are recognized only in
those cases where it is probable and there is convincing evidence that the Group will generate future taxable income to
which the loss carry-forward can be utilized. See Note 10.
(iv)
In accordance with the accounting policy described in Note 2, the Group annually performs an impairment test regarding
goodwill. The assumptions used for estimating fair value and assessing available headroom based on conditions that
existed at the testing date are disclosed in Note 14.
(v) The Group’s agreements and arrangements with rights holders for the content used on its platform are complex. Some
rights holders have allowed the use of their content on the platform while negotiations of the terms and conditions are
ongoing. In certain jurisdictions, rights holders have several years to claim royalties for musical composition and therefore
estimates of the royalty accruals are based on available information and historical trends. The determination of royalty
accruals involves significant judgements, assumptions, and estimates of the amounts to be paid. See Note 21.
(vi) Management makes significant assumptions and estimates when determining the amounts to record for provision for legal
contingencies. See Note 22.
(vii) In business combinations, the Group allocates the fair value of purchase consideration to the tangible assets acquired,
liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of
purchase consideration over the fair values of these identified assets and liabilities is recorded as goodwill. Such
valuations require management to make significant estimates, assumptions, and judgments, especially with respect to
intangible assets and contingent consideration. See Note 5.
(viii) As most of the Group's lease agreements do not provide an implicit rate of return, the Group uses its incremental
borrowing rate based on the information available at the lease commencement date to determine the present value of lease
payments. For the Group’s lease agreements that existed prior to the adoption date, the Group determined its incremental
borrowing rate as of January 1, 2019. The Group's incremental borrowing rate is determined based on estimates and
judgments, including the credit rating of the Group's leasing entities and a credit spread. See Note 2 and 12.
4. Revenue recognition
Revenue from contracts with customers
(i) Disaggregated revenue
The Group discloses revenue by reportable segment and geographic area in Note 6.
(ii) Performance obligations
The Group discloses its policies for how it identifies, satisfies, and recognizes its performance obligations associated with its
contracts with customers in Note 2.
(iii)
Contract liabilities
F-21
The Group’s contract liabilities from contracts with customers consist only of deferred revenue. Deferred revenue is mainly
comprised of subscription fees collected for services not yet performed and therefore the revenue has not been recognized. Revenue is
recognized over time as the services are performed. As of December 31, 2019 and 2018, the Group had deferred revenue of €319
million and €258 million, respectively. The increase in deferred revenue in 2019 is a result of an increase in the number of Premium
Subscribers. This balance will be recognized as revenue as the services are performed, which is generally expected to occur over a
period up to a year.
Revenue recognized that was included in the contract liability balance at the beginning of the years ended December 31, 2019,
2018, and 2017 is €248 million, €210 million, and €149 million respectively.
5.
Business combinations
The following sections describe the Group’s material acquisitions during the years ended December 31, 2019 and 2018.
Anchor FM Inc.
On February 14, 2019, the Group acquired Anchor FM Inc. (“Anchor”), a software company that enables users to create and
distribute their own podcasts. The acquisition allows the Group to leverage Anchor’s creator-focused platform to accelerate the
Group’s path to becoming the world’s leading audio platform.
The total purchase consideration was €136 million, which consisted of €125 million in cash and €11 million related to the fair
value of partially vested share-based payment awards replaced. The replacement of Anchor’s share-based payment awards with share-
based payments awards of the Company has been measured in accordance with IFRS 2, Share-based Payment, at the acquisition date.
The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €126 million has been recorded
to goodwill, €9 million to acquired intangible assets, €2 million to deferred tax liabilities, €4 million to cash and cash equivalents, and
€1 million to other liabilities. The Group incurred €1 million in acquisition related costs, which were recognized as general and
administrative expenses.
The goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify
for separate recognition, including expected future synergies and technical expertise of the acquired workforce. None of the goodwill
recognized is expected to be deductible for tax purposes. The goodwill was included in the Ad-Supported segment.
The intangible assets acquired primarily relate to existing technology and have a useful life of 3 years. The Group valued the
existing technology using the replacement cost method under the cost approach.
Included in the arrangement are €20 million of equity instruments granted to certain employees that have vesting conditions
contingent on continued employment and are accounted for as equity-settled share-based payment transactions. Of the value of these
instruments, €11 million is included in purchase consideration as discussed above, with the remaining amount of up to €9 million to be
recorded as post-combination expense over service periods of up to four years, if not forfeited by the employees.
Gimlet Media Inc.
On February 15, 2019, the Group acquired Gimlet Media Inc. (“Gimlet”), an independent producer of podcast content. The
acquisition allows the Group to leverage Gimlet’s in-depth knowledge of original content production and podcast monetization.
The total purchase consideration was €172 million, which consisted of €170 million in cash and €2 million related to the fair
value of partially vested share-based payment awards replaced. The replacement of Gimlet’s share-based payment awards with share-
based payments awards of the Company has been measured in accordance with IFRS 2, Share-based Payment, at the acquisition date.
The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €148 million has been
recorded to goodwill, €15 million to acquired intangible assets, €5 million to deferred tax liabilities, €3 million to cash and cash
equivalents, €3 million to content assets and €8 million to other tangible net assets. The Group incurred €3 million in acquisition
related costs, which were recognized as general and administrative expenses.
The goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify
for separate recognition, including an increase in content development capabilities, an experienced workforce, and expected future
synergies. None of the goodwill recognized is expected to be deductible for tax purposes. The goodwill was included in the Ad-
Supported segment.
F-22
The intangible assets and the content assets were valued by the Group using the relief from royalty method and the discounted
cash flow method, respectively, both under the income approach. The relief from royalty method is based on the application of a
royalty rate to forecasted revenue under the trade names. The assets have useful lives ranging from 2 to 8 years.
Included in the arrangement are payments that are contingent on continued employment. The payments are recognized as
remuneration for post-combination services and are automatically forfeited if employment terminates. A total of up to €40 million of
post-combination cash pay-outs will be recorded as compensation expense over a service period of up to four years.
Cutler Media, LLC
On April 1, 2019, the Group acquired Cutler Media, LLC (“Parcast”), a premier storytelling podcast studio. The acquisition
allows the Group to bolster its content portfolio and utilize Parcast’s writers, producers, and researchers in the production of high-
quality content.
The total purchase consideration was €49 million, which consisted of €36 million in cash and €13 million related to the
estimated fair value of contingent consideration. The maximum potential contingent consideration is €43 million over the next three
years, which is dependent on certain user engagement targets. The fair value of the contingent consideration is presented as a
component of accrued expenses and other liabilities on the consolidated statement of financial position. The contingent consideration
was valued by the Group using a simulation of user engagement outcomes under the income approach. Changes to the fair value of the
contingent consideration will be recorded as operating expenses within general and administrative expenses.
The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €46 million has been
recorded to goodwill, €2 million to acquired intangible assets, and €1 million to content assets. The Group incurred €1 million in
acquisition related costs, which were recognized as general and administrative expenses.
The goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify
for separate recognition, including an increase in content development capabilities, an experienced workforce, and expected future
synergies. The goodwill recognized is expected to be deductible for tax purposes. The goodwill was included in the Ad-Supported
segment.
The intangibles assets and the content assets were valued by the Group using the relief from royalty method and the discounted
cash flow method, respectively, both under the income approach. The relief from royalty method is based on the application of a
royalty rate to forecasted revenue under the trade names. The assets have useful lives ranging from 2 to 6 years.
Included in the arrangement are payments that are contingent on continued employment. The payments are recognized as
remuneration for post-combination services and are automatically forfeited if employment terminates. A total of up to €10 million of
post-combination cash pay-outs will be recorded as compensation expense over a service period of up to four years.
Revenues and operating losses of acquired businesses for the year ended December 31, 2019 were not significant, individually
or in the aggregate, to the Group’s consolidated statement of operations.
6.
Segment information
The Group has two reportable segments: Premium and Ad-Supported. The Premium Service is a paid service in which
customers can listen on-demand and offline. Revenue is generated through subscription fees. The Ad-Supported Service is free to the
user. Revenue is generated primarily through the sale of advertising. Royalty costs are primarily recorded in each segment based on
specific rates for each segment agreed to with rights holders. The remaining royalties that are not specifically associated to either of
the segments are allocated based on user activity or the revenue recognized in each segment. The operations of businesses acquired
during the year ended December 31, 2019 are included in the Ad-Supported segment. No operating segments have been aggregated to
form the reportable segments.
F-23
Key financial performance measures of the segments including revenue, cost of revenue, and gross profit are as follows:
Premium
Revenue
Cost of revenue
Gross profit
Ad-Supported
Revenue
Cost of revenue
Gross (loss)/profit
Consolidated
Revenue
Cost of revenue
Gross profit
2019
2018
(in € millions)
2017
6,086
4,465
1,621
4,717
3,461
1,256
678
577
101
542
445
97
6,764
5,042
1,722
5,259
3,906
1,353
3,674
2,868
806
416
373
43
4,090
3,241
849
Reconciliation of gross profit
Operating expenses, finance income, and finance costs are not allocated to individual segments as these are managed on an
overall group basis. The reconciliation between reportable segment gross profit to the Group’s loss before tax is as follows:
Segment gross profit
Research and development
Sales and marketing
General and administrative
Finance income
Finance costs
Share in (losses)/earnings of associate
Loss before tax
Revenue by country
United States
United Kingdom
Luxembourg
Other countries
2019
2018
(in € millions)
2017
1,722
(615 )
(826 )
(354 )
275
(333 )
—
(131 )
1,353
(493 )
(620 )
(283 )
455
(584 )
(1 )
(173 )
849
(396 )
(567 )
(264 )
118
(974 )
1
(1,233 )
2019
2018
(in € millions)
2017
2,542
727
4
3,491
6,764
1,973
576
3
2,707
5,259
1,577
444
3
2,066
4,090
F-24
Premium revenue is attributed to a country based on where the membership originates. Ad-Supported revenue is attributed to a
country based on where the advertising campaign is viewed. There are no countries that individually make up greater than 10% of
total revenue included in “Other countries.”
Non-current assets by country
Non-current assets for this purpose consists of property and equipment and lease right-of-use assets.
Sweden
United States
United Kingdom
Other countries
2019
2018
(in € millions)
2017
154
525
79
22
780
29
142
19
7
197
32
28
6
7
73
As of December 31, 2019, 2018, and 2017, the Group held no property and equipment in Luxembourg.
7.
Personnel expenses
Wages and salaries
Social costs
Contributions to retirement plans
Share-based payments
Other employee benefits
Average full-time employees
8. Auditor remuneration
Auditor fees
9.
Finance income and costs
Finance income
Fair value movements on derivative liabilities (Note 23)
Interest income
Other financial income
Foreign exchange gains
Total
Finance costs
Fair value movements on derivative liabilities (Note 23)
Fair value movements on Convertible Notes (Note 23)
Interest expense on lease liabilities
Interest, bank fees and other costs
Foreign exchange losses
Total
F-25
2019
2018
(in € millions, except
employee data)
2017
541
111
26
122
88
888
4,405
409
90
20
88
60
667
3,651
348
136
17
65
48
614
2,960
2019
2018
(in € millions)
2017
5
4
5
2019
2018
(in € millions)
2017
182
31
1
61
275
(235 )
—
(38 )
(5 )
(55 )
(333 )
376
25
11
43
455
(360 )
(201 )
—
(6 )
(17 )
(584 )
97
19
2
—
118
(303 )
(524 )
—
(4 )
(143 )
(974 )
10.
Income tax
Current tax expense
Current year
Changes in estimates in respect to prior year
Deferred tax expense/(benefit)
Temporary differences
Change in recognition of deferred tax
Change in tax rates
Income tax expense/(benefit)
2019
2018
(in € millions)
2017
45
(1 )
44
27
(17 )
1
11
55
41
—
41
(123 )
(14 )
1
(136 )
(95 )
6
1
7
(5 )
—
—
(5 )
2
For the years ended December 31, 2019, 2018, and 2017, the Group recorded an income tax (benefit)/expense of €(31) million,
€147 million, and €0 million, respectively, in other comprehensive (loss)/income related to components of other comprehensive
(loss)/income.
The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many
factors, including interpretations of tax law and prior experience.
In 2019, the Group did not recognize current income tax expense for uncertain tax positions and have cumulatively recorded
liabilities of €1 million for uncertain tax positions at December 31, 2019, of which none is reasonably expected to be resolved within
twelve months.
A reconciliation between the reported tax expense for the year, and the theoretical tax expense that would arise when applying
the statutory tax rate in Luxembourg of 24.94%, 26.01%, and 27.08%, and on the consolidated loss before taxes for the years ended
December 31, 2019, 2018, and 2017, respectively, is shown in the table below:
Loss before tax
Tax using the Luxembourg tax rate
Effect of tax rates in foreign jurisdictions
Permanent differences
Change in unrecognized deferred taxes
Deferred tax on foreign exchange differences
Other
Income tax expense/(benefit)
2019
2018
(in € millions)
2017
(131 )
(33 )
2
58
29
1
(2 )
55
(173 )
(45 )
(11 )
(7 )
(43 )
8
3
(95 )
(1,233 )
(334 )
(10 )
15
329
—
2
2
In 2019 and 2018, the Group recognized deferred tax expense of €0 million and €8 million, respectively, as a result of foreign
exchange differences on its investment in TME. The Group will be subject to deferred tax in future periods as a result of foreign
exchange movements between USD, EUR, and SEK, primarily related to its investment in TME.
The major components of deferred tax assets and liabilities are comprised of the following:
Intangible assets
Share-based compensation
Tax losses carried forward
Property and equipment
Unrealized gains
Other
Net tax
F-26
2019
2018
(in € millions)
(42 )
14
78
79
(126 )
4
7
(1 )
6
147
5
(154 )
3
6
A reconciliation of net deferred tax is shown in the table below:
At January 1
Movement recognized in consolidated statement of
operations
Movement recognized in consolidated statement of
changes in equity and other comprehensive income
Movement due to acquisition
At December 31
2019
2018
(in € millions)
2017
6
6
(11 )
136
18
(6 )
7
(136 )
—
6
3
5
2
(4 )
6
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against
current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Reconciliation to consolidated statement of financial position
2019
2018
Deferred tax assets
Deferred tax liabilities
(in € millions)
9
2
8
2
Deferred tax assets have not been recognized in respect of the following items, because it is not probable that future taxable
profit will be available against which the Group can use the benefits.
Intangible assets
Share-based compensation
Tax losses carried forward
Unrealized losses
Other
2019
2018
(in € millions)
77
58
192
3
49
379
72
34
148
2
20
276
At December 31, 2019, no deferred tax liability had been recognized on investments in subsidiaries. The Company has
concluded it has the ability and intention to control the timing of any distribution from its subsidiaries and will only do so in a tax
advantageous manner. It is not practicable to calculate the unrecognized deferred tax liability on investments in subsidiaries.
Tax loss carry-forwards as at December 31, 2019 were expected to expire as follows:
Expected expiry
Tax loss carry-forwards
Research and development credit carryforward
Foreign tax credits
2020-2029
2030 and
onwards
Unlimited
Total
—
—
4
(in € millions)
509
16
—
996
—
—
1,505
16
4
The Group has significant net operating loss carry-forwards in the United States and Sweden. In certain jurisdictions, if the
Group is unable to earn sufficient income or profits to utilize such carry-forwards before they expire, they will no longer be available
to offset future income or profits.
In Sweden, utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation if there is an
ownership change within the meaning of Chapter 40, paragraphs 10-14, of the Swedish Income Tax Act (the “Swedish Income Tax
Act”). In general, an ownership change, as defined by the Swedish Income Tax Act results from a transaction or series of transactions
over a five-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain
categories or individuals, businesses or organizations.
F-27
In addition, in the United States, utilization of these net operating loss carry-forwards may be subject to a substantial annual
limitation if there is an ownership change within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). In
general, an ownership change, as defined by Section 382, results from a transaction or series of transactions over a three-year period
resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.
Since the Group formation, the Group has raised capital through the issuance of capital stock on several occasions, and the Group may
continue to do so, which, combined with current or future shareholders’ disposition of ordinary shares, may have resulted in such an
ownership change. Such an ownership change may limit the amount of net operating loss carry-forwards that can be utilized to offset
future taxable income.
The Group’s most significant tax jurisdictions are Sweden and the U.S. (both at the federal level and in various state
jurisdictions). Because of its tax loss and tax credit carry-forwards, substantially all of the Group’s tax years after 2012 remain open to
federal, state, and foreign tax examination. Certain of the Group’s subsidiaries are currently under examination by the Swedish, U.S.
and other foreign tax authorities for tax years from 2013-2017. These examinations may lead to adjustments to the Group’s taxes.
The Group has initiated and are in negotiations of an Advanced Pricing Agreement (“APA) between Sweden and the United
States governments for the tax years 2014 through 2020 covering various transfer pricing matters. These transfer pricing matters may
be significant to the consolidated financial statements.
11. Loss per share
Basic loss per share is computed using the weighted-average number of outstanding ordinary shares during the period. Diluted
loss per share is computed using the treasury stock method to the extent that the effect is dilutive by using the weighted-average
number of outstanding ordinary shares and potential ordinary shares during the period. The Group’s potential ordinary shares consist
of incremental shares issuable upon the assumed exercise of stock options and warrants, and the incremental shares issuable upon the
assumed vesting of unvested restricted stock units, restricted stock awards, and other contingently issuable shares, excluding all anti-
dilutive ordinary shares outstanding during the period. The Group used the if-converted method to calculate the dilutive impact of the
warrants and adjusted the numerator for changes in profit or loss. The computation of loss per share for the respective periods is as
follows:
2019
2018
(in € millions, except share and per share data)
2017
Basic loss per share
Net loss attributable to owners of the parent
Shares used in computation:
(186 )
(78 )
(1,235 )
Weighted-average ordinary shares outstanding
180,960,579 177,154,405 151,668,769
Basic net loss per share attributable to
owners of the parent
(1.03 )
(0.44 )
(8.14 )
Diluted loss per share
Net loss attributable to owners of the parent
Fair value adjustments on warrants
Net loss used in the computation of diluted loss per share
Shares used in computation:
(186 )
—
(186 )
(78 )
(14 )
(92 )
(1,235 )
—
(1,235 )
Weighted-average ordinary shares outstanding
Warrants
Diluted weighted average ordinary shares
Diluted net loss per share attributable to
owners of the parent
180,960,579 177,154,405 151,668,769
— 4,055,887
—
180,960,579 181,210,292 151,668,769
(1.03 )
(0.51 )
(8.14 )
F-28
Potential dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were
as follows:
Employee options
Restricted stock units
Restricted stock awards
Other contingently issuable shares
Warrants
12.
Leases
2017
2019
2018
12,153,772 12,243,526 14,646,720
195,937
100,383
61,880
61,880
—
—
— 6,720,000
638,350
41,280
162,320
2,400,000
On January 1, 2019, the Group adopted IFRS 16, and all related amendments, using the modified retrospective transition
method, under which the cumulative effect of initial application is recognized in accumulated deficit at January 1, 2019. The new
standard requires the recognition of right-of-use assets and lease liabilities on the Group's balance sheet for operating leases, along
with the net impact on transition recorded to accumulated deficit. The Group is required to separately recognize the interest expense
on the lease liability and the depreciation expense on the right-of-use asset.
The Group’s statement of operations for 2019 reflects additional depreciation expense due to the right-of use assets and an
increase in finance costs for effective interest expense on its lease liabilities, partially offset by a reduction in rental expenses.
There is no impact to the overall changes in cash flows. However, operating cash flows are positively impacted, while financing
cash flows are negatively impacted due primarily to the classification of principal payments on lease liabilities.
The comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related
interpretations. The primary change in accounting policies as a result of the application of IFRS 16 is explained above in Note 2. Such
a change is made in accordance with the transitional provisions of IFRS 16.
Definition of a lease
Previously, the Group determined at contract inception whether an arrangement is or contains a lease under IAS 17 and IFRIC 4.
Under IFRS 16, the Group assesses whether a contract is or contains a lease based on the definition of a lease, as explained in Note 2.
The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were
previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. Therefore, the definition of a lease under
IFRS 16 was applied only to contracts entered into or changed on or after January 1, 2019.
As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease
transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the
Group recognizes right-of-use assets and lease liabilities for most leases previously classified as operating under IAS 17.
Leases classified as operating leases under IAS 17
At transition, lease liabilities were measured at the present value of the remaining lease payments, net of lease incentives
receivable, that are not paid at the commencement date, discounted at the lessee’s incremental borrowing rate as at January 1, 2019.
Right-of-use assets are measured at their carrying amount as if IFRS 16 had been applied since the commencement date and
discounted using the lessee's incremental borrowing rate at the date of initial application.
The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases
under IAS 17.
- Applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of lease term.
- Excluded initial direct costs from measuring the right-of-use asset at the date of initial application.
- Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
Below is a reconciliation of lease liabilities related to lease commitments as of the date recognized due to the modified
retrospective application of IFRS 16:
F-29
Total lease commitments as of December 31, 2018
Impact of discounting remaining lease payments
Recognition exemption for short-term leases
Total lease liabilities included in the consolidated
statement of financial position at January 1, 2019
Current
Non-current
Total
January 1, 2019
(in € millions)
833
(285 )
(7 )
541
20
521
541
The weighted average incremental borrowing rate applied to lease liabilities recognized in the statement of financial position at
the date of initial application was 6.7%.
Expenses relating to short-term leases, including those excluded from the IFRS 16 transition due to the election of the practical
expedient, were approximately €14 million for 2019.
The Group’s right of use assets are comprised of leased office space. Below is the roll-forward of lease right-of-use assets:
Right of use assets
Cost
At January 1, 2019
Increases
Acquired in business combinations
Decreases
Exchange differences
At December 31, 2019
Accumulated depreciation
At January 1, 2019
Depreciation charge
Decreases
Exchange differences
At December 31, 2019
Cost, net accumulated depreciation
At January 1, 2019
At December 31, 2019
Below is the maturity analysis of lease liabilities:
(in € millions)
471
138
11
(39 )
6
587
(75 )
(42 )
21
(2 )
(98 )
396
489
F-30
Lease liabilities
Maturity Analysis
Less than one year
One to five years
More than five years
Total lease commitments
Impact of discounting remaining lease payments
Lease incentives receivable
Total lease liabilities
Lease liabilities included in the consolidated
statement of financial position
Current
Non-current
Total
December 31, 2019
(in € millions)
79
317
589
985
(324 )
(32 )
629
7
622
629
(1) Excluded from the lease commitments above are short-term leases that are not recognized under IFRS 16 based on the Group’s election of the practical
expedient. Additionally, the Group has entered into certain lease agreements with approximately €19 million of commitments, which have not
commenced as of December 31, 2019, and as such, have not been recognized on the consolidated statement of financial position.
The weighted average incremental borrowing rate applied to lease liabilities recognized in the statement of financial position as
of December 31, 2019 was 6.4%.
13. Property and equipment
Cost
At January 1, 2018
Additions
Disposals
Exchange differences
At December 31, 2018
Additions
Acquired in business combinations
Disposals
Exchange differences
At December 31, 2019
Accumulated depreciation
At January 1, 2018
Depreciation charge
Disposals
Exchange differences
At December 31, 2018
Depreciation charge
Impairment charge
Disposals
Exchange differences
At December 31, 2019
Cost, net accumulated depreciation
At December 31, 2018
At December 31, 2019
Property
and
equipment
Leasehold
improvements
(in € millions)
Total
105
3
(46 )
(1 )
61
20
1
(29 )
1
54
(84 )
(12 )
45
1
(50 )
(8 )
—
30
(1 )
(29 )
11
25
73
142
(1 )
2
216
106
5
(38 )
6
295
(21 )
(9 )
—
—
(30 )
(21 )
(6 )
28
—
(29 )
186
266
178
145
(47 )
1
277
126
6
(67 )
7
349
(105 )
(21 )
45
1
(80 )
(29 )
(6 )
58
(1 )
(58 )
197
291
F-31
For the year ended December 31, 2019, the Group recognized a €6 million impairment charge on leasehold improvements upon
termination of the associated lease agreement.
The Group had €15 million and €100 million of leasehold improvements that were not placed into service as of December 31,
2019 and 2018, respectively.
14. Goodwill and intangible assets
Cost
At January 1, 2018
Additions
Acquisition, business combination (Note 5)
Exchange differences
At December 31, 2018
Additions
Acquisition, business combination
Exchange differences
At December 31, 2019
Accumulated amortization
At January 1, 2018
Amortization charge
At December 31, 2018
Amortization charge
Exchange differences
At December 31, 2019
Cost, net accumulated amortization
At December 31, 2018
At December 31, 2019
Internal
development
costs and
patents
Acquired
intangible
assets
Total
(in € millions)
Goodwill
Total
18
8
—
—
26
19
—
—
45
(6 )
(6 )
(12 )
(7 )
—
(19 )
14
26
17
—
3
1
21
—
27
(1 )
47
(2 )
(5 )
(7 )
(9 )
1
(15 )
14
32
35
8
3
1
47
19
27
(1 )
92
(8 )
(11 )
(19 )
(16 )
1
(34 )
28
58
135
—
8
3
146
—
328
4
478
—
—
—
—
—
—
146
478
170
8
11
4
193
19
355
3
570
(8 )
(11 )
(19 )
(16 )
1
(34 )
174
536
Amortization of €14 million, €11 million and €8 million in 2019, 2018, and 2017, respectively, is included in research and
development in the consolidated statement of operations. Research and development costs that are not eligible for capitalization have
been expensed in the period incurred.
Goodwill is tested for impairment on an annual basis or when there are indications the carrying amount may be impaired.
Goodwill is allocated to the Group’s two operating segments, Premium and Ad-Supported, based on the segment that is expected to
benefit from the business combination. The Group monitors goodwill at the operating segment level for internal purposes, consistent
with the way it assesses performance and allocates resources. The carrying amount of goodwill allocated to each of the operating
segments is as follows:
Goodwill
Valuation methodology
Premium
2019
Ad-Supported
2019
Premium
2018
Ad-Supported
2018
130
(in € millions)
348
128
18
The Group performed its annual impairment test in the fourth quarter of 2019. The recoverable amount of the Premium and Ad-
Supported operating segments represents fair value less costs of disposal (“FVLCD”). The FVLCD is considered a level 3 fair value
based on certain unobservable inputs. FVLCD is calculated using both the income and market approaches. The income approach is
calculated by discounting the projected cash flows of each of the operating segments. The market valuation is calculated by applying a
median multiple from comparable publicly traded companies to the average revenue of the preceding and forecast twelve months,
F-32
before and after the date of the impairment test. As a result of the analysis, the FVLCD for the Premium and Ad-Supported operating
segments was determined to be in excess of their carrying amounts.
Key assumptions used in the FVLCD calculations at the impairment testing date
In 2019, the Group weighted the income and market approaches 50% and 50%, respectively, for each of its operating segments.
The key assumptions used in the income approach was the discount rate based on the weighted-average cost of capital. The discount
rate was 7.5% and 9% for the Group’s premium and ad-supported segments, respectively. The key assumptions used in the market
approach were the revenue multiples for comparable companies, which were selected, based on industry similarity, financial risk, and
size of each of the Group’s operating segments. Revenue multiples used in the market approach ranged from 2.5 to 3.5.
There are no reasonably possible changes in the key assumptions that would result in the operating segments’ carrying amounts
exceeding their recoverable amounts.
15. Restricted cash and other non-current assets
Restricted cash
Lease deposits and guarantees
Other
Other non-current assets
16. Trade and other receivables
Trade receivables
Less: allowance for expected credit losses
Less: provision for credit reserves
Trade receivables – net
Other
2019
2018
(in € millions)
54
1
14
69
2019
2018
(in € millions)
305
(5 )
(3 )
297
105
402
52
3
10
65
286
(8 )
(5 )
273
127
400
Trade receivables are non-interest bearing and generally have 30-day payment terms. Due to their comparatively short
maturities, the carrying value of trade and other receivables approximate their fair value.
The aging of the Group’s net trade receivables is as follows:
Current
Overdue 1 – 30 days
Overdue 31 – 60 days
Overdue 60 – 90 days
Overdue more than 90 days
2019
2018
(in € millions)
209
51
19
10
8
297
195
44
19
7
8
273
F-33
The movements in the Group’s allowance for expected credit losses are as follows:
At January 1
Provision for expected credit losses
Reversal of unutilized provisions
Receivables written off
At December 31
2019
2018
(in € millions)
8
12
(12 )
(3 )
5
15
15
(18 )
(4 )
8
The Group maintains an allowance for expected credit losses of a portion of trade receivables based on the simplified approach
for measuring expected credit losses. The Group estimates anticipated losses based on lifetime expected credit losses at each reporting
date. The Group has an established provision matrix which takes into account the number of days past due, collection history,
identification of specific customer exposure, product type, geographical region and current economic trends. Expected credit losses on
trade receivables are calculated based on the aforementioned matrix and are charged to general and administrative expense in the
consolidated statement of operations. Receivables for which an impairment provision was recognized are written off against the
provision when it is deemed uncollectible.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above.
The Group does not hold any collateral as security.
17.
Issued share capital and other reserves
As at December 31, 2019, 2018, and 2017, the authorized and subscribed share capital was comprised of 403,032,520,
403,032,520, and 403,001,760 shares, respectively, at a par value €0.000625 each. As at December 31, 2019, 2018, and 2017, the
Company had 187,492,667, 183,901,040, and 167,258,400 ordinary shares issued and fully paid, respectively.
The Group has incentive stock plans under which options and restricted stock to subscribe to the Company’s share capital have
been granted to executives and certain employees. Options exercised or restricted stock vesting under these plans are settled via either
the issuance of new shares or issuance of shares from treasury.
On November 13, 2012, the Group entered into an equity financing agreement with new and existing shareholders for the
issuance of 4,204,120 ordinary shares for total gross proceeds of €79 million and incurred transaction costs of €3 million in addition to
the shares received, the new investors also received contingent options that provided downside protection (meaning that the new
investors are eligible to receive additional shares at certain valuations in the event of certain triggering events such as a trade sale,
public listing, or liquidation). The contingent options were determined to be embedded derivatives which required separation from the
equity issuance. The contingent options recognized as a derivative liability upon issuance were valued at €39 million at December 31,
2012. Upon the direct listing, the contingent options expired at no value.
On November 20, 2013, the Group entered into an equity financing agreement with new investors for the issuance of 8,233,160
shares. On December 19, 2013, the first closing occurred and the Group issued 5,584,160 shares for total gross proceeds of
€123 million and incurred transaction costs of €2 million. The second closing occurred on January 17, 2014, whereby 2,649,000
ordinary shares were issued for total gross proceeds of €58 million. In addition to the shares received in December 2013, the new
investors also received contingent options that provided downside protection (meaning that the new investors are eligible to receive
additional shares at certain valuations in the event of certain triggering events such as a trade sale, public listing, or liquidation). The
contingent options were determined to be embedded derivatives, which required separation from the equity issuance. The contingent
options recognized as a derivative liability upon issuance were valued at €31 million at December 31, 2013. Upon the direct listing,
the contingent options expired at no value.
On April 17, June 9, and July 15, 2015, the Group entered into an equity financing agreement with new and existing
shareholders for the issuance of 9,484,880 ordinary shares for total gross proceeds of €479 million and incurred transaction costs of €5
million. In addition to the shares received, the new investors also received contingent options that provided downside protection
(meaning that the new investors are eligible to receive additional shares at certain valuations in the event of certain triggering events
such as a trade sale, public listing, or liquidation). The contingent options were determined to be embedded derivatives, which
required separation from the equity issuance. The contingent options are recognized as a derivative liability and were valued at
€87 million upon issuance. Upon the direct listing, the contingent options expired at no value.
F-34
On October 17, 2016, the Group issued, for €27 million in cash, warrants to acquire 5,120,000 ordinary shares to certain members
of key management. The exercise price of each warrant was US$50.61, which was equal to 1.2 times the fair market value of ordinary
shares on the date of issuance. On October 4, 2019, the Company issued 1,600,000 ordinary shares upon the exercise of 1,600,000 of
these warrants, for cash of €74 million. On October 17, 2019, the Company issued 1,991,627 shares upon the effective net settlement of
the remaining 3,520,000 warrants.
On July 13, 2017, the Group issued, for €9 million in cash, a warrant to acquire 1,600,000 ordinary shares to a holder that is an
employee and a member of management of the Group. The exercise price of each warrant is US$89.73, which was equal to 1.3 times
the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through July 2020.
On December 15, 2017, the Group issued 8,552,440 ordinary shares in exchange for a non-controlling equity interest in TME
valued at €910 million. For further details, please see Note 23. The ordinary shares issued are subject to certain transfer restrictions for
a period of up to three years from December 15, 2017, subject to limited exceptions, including transfers with the Group’s prior
consent; transfers to certain permitted transferees; transfers pursuant to a tender offer or exchange offer recommended by the Group’s
board of directors for a majority of the Group’s issued and outstanding securities; transfers pursuant to mergers, consolidations, or
other business combination transactions approved by the Group’s board of directors; transfers to the Group or any of its subsidiaries;
or transfers that are necessary to avoid regulation as an “investment company” under the U.S. Investment Company Act of 1940, as
amended.
On December 15 and 29, 2017, the Group entered into exchange agreements with holders of a portion of its Convertible Notes,
pursuant to which the Group exchanged an aggregate of US$411 million in principal of Convertible Notes, plus accrued interest of
US$37 million, for an aggregate of 6,554,960 ordinary shares.
In January 2018, the Group entered into an exchange agreement with holders of the remaining balance of its Convertible Notes,
pursuant to which the Group exchanged the remaining of US$628 million of Convertible Notes, plus accrued interest, for 9,431,960
ordinary shares.
On February 16, 2018, the Company issued 10 beneficiary certificates per ordinary share held of record to entities beneficially
owned by the Group’s founders, Daniel Ek and Martin Lorentzon. The beneficiary certificates carry no economic rights and are issued
to provide the holders of such beneficiary certificates with additional voting rights. The beneficiary certificates, subject to certain
exceptions, are non-transferable and shall be automatically canceled for no consideration in the case of sale or transfer of the ordinary
share to which they are linked. The Company may issue additional beneficiary certificates under the total authorized amount at the
discretion of its Board of Directors, of which the Group’s founders are members.
On March 7, 2018, the Company issued 5,740,000 ordinary shares to its Netherlands subsidiary at par value and subsequently
repurchased those shares at the same price. These shares are held in treasury in order to facilitate the fulfillment of employee exercises
under the Company’s ESOP and RSU plans. Similar future transactions are expected to take place to fulfill future option exercises.
On April 3, 2018, the Group completed a direct listing of the Company’s ordinary shares on the NYSE. Upon the direct listing,
the option for the Convertible Noteholders to unwind the January 2018 exchange transaction expired and, as a result, the Company
reclassified the Convertible Notes balance of €1.1 billion to Other paid in capital within Equity.
On November 5, 2018, the Company announced that it would commence a share repurchase program beginning in the fourth
quarter of 2018. Repurchases of up to 10,000,000 of the Company’s ordinary shares have been authorized by the Company’s general
meeting of shareholders and the Board of Directors approved such repurchase up to the amount of US$1.0 billion. The repurchase
program will expire on April 21, 2021. Through December 31, 2019, there have been 4,366,427 shares repurchased for €510 million
under this program.
On July 1, 2019, the Group issued, for €15 million in cash, a warrant to acquire 800,000 ordinary shares to a holder that is an
employee and a member of management of the Group. The exercise price of each warrant is US$190.09, which was equal to 1.3 times
the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through July 1, 2022.
No dividends were paid during the year or are proposed.
All outstanding shares have equal rights to vote at general meetings.
For the year ended December 31, 2019 and 2018, the Company repurchased, in total, 3,679,156 and 6,427,271 of its own
ordinary shares, respectively, and reissued 3,557,405 and 3,382,312 treasury shares, respectively, upon the exercise of stock options
F-35
and restricted stock units. As of December 31, 2019 and 2018, the Company had 3,166,710 and 3,044,959 ordinary shares held as
treasury shares, respectively.
As of December 31, 2019 and 2018, the Group’s founders held 378,201,910 and 364,785,640 beneficiary certificates,
respectively.
Other reserves
Currency translation
At January 1
Currency translation
Gains reclassified to consolidated statement of operations
At December 31
Short term investments
At January 1
Gains/(losses) on fair value that may be subsequently reclassified
to consolidated statement of operations
Losses reclassified to consolidated statement of operations
Deferred tax
At December 31
Long term investments
At January 1
(Losses)/gains on fair value not to be subsequently reclassified
to consolidated statement of operations
Deferred tax
At December 31
Cash flow hedges
At January 1
(Losses)/gains on fair value that may be subsequently reclassified
to consolidated statement of operations
Losses/(gains) reclassified to revenue
(Gains)/losses reclassified to cost of revenue
Deferred tax
At December 31
Share-based payments
At January 1
Share-based payments (Note 18)
Income tax impact associated with share-based
payments (Note 10)
Issuance of share-based payments in conjunction
with business combinations (Note 5)
Restricted stock units withheld for employee taxes
At December 31
Other reserves at December 31
2019
2018
(in € millions)
2017
(15 )
4
—
(11 )
(4 )
7
—
(2 )
1
(7 )
(6 )
(2 )
(15 )
(5 )
(2 )
2
1
(4 )
561
(11 )
(149 )
32
444
(1 )
(7 )
10
(7 )
1
(4 )
334
127
720
(148 )
561
—
1
(5 )
3
—
(1 )
200
88
26
48
13
(6 )
494
924
—
(2 )
334
875
(4 )
(3 )
—
(7 )
(4 )
(2 )
1
—
(5 )
—
(11 )
—
(11 )
—
—
—
—
—
—
130
67
3
—
—
200
177
Currency translation reserve comprises foreign exchange differences arising from the translation of the financial statements of
foreign operations into the reporting currency.
Short term investment reserve recognizes the unrealized fair value gains and losses on debt instruments held at fair value
through OCI.
Long term investment reserve recognizes the unrealized fair value gains and losses on equity instruments held at fair value
through OCI.
F-36
Cash flow hedge reserve recognizes the unrealized gains and losses on the effective portion of foreign exchange forward
contracts designated for hedging.
Share-based payments reserve recognizes the grant date fair value of equity-settled awards provided to employees as part of
their remuneration. For further details, please see Note 18.
18. Share-based payments
Employee Stock Option Plans
Under the Employee Stock Option Plans (“ESOP”), stock options of the Company are granted to executives and certain
employees of the Group. For options granted prior to January 1, 2016, the exercise price is equal to the fair value of the shares on
grant date for employees in the United States and for U.S. citizens and fair value less 30% for the rest of the world. The value of the
discount is included in the grant date fair value of the award. For options granted thereafter under these ESOP plans, the exercise price
of the options is equal to the fair value of the shares on grant date for all employees. Generally, the first vesting period (13.5% – 25%
of the initial grant) is up to one year from the grant date and subsequently vests at a rate of 6.25% each quarter until fully vested. The
exercise price for options is payable in the EUR value of a fixed USD amount; therefore, the Group considers these awards to be
USD-denominated. The options are generally granted with a term of five years.
During 2019, the Company implemented a new ESOP and Director Stock Option Plan, under which stock options of the
Company are granted to executives and employees of the Group and to members of the Company’s Board of Directors, respectively.
For options granted under the 2019 plans, the exercise price is equal to the fair value of the ordinary shares on grant date or equal to
150% of the fair value of the ordinary shares on grant date. The exercise price is included in the grant date fair value of the award. The
options granted to participants under the 2019 programs have a first vesting period of three or eight months from date of grant and vest
monthly or annually thereafter until fully vested. The options are granted with a term of five years.
Restricted Stock Unit Program
During 2019, the Company implemented a new restricted stock unit (“RSU”) program for employees and for members of its Board
of Directors. Both are accounted for as equity-settled share-based payment transactions. The RSUs are measured based on the fair market
value of the underlying ordinary shares on the date of grant. The RSUs granted to participants under the 2019 programs have a first
vesting period of three or eight months from date of grant and vest monthly or annually thereafter until fully vested four years from date
of grant. The valuation of the RSUs was consistent with the fair value of the ordinary shares.
Restricted Stock Awards and Other
In connection with an acquisition during 2017, the Group issued 61,880 restricted stock awards (“RSAs”) to certain employees
of the aquiree. Vesting of the RSAs is contingent on continued employment of these employees. The awards are accounted for as
equity-settled share-based payment transactions. The RSAs vest over a two- and three-year period from the acquisition date. The
valuation of the RSAs was consistent with the fair value of the ordinary shares.
In connection with the acquisition of Anchor during the first quarter of 2019, the Company granted 162,320 equity instruments to
certain employees of Anchor. Each instrument effectively represents one ordinary share of the Company, which will be issued to the
holder upon vesting. The instruments vest annually over a four-year period from the acquisition date, and vesting of the instruments is
contingent on continued employment. The instruments are accounted for as equity-settled share-based payment transactions and are
measured based on the fair market value of the underlying ordinary shares on the date of grant. The grant date fair value of each equity
instrument was US$145.21.
F-37
Activity in the RSUs, RSAs, and other contingently issuable shares outstanding and related information is as follows:
RSUs
RSAs
Other
Outstanding at January 1, 2017
Granted
Forfeited
Released
Outstanding at December 31, 2017
Granted
Forfeited
Released
Outstanding at December 31, 2018
Granted
Forfeited
Released
Outstanding at December 31, 2019
Number of
RSUs
Number of
Awards
Weighted
average
grant date
fair value
US$
36.73
Weighted
average
grant date
fair value
US$
Number of
Awards
Weighted
average
grant date
fair value
US$
501,480
80,920
(85,903 )
(300,560 )
195,937
—
59.63 61,880
—
37.43
—
38.95
42.46 61,880
—
14,383 168.24
—
34.93
(15,991 )
—
40.12
(93,946 )
63.87 61,880
100,383
—
715,224 137.15
—
(48,754 ) 118.96
(128,503 )
98.52 (20,600 )
638,350 134.79 41,280
—
90.65
—
—
90.65
—
—
—
90.65
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 162,320 145.21
—
—
—
—
—
90.65
90.65 162,320 134.15
In the table above, the number of RSUs released include ordinary shares that the Group has withheld for settlement of
employees’ tax obligations due upon the vesting of RSUs.
Activity in the stock options outstanding and related information is as follows:
Outstanding at January 1, 2017
Granted
Forfeited
Exercised
Expired
Outstanding at December 31, 2017
Granted
Forfeited
Exercised
Expired
Outstanding at December 31, 2018
Granted
Forfeited
Exercised
Expired
Outstanding at December 31, 2019
Exercisable at December 31, 2017
Exercisable at December 31, 2018
Exercisable at December 31, 2019
F-38
Number of
options
Options
Weighted
average
exercise price
US$
10,976,480
5,819,520
(659,000 )
(1,422,520 )
(67,760 )
14,646,720
3,578,000
(1,220,508 )
(4,736,555 )
(24,131 )
12,243,526
4,152,565
(719,860 )
(3,478,660 )
(43,799 )
12,153,772
5,822,400
5,162,876
5,553,650
36.88
64.11
46.34
22.23
28.49
48.73
142.20
62.82
40.97
54.98
77.63
147.11
105.01
49.41
117.79
107.68
39.62
58.25
84.18
The weighted-average contractual life for the stock options outstanding at December 31, 2019, 2018, and 2017 is 2.9 years, 2.9
years, and 3.3 years, respectively. The weighted-average share price at exercise for options exercised during 2019, 2018, and 2017
was US$141.82, US$152.33, and US$57.53, respectively. The weighted-average fair value of options granted during the year ended at
December 31, 2019, 2018, and 2017 was US$34.63 per option, US$39.23 per option, and US$18.05 per option, and, respectively.
The stock options outstanding December 31, 2019, 2018, and 2017 are comprised of the following:
2019
2018
2017
Range of exercise prices (US$)
to
1.65
to
45.01
to
90.01
to
135.01
to
180.01
45.00
90.00
135.00
180.00
233.42
Number of
options
2,130,161
2,482,270
2,946,838
3,318,423
1,276,080
12,153,772
Weighted
average
remaining
contractual
life (years)
Number of
options
0.9 4,753,052
2.2 3,337,414
3.4 2,695,890
749,360
4.1
3.7
707,810
2.9 12,243,526
Weighted
average
remaining
contractual
life (years)
Number of
options
1.8 9,039,248
3.2 4,736,432
871,040
3.9
—
4.3
—
4.2
2.9 14,646,720
Weighted
average
remaining
contractual
life (years)
2.7
4.2
4.2
—
—
3.3
In determining the fair value of the employee share-based awards, the Group uses the Black-Scholes option-pricing model. The
Company does not anticipate paying any cash dividends in the near future and therefore uses an expected dividend yield of zero in the
option valuation model. The expected volatility is based on the historical volatility of public companies that are comparable to the
Group over the expected term of the award. The risk-free rate is based on U.S. Treasury zero-coupon rates as the exercise price is
based on a fixed USD amount. The expected life of the stock options is based on historical data and current expectations.
The following table lists the inputs to the Black-Scholes option-pricing models used for employee share-based payments for the
years ended December 31, 2019, 2018, and 2017:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of stock options (years)
Weighted-average share price (US$)
2019
30.1 – 35.2
1.4 – 2.6
2.5 – 4.8
136.09
2018
32.0 – 34.7
2.4 – 2.9
2.4 – 4.4
142.20
2017
32.0 – 43.5
1.4 – 2.0
2.4 – 4.4
64.11
Valuation assumptions are determined at each grant date and, as a result, are likely to change for share-based awards granted in
future periods. Changes to the input assumptions could materially affect the estimated fair value of share-based payment awards.
The sensitivity analysis below shows the impact of increasing and decreasing expected volatility by 10% as well as the impact
of increasing and decreasing the expected life by one year. This analysis was performed on stock options granted in 2019. The
following table shows the impact of these changes on stock option expense for the options granted in 2019:
Actual stock option expense
Stock option expense increase (decrease) under the following
assumption changes
Volatility decreased by 10%
Volatility increase by 10%
Expected life decrease by 1 year
Expected life increase by 1 year
2019
(in € millions)
48
(13 )
13
(9 )
8
F-39
The expense recognized in the consolidated statement of operations for employee share-based payments is as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
19. Convertible notes and borrowings
Convertible Notes
2019
2018
(in € millions)
2017
4
61
27
30
122
3
40
19
26
88
2
21
15
27
65
On April 1, 2016, the Group issued US$1,000 million principal amount of Convertible Notes due in 2021. The notes were issued
at par and bore interest of 5.0% payment-in-kind interest increasing by 100 basis points every six months after two years. Upon a
specified conversion event occurring, the Convertible Notes would convert into ordinary shares at a conversion rate reflecting a
conversion price equal to the lesser of a price cap per share or a discount of 20.0% to the per share price of the Company’s ordinary
shares. If a specified conversion event did not occur within twelve months, the discount would increase by 250 basis points and then
again, every six months thereafter until a specified conversion event did occur. A direct listing was not considered a specified
conversion event. The terms also included change of control clauses where the notes holders had the option to convert into ordinary
shares. At maturity, if the notes had not yet been converted or repaid, note holders would receive cash in an amount equal to the
original principal amount plus 10% annualized return.
The transaction costs of approximately US$20 million were effectively immediately expensed in finance costs.
The Convertible Note agreements included certain affirmative covenants, including the delivery of audited consolidated
financial statements to the holders.
On December 15, 2017, holders of a portion of the Group’s Convertible Notes exchanged US$301 million in principal of
Convertible Notes, plus accrued interest of US$27 million, for 4,800,000 ordinary shares. The Convertible Notes were recorded at fair
value on the date of exchange, which was reclassified to equity upon issuance of the ordinary shares. The fair value at exchange was
based on secondary market transactions of US$600 million between note holders and a third party.
On December 27, 2017, the Group entered into an exchange agreement with holders of a portion of its Convertible Notes,
pursuant to which the Group exchanged an aggregate of US$110 million in principal of Convertible Notes, plus accrued interest of
US$10 million, for an aggregate of 1,754,960 ordinary shares as of December 29, 2017. The Convertible Notes were recorded at fair
value on the date of exchange, which was reclassified to equity upon issuance of the ordinary shares. The fair value at exchange of
US$211 million was based on the ordinary share fair value as at December 31, 2017.
In January 2018, the Group entered into an exchange agreement with holders of the remaining balance of its Convertible Notes,
pursuant to which the Group exchanged the remaining of US$628 million of Convertible Notes, plus accrued interest, for 9,431,960
ordinary shares. Pursuant to this exchange agreement, subject to certain conditions, if the Company failed to list its ordinary shares on
or prior to July 2, 2018, the Group had agreed to offer to each noteholder the option to unwind the transaction such that the Group
purchases back the shares that were issued to such noteholder pursuant to the exchange and would have issued such noteholder a new
note that is materially identical to its note prior to the exchange. The option to unwind the exchange if a listing did not occur by July 2,
2018 met the definition of a contingent settlement event, and resulted in the issued equity shares (“Converted Notes”) being classified
as a financial liability in the statement of financial position until the option to unwind expired due to a direct listing or the passage of
time.
On April 3, 2018, the Group completed a direct listing of the Company’s ordinary shares on the NYSE. Upon the direct listing,
the option for the Convertible Noteholders to unwind the January 2018 exchange transaction expired and, as a result, the Group
recorded an expense of €123 million within finance costs to mark to market the Convertible Notes to the fair value based on the
closing price of the Company’s ordinary shares on April 3, 2018. The Company then reclassified the Convertible Notes balance of
€1.1 billion to Other paid in capital within Equity.
F-40
20. Trade and other payables
Trade payables
Value added tax and sales taxes payable
Other current liabilities
2019
2018
(in € millions)
377
148
24
549
295
118
14
427
Trade payables generally have a 30-day term and are recognized and carried at their invoiced value, inclusive of any value
added tax that may be applicable.
21. Accrued expenses and other liabilities
Non-current
Deferred rent
Other accrued liabilities
Current
Accrued fees to rights holders
Accrued salaries, vacation, and related taxes
Accrued social costs for options and RSUs
Other accrued expenses
2019
2018
(in € millions)
—
20
20
1,153
54
64
167
1,438
1,458
85
—
85
832
41
64
139
1,076
1,161
During the year ended December 31, 2018, the Group recorded an accrual for fees to rights holders of €12 million that relates to
prior years.
F-41
22. Provisions
Carrying amount at January 1, 2018
Charged/(credited) to the consolidated statement of
operations:
Additional provisions
Exchange differences
Utilized
Carrying amount at December 31, 2018
Charged/(credited) to the consolidated statement of
operations:
Additional provisions
Reversal of unutilized amounts
Exchange differences
Utilized
Carrying amount at December 31, 2019
As at December 31, 2018
Current portion
Non-current portion
As at December 31, 2019
Current portion
Non-current portion
Legal contingencies
Legal
contingencies
Other
(in € millions)
Total
53
12
65
—
3
(17 )
39
11
—
2
(47 )
5
39
—
5
—
5
—
(8 )
9
5
(3 )
—
(1 )
10
3
6
8
2
5
3
(25 )
48
16
(3 )
2
(48 )
15
42
6
13
2
Various legal actions, proceedings, and claims are pending or may be instituted or asserted against the Group. The results of
such legal proceedings are difficult to predict and the extent of the Group’s financial exposure is difficult to estimate. The Group
records a provision for contingent losses when it is both probable that a liability has been incurred, and the amount of the loss can be
reasonably estimated.
Between December 2015 and January 2016, two putative class action lawsuits were filed against Spotify USA Inc. in the U.S.
District Court for the Central District of California, alleging that the Group unlawfully reproduced and distributed musical
compositions without obtaining licenses. These cases were subsequently consolidated in May 2016 and transferred to the U.S. District
Court for the Southern District of New York in October 2016, as Ferrick et al. v. Spotify USA Inc., No. 1:16-cv-8412-AJN (S.D.N.Y.).
In May 2017, the parties reached a signed class action settlement agreement pursuant to which the Group will be responsible for (i) a
US$43 million cash payment to a fund for the class, (ii) all settlement administration and notice costs, expected to be between US$1
million to US$2 million, (iii) a direct payment of class counsel’s attorneys’ fees of up to US$5 million dollars, (iv) future royalties for
any tracks identified by claimants, as well as other class members who provide proof of ownership following the settlement, and (v)
reserving future royalties for unmatched tracks. On May 22, 2018, the court granted final approval of the settlement. All appeals of the
court’s final approval have been dismissed, and the April 15, 2019 deadline for appellants to appeal to the U.S. Supreme Court has
passed, and thus the settlement is now effective.
Since July 2017, six lawsuits alleging unlawful reproduction and distribution of musical compositions have been filed against
the Group in (i) the U.S. District Court for the Middle District of Tennessee (Bluewater Music Services Corporation v. Spotify USA
Inc., No. 3:17-cv-01051; Gaudio et al. v. Spotify USA Inc., No. 3:17-cv-01052; Robertson et al. v. Spotify USA Inc., No. 3:17-cv-
01616; and A4V Digital, Inc. et al. v. Spotify USA Inc., 3:17-cv-01256), (ii) in the U.S. District Court for the Southern District of
Florida (Watson Music Group, LLC v. Spotify USA Inc., No. 0:17-cv-62374), and (iii) the U.S. District Court for the Central District of
California (Wixen Music Publishing Inc. v. Spotify USA, Inc., 2:17-cv-09288). The complaints sought an award of damages, including
the maximum statutory damages allowed under U.S. copyright law of US$150,000 per work infringed. The Wixen v. Spotify lawsuit
was voluntarily dismissed on December 20, 2018 after the parties reached a mutual settlement. The Watson v. Spotify lawsuit was
voluntarily dismissed on April 24, 2019 following the resolution of all appeals of the Ferrick class action settlement. As of December
31, 2019, the Robertson v. Spotify, Bluewater v. Spotify, Gaudio v. Spotify, and A4V v. Spotify lawsuits have all been dismissed.
F-42
Other
The Group has obligations under lease agreements to return the leased assets to their original condition. An obligation to return
the leased asset to their original condition upon expiration of the lease is accounted for as asset retirement obligations. The obligations
are expected to be settled at the end of the lease terms. The Group has indirect tax provisions which relate primarily to potential non-
income tax obligations in various jurisdictions. The Group recognizes provisions for claims or indirect taxes when it determines that
an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These provisions are recognized as general
and administrative expenses.
23. Financial risk management and financial instruments
Financial risk management
The Group’s operations are exposed to financial risks. To manage these risks efficiently, the Group has established guidelines in
the form of a treasury policy that serves as a framework for the daily financial operations. The treasury policy stipulates the rules and
limitations for the management of financial risks.
Financial risk management is centralized within Treasury who are responsible for the management of financial risks. Treasury
manages and executes the financial management activities, including monitoring the exposure of financial risks, cash management,
and maintaining a liquidity reserve, and it provides certain financial services to the Group’s entities. Treasury operates within the
limits and policies authorized by the Board of Directors.
Capital management
The Group’s objectives when managing capital (cash and cash equivalents, short term investments, equity, and, until April 2018,
Convertible Notes) is to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and
to maintain an optimal capital structure to reduce the cost of capital. The Group’s capital structure and dividend policy is decided by
the Board of Directors. Treasury continuously reviews the Group’s capital structure considering, amongst other things, market
conditions, financial flexibility, business risk, and growth rate.
On November 5, 2018, Spotify Technology S.A. announced that it would commence a share repurchase program beginning in
the fourth quarter of 2018. Repurchases of up to 10,000,000 of the Company’s ordinary shares have been authorized by the
Company’s general meeting of shareholders and the Board of Directors approved such repurchase up to the amount of US$1.0 billion.
The repurchase program will expire on April 21, 2021. The timing and actual number of shares repurchased depends on a variety of
factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is
executed consistent with the Group’s capital allocation strategy of prioritizing investment to grow the business over the long term.
Under the repurchase program, repurchases can be made from time to time using a variety of methods, including open market
purchases, all in compliance with the rules of the Commission and other applicable legal requirements. The repurchase program does
not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or
discontinued at any time at the Company’s discretion. The Group uses current cash and cash equivalents and the cash flow it generates
from operations to fund the share repurchase program.
The Group is not subject to any externally imposed capital requirements.
Credit risk management
Financial assets carry an element of risk that counterparties may be unable to fulfill their obligations. This exposure arises from
the investments in liquid funds of banks and other counterparties. The Group mitigates this risk by adopting a risk averse approach in
relation to the investment of surplus cash. The main objectives for investments are first, to preserve principal and secondarily, to
maximize return given the rules and limitations of the treasury policy. Surplus cash is invested in counterparties and instruments
considered to carry low credit risk. Investments are subject to credit rating thresholds and at the time of investment, no more than 10%
of surplus cash can be invested in any one issuer (excluding certain government bonds and investments in cash management banks).
The weighted-average maturity of the portfolio shall not be greater than 2 years, and the final maturity of any investment is not to
exceed 5 years. The Group shall maintain the ability to liquidate the majority of all short term investments within 90 days. At
December 31, 2019 and 2018, the financial credit risk was equal to the consolidated statement of financial position value of cash and
cash equivalents and short term investments of €1,757 million and €1,806 million, respectively. No credit losses were incurred during
2019 or 2018 on the short term investments.
F-43
The credit risk with respect to the Group’s trade receivables is diversified geographically and among a large number of
customers, private individuals, as well as companies in various industries, both public and private. The majority of the Group’s
revenue is paid monthly in advance significantly lowering the credit risk incurred for these specific counterparties. Solvency
information is generally required for credit sales within the Ad sales and Partner subscription business to minimize the risk of bad debt
losses and is based on information provided by credit and business information from external sources.
Liquidity risk management
Liquidity risk is the Group’s risk of not being able to meet the short term payment obligations due to insufficient funds. The
Group has internal control processes and contingency plans for managing liquidity risk. A centralized cash pooling process enables the
Group to manage liquidity surpluses and deficits according to the actual needs at the group and subsidiary level. The liquidity
management takes into account the maturities of financial assets and financial liabilities and estimates of cash flows from operations.
The Group’s policy is to have a strong liquidity position in terms of available cash and cash equivalents, and short term
investments.
Liquidity
Short term investments
Short term deposits
Cash at bank and on hand
Total surplus liquidity
Liquidity position
Currency risk management
2019
2018
(in € millions)
692
585
480
1,757
1,757
915
307
584
1,806
1,806
Transaction exposure relates to business transactions denominated in foreign currency required by operations (purchasing and
selling) and/or financing (interest and amortization). The Group’s general policy is to hedge a portion of its transaction exposure on a
case-by-case basis under the Group’s cash-flow hedging program by entering into multiple foreign exchange forward contracts. The
Group does not enter into foreign exchange forward contracts greater than one year. The Group’s currency pairs used for cash flow
hedges are Euro / U.S. dollar, Euro / Australian dollar, Euro / British pound, Euro / Swedish krona, Euro / Canadian dollar, and Euro /
Norwegian krone. Translation exposure relates to net investments in foreign operations. The Group does not conduct translation risk
hedging.
(i)
Transaction exposure sensitivity
In most cases, the Group’s customers are billed in their respective local currency. Major payments, such as salaries, consultancy
fees, and rental fees are settled in local currencies. Royalty payments are primarily in EUR and USD. Hence, the operational
need to net purchase foreign currency is due primarily to a deficit from such settlements.
The table below shows the immediate impact on net loss before tax of a 10% strengthening in the closing exchange rate of
significant currencies to which the Group had exposure, at December 31, 2019 and 2018. The impact on net loss is due primarily
to monetary assets and liabilities in a transactional currency other than the functional currency of a subsidiary within the Group.
The sensitivity associated with a 10% weakening of a particular currency would be equal and opposite. This assumes that each
currency moves in isolation.
2019
(Increase)/decrease in loss before tax
2018
(Increase)/decrease in loss before tax
SEK
USD
(in € millions)
(13 )
SEK
USD
(in € millions)
—
121
74
F-44
(ii) Translation exposure sensitivity
Translation exposure exists due to the translation of the results and financial position of all of the Group entities that have a
functional currency different from the presentation currency of Euro. The impact on the Group’s equity would be approximately
€50 million and €12 million if the EUR weakened by 10% against all translation exposure currencies, based on the exposure at
December 31, 2019 and 2018, respectively.
Interest rate risk management
Interest rate risk is the risk that changes in interest rates will have a negative impact on the Group’s earnings and cash flow.
Prior to the Group’s direct listing, the fair value of the Group’s Convertible Notes was dependent on market interest rates, which
might have negatively impacted earnings. The Convertible Notes were re-measured at each reporting date using valuation models
using input data, which included market interest rates. Changes in the fair value of the Convertible Notes were recognized in finance
income or cost in the consolidated statement of operations. An increase in market interest rates would have decreased the value of the
Convertible Notes. The Group did not enter into any hedging arrangement to mitigate these fluctuations.
The Group’s exposure to interest rate risk also is related to its interest-bearing assets, primarily its debt securities held at fair
value through other comprehensive income. Fluctuations in interest rates impact the yield of the investment. The sensitivity analysis
considered the historical volatility of short term interest rates and determined that it was reasonably possible that a change of 100 basis
points could be experienced in the near term. A hypothetical 100 basis points increase in interest rates would have impacted interest
income by €6 million and €8 million for the years ended December 31, 2019 and 2018, respectively.
Financing risk management
The Group finances its operations through external borrowings, equity, and cash flow from operations. The funding strategy has
been to diversify funding sources. Historically, the external debt consisted of the Convertible Notes and finance leases.
Share price risk management
Share price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in the
fair value of the Company’s ordinary share price. The Group’s exposure to this risk relates primarily to the outstanding warrants.
The warrants are re-measured at each reporting date using valuation models using input data based on the Company’s share
price. Changes in the fair value of these instruments are recognized in finance income or cost. An increase of share price will increase
the value of the warrants. The Group has not entered into any hedging arrangement to mitigate these fluctuations.
Other share price risk
Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation that the
Group is subject to in various countries in which the Group operates. Social costs are accrued at each reporting period based on the
number of vested stock options and awards outstanding, the exercise price, and the Company's share price. Changes in the accrual are
recognized in operating expenses. An increase in share price will increase the accrued expense for social costs, and when the share
price decreases, the accrued expense will become a reduction in social costs expense, all other things being equal, including the
number of vested stock options and exercise price remaining constant. The impact on the accrual for social costs on outstanding share
based payment awards of an increase or decrease in the Company’s ordinary share price of 10% would result in a change of €14
million and €11 million at December 31, 2019 and December 31, 2018, respectively.
Investment risk
The Group is exposed to investment risk as it relates to changes in the market value of its long term investments, due primarily
to volatility in the share price used to measure the investment and exchange rates. The majority of the Group’s long term investments
relate to TME.
Insurance risk management
Insurance coverage is governed by corporate guidelines and includes a common package of different property and liability
insurance programs. The business is responsible for assessing the risks to decide the extent of actual coverage. Treasury manages the
common Group insurance programs.
F-45
Financial instruments
Foreign exchange forward contracts
Cash flow hedges
The notional principal of the foreign exchange contracts was approximately €1,538 million and €968 million as of December 31,
2019 and 2018, respectively. The following table summarizes the notional principal of the foreign currency exchange contracts by
hedged line item in the statement of operations as of December 31, 2019:
Hedged line item in consolidated
statement of operations
Revenue
Cost of revenue
Total
Notional amount in foreign currency
Australian dollar
(AUD)
British pound
(GBP)
Canadian
dollar
(CAD)
Norwegian
krone
(NOK)
(in millions)
Swedish krona
(SEK)
U.S. dollar
(USD)
226
176
402
328
242
570
194
141
335
739
499
1,238
1,221
832
2,053
38
29
67
The following table summarizes the notional principal of the foreign currency exchange contracts by hedged line item in the
statement of operations as of December 31, 2018:
Hedged line item in consolidated
statement of operations
Revenue
Cost of revenue
Total
Non designated hedges
Australian dollar
(AUD)
Notional amount in foreign currency
Swedish krona
(SEK)
British pound
(GBP)
(in millions)
U.S. dollar
(USD)
187
143
330
282
202
484
1,112
757
1,869
27
21
48
In the first quarter of 2018, the Group effectively closed its positions in foreign exchange forward contracts not designated as
hedges and recognized a gain of €8 million in finance income associated with the changes in fair value of these instruments. The
Group had no such instruments outstanding as of December 31, 2019, and 2018. For the years ended December 31, 2019 and 2018,
the gain associated with the changes in fair value of these instruments was €0 million and €8 million, respectively.
Fair values
The carrying amounts of certain financial instruments, including cash and cash equivalents, trade and other receivables,
restricted cash, trade and other payables, and accrued expenses and other liabilities approximate fair value due to their relatively short
maturities. The Group measures its lease liabilities as described in Note 2. All other financial assets and liabilities are accounted for at
fair value.
F-46
The following tables summarize, by major security type, the Group’s financial assets and liabilities that are measured at fair
value on a recurring basis, and the category using the fair value hierarchy. The different levels have been defined in Note 2.
Financial assets and liabilities by fair value hierarchy level
Level 1
Level 2
Level 3
(in € millions)
December 31,
2019
Financial assets at fair value
Short term investments:
Government securities
Agency securities
Corporate notes
Collateralized reverse purchase agreements
Derivatives (designated for hedging):
Foreign exchange forwards
Long term investments
Total financial assets at fair value by level
Financial liabilities at fair value
Derivatives (not designated for hedging):
Warrants
Derivatives (designated for hedging):
Foreign exchange forwards
Contingent consideration
Total financial liabilities at fair value by level
229
—
—
—
—
1,481
1,710
39
5
263
156
8
—
471
—
—
—
—
—
16
16
268
5
263
156
8
1,497
2,197
—
—
98
98
—
—
—
13
—
13
—
27
125
13
27
138
Financial assets and liabilities by fair value hierarchy level
Level 1
Level 2
Level 3
December 31,
2018
Financial assets at fair value
Short term investments:
Government securities
Agency securities
Corporate notes
Collateralized reverse purchase agreements
Derivatives (designated for hedging):
Foreign exchange forwards
Derivatives (not designated for hedging):
Other
Long term investments
Total financial assets at fair value by level
Financial liabilities at fair value
Derivatives (not designated for hedging):
Warrants
Derivatives (designated for hedging):
Foreign exchange forwards
Total financial liabilities at fair value by level
(in € millions)
57
7
343
344
6
—
—
757
164
—
—
—
—
—
1,630
1,794
—
—
—
—
—
2
16
18
221
7
343
344
6
2
1,646
2,569
—
—
333
333
—
—
6
6
—
333
6
339
The Group’s policy is to recognize transfers into and transfers out of fair value hierarchy levels at the end of each reporting
period. During the years ended December 31, 2019 and 2018 there were no transfers between levels in the fair value hierarchy other
than the Group’s long term investment in TME, as noted below.
F-47
Recurring fair value measurements
Long term investment – Tencent Music Entertainment Group
The Group’s approximate 8% investment in TME is carried at fair value through other comprehensive income. Prior to
December 12, 2018, the fair value of unquoted ordinary shares of TME had been estimated using unquoted TME market transactions,
the latest fair value per ordinary share disclosed within TME’s initial registration statement on Form F-1 filed with the SEC and other
unobservable inputs. Subsequent to December 12, 2018, the fair value of ordinary shares of TME is based on the ending NYSE
American depository share price. Accordingly, the entire balance of the Group’s investment in TME of €1,630 million was transferred
from level 3 to level 1 within the fair value hierarchy in accordance with IFRS 7. The fair value of the long term investments may vary
over time and is subject to a variety of risks including: company performance, macro-economic, regulatory, industry, USD to Euro
exchange rate and systemic risks of the equity markets overall.
The table below presents the changes in the investment in TME:
At January 1
Equity issued in exchange for long term investment
Changes in fair value recorded in other comprehensive loss
At December 31
2019
2018
2017
(in € millions)
1,630
—
(149 )
1,481
910
—
720
1,630
—
910
—
910
The impact on the fair value of the Group’s long term investment in TME using reasonably possible alternative assumptions
with an increase or a decrease of TME’s share price used to value its equity interests of 10% results in a range of €1,333 million to
€1,629 million at December 31, 2019 and €1,467 million to €1,793 million at December 31, 2018.
The following sections describe the valuation methodologies the Group uses to measure its Level 3 financial instruments at
fair value on a recurring basis.
Fair value of ordinary shares
On April 3, 2018, the Group completed a direct listing of the Company’s ordinary shares on the NYSE. The fair value of the
Company’s ordinary shares subsequent to the direct listing is based on the NYSE closing ordinary share price of the Group.
The valuation of certain items in the consolidated financial statements prior to the direct listing was consistent with the Group’s
use of the Probability Weighted Expected Return Method (“PWERM”) to value the Company’s ordinary shares.
The fair value of the ordinary shares prior to the direct listing was determined using recent secondary market transactions in the
Company’s ordinary shares and the PWERM, which is one of the recommended valuation methods to measure fair value in privately
held companies with complex equity structures in the American Institute of Certified Public Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. Under this method, discrete future outcomes, including as a
public company, non-public company scenarios, and a merger or sale, are weighted based on estimates of the probability of each
scenario. In the Group’s application of this method, five different future scenarios are identified (high and low case public company,
high and low case transaction, and private company). For each scenario, an equity value is calculated based on revenue multiples,
derived from listed peer companies, which are applied on different (scenario-dependent) forecasted revenue. For the private company
scenario, a discounted cash flow method also is considered in determining the equity value. Ordinary share values are weighted by the
probability of each scenario in the valuation model. In addition, an appropriate discount adjustment is incorporated to recognize the
lack of marketability due to being a closely held entity. Finally, the impact on the share value of recent financing and secondary
trading is considered.
The following weightings, up until the Group’s direct listing, were applied to each valuation method:
PWERM
Secondary market transactions
2018
50%
50%
2017
50 – 80%
20 – 50%
F-48
The PWERM valuations, up until the Group’s direct listing, weighted the different scenarios as follows:
Market Approach – High Case Public Company
Market Approach – Low Case Public Company
Market Approach – High Case Transaction
Market Approach – Low Case Transaction
Private Case – Income and Market Approaches
2018
55 – 70%
28 – 35%
0 – 3%
0 – 2%
2 – 5%
2017
25 – 40%
35%
4 – 6%
4 – 6%
5 – 30%
The key assumptions used to estimate the fair value of the ordinary shares and contingent options using the PWERM, up until
the Group’s direct listing, were as follows:
Revenue multiple used to estimate enterprise value
Discount rate (%)
Volatility (%)
2018
3.0
13.0
32.5 – 35.0
2017
2.2 – 4.6
13.0 – 19.5
30.0 – 37.5
Warrants
On October 17, 2016, the Company sold, for €27 million, warrants to acquire 5,120,000 ordinary shares to certain holders that
are employees and management of the Group. The exercise price of each warrant is US$50.61, which was equal to 1.2 times the fair
market value of ordinary shares on the date of issuance.
On July 13, 2017, the Company sold, for €9 million, a warrant to acquire 1,600,000 ordinary shares to certain holders that are
employees and management of the Group. The exercise price of each warrant is US$89.73, which was equal to 1.3 times the fair
market value of ordinary shares on date of issuance. The warrants are exercisable at any time through July 2020.
On July 1, 2019, the Company sold, for €15 million, warrants to acquire 800,000 ordinary shares to Mr. Ek, through D.G.E.
Investments Limited, an entity indirectly wholly owned by him. The exercise price of each warrant is US$190.09, which was equal to
1.3 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through July 1,
2022.
On October 4, 2019, the Company issued 1,600,000 ordinary shares upon the exercise of 1,600,000 warrants that were granted
on October 17, 2016, for cash of €74 million. On October 17, 2019, the Company issued 1,991,627 shares upon the effective net
settlement of the remaining 3,520,000 warrants that were granted on October 17, 2016. Refer to Note 25.
The outstanding warrants are measured on a recurring basis in the consolidated statement of financial position and are Level 3
financial instruments recognized at fair value through the consolidated statement of operations. The warrants are valued using a Black-
Scholes option-pricing model, which includes inputs determined from models that include the value of the Company’s ordinary
shares, as determined above and additional assumptions used to estimate the fair value of the warrants in the option pricing model as
follows:
Expected term (years)
Risk free rate (%)
Volatility (%)
Share price (US$)
2019
0.5 – 2.5
1.58 – 1.59
32.5
149.55
2018
0.8 – 1.5
2.55 – 2.58
40.0
113.50
2017
0.9 – 1.1
1.71 – 1.76
30.0
120.50
F-49
The table below presents the changes in the warrants liability:
At January 1
Issuance of warrant for cash
Issuance of shares upon exercise of, or net settlement of,
warrants
Non cash changes recognized in profit or loss
Changes in fair value
Effect of changes in foreign exchange rates
At December 31
2019
2018
(in € millions)
2017
333
15
346
—
(303 )
—
35
18
98
(39 )
26
333
34
9
—
313
(10 )
346
The warrant liability is included in derivative liabilities on the consolidated statement of financial position. The change in
estimated fair value is recognized within finance income or costs in the consolidated statement of operations.
The impact on the fair value of the warrants with an increase or decrease in the Company’s ordinary share price of 10% results
in a range of €75 million to €127 million at December 31, 2019 and €273 million to €399 million at December 31, 2018.
Contingent consideration
On April 1, 2019, the Group acquired Parcast, a premier storytelling podcast studio. A contingent consideration was included in
the purchase consideration of the acquisition. Included in the purchase price was €13 million related to the estimated fair value of
contingent consideration. The contingent consideration is valued by the Group using a simulation of user engagement outcomes. The
maximum potential contingent consideration payout is €43 million over the next three years. The change in the fair value of the
contingent consideration is recognized within general and administrative expenses in the consolidated statement of operations.
The table below presents the changes in the contingent consideration liability:
At January 1
Initial recognition of contingent consideration included in
purchase consideration of acquisition
Non cash changes recognized in profit or loss
Changes in fair value
At December 31
2019
(in € millions)
—
13
14
27
Convertible Notes
On April 3, 2018, the Group completed a direct listing of the Company’s ordinary shares on the NYSE, and the option for the
Convertible Noteholders to unwind the January 2018 exchange transaction expired. As a result, the Group recorded an expense of
€123 million within finance costs to mark to market the Convertible Notes to the fair value based on the closing price of the
Company’s ordinary shares on April 3, 2018. The Company then reclassified the Convertible Notes balance of €1.1 billion to Other
paid in capital within Equity. Refer to Note 19.
The table below presents the changes in the Convertible Notes:
At January 1
Non cash changes recognized in profit or loss
Changes in fair value
Effect of changes in foreign exchange rates
Issuance of shares upon exchange of Convertible Notes
At December 31
F-50
2018
2017
(in € millions)
944
221
(20 )
(1,145 )
—
1,106
666
(142 )
(686 )
944
The change in estimated fair value is recognized within finance costs in the consolidated statement of operations.
24. Commitments and contingencies
Obligations under leases
On January 1, 2019, the Group recognized right-of-use assets for non-cancellable operating lease arrangements, except for
short-term leases excluded from the IFRS 16 transition due to the election of the practical expedient. Refer to Note 12.
The future minimum lease payments under non-cancellable operating leases, prior to the adoption of IFRS 16, as at
December 31, were as follows:
Not later than one year
Later than one year but not more than 5 years
More than 5 years
2018
2017
62
288
483
833
47
244
478
769
Total lease expenses were €79 million and €52 million for the years ended December 31, 2018 and 2017, respectively.
Commitments
The Group is subject to the following minimum guarantees relating to the content on its service, the majority of which relate to
minimum royalty payments associated with its license agreements for the use of licensed content, as at December 31:
Not later than one year
Later than one year but not more than 5 years
2019
2018
(in € millions)
2017
657
383
1,040
548
152
700
1,060
635
1,695
In addition to the minimum guarantees listed above, the Group is subject to various non-cancelable purchase obligations and
service agreements with minimum spend commitments of €200 million over the next 2 years, the majority of which relate to a service
agreement with Google for the use of Google Cloud Platform.
Contingencies
Various legal actions, proceedings, and claims are pending or may be instituted or asserted against the Group. These may
include but are not limited to matters arising out of alleged infringement of intellectual property; alleged violations of consumer
regulations; employment-related matters; and disputes arising out of supplier and other contractual relationships. As a general matter,
the music and other content made available on the Group’s service are licensed to the Group by various third parties. Many of these
licenses allow rights holders to audit the Group’s royalty payments, and any such audit could result in disputes over whether the
Group has paid the proper royalties. If such a dispute were to occur, the Group could be required to pay additional royalties, and the
amounts involved could be material. The Group expenses legal fees as incurred. The Group records a provision for contingent losses
when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable
outcome to any legal matter, if material, could have an adverse effect on the Group’s operations or its financial position, liquidity, or
results of operations.
F-51
On February 25, 2019, Warner/Chappell Music Limited (“WCM”) filed a lawsuit against the Group in the High Court of
Bombay, India, alleging that the Group sought to exploit WCM’s copyrights in musical compositions in India without obtaining a
license. On January 13, 2020, WCM and the Group resolved the dispute, and on January 14, 2020, the High Court of Bombay, India,
disposed of the lawsuit. On April 22, 2019, Saregama India Limited filed a lawsuit against the Group in the High Court of Delhi,
India, alleging copyright infringement, and has sought injunctive relief. Any unfavorable outcome could harm the Group’s business in
India. The Group intends to vigorously defend this action.
As of April 2019, the Group’s settlement of the Ferrick et al. v. Spotify USA Inc., No. 1:16-cv-8412-AJN (S.D.N.Y.), putative
class action lawsuit, which alleged that the Group unlawfully reproduced and distributed musical compositions without obtaining
licenses, was final and effective. Even with the effectiveness of the settlement, the Group may still be subject to claims of copyright
infringement by rights holders who have purported to opt out of the settlement or who may not otherwise be covered by its terms. The
Music Modernization Act of 2018 contains a limitation of liability with respect to such lawsuits filed on or after January 1, 2018.
Rights holders may nevertheless file lawsuits, and may argue that they should not be bound by this limitation of liability. For example,
in August 2019, the Eight Mile Style, LLC et al v. Spotify USA Inc., No. 3:19-cv-00736-AAT, lawsuit was filed against the Group in
the U.S. District Court for the Middle District of Tennessee, alleging both that the Group does not qualify for the limitation of liability
in the Music Modernization Act and that the limitation of liability is unconstitutional and thus not valid law. The Group intends to
vigorously defend this lawsuit, including plaintiffs’ challenges to the limitation of liability in the Music Modernization Act.
25. Related party transactions
Key management compensation
Key management includes members of the Company’s senior management and the board of directors. The compensation paid or
payable to key management for Board and employee services includes their participation in share-based compensation arrangements.
The disclosure amounts are based on the expense recognized in the consolidated statement of operations in the respective year.
Key management compensation
Short term employee benefits
Share-based payments
Termination benefits
2019
2018
(in € millions)
2017
5
22
—
27
4
19
1
24
4
17
1
22
On July 1, 2019, the Company issued, for €15 million, warrants to acquire 800,000 ordinary shares to Mr. Ek, through D.G.E.
Investments Limited, an entity indirectly wholly owned by him. The exercise price of each warrant is US$190.09, which was equal to
1.3 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through July 1,
2022.
On October 4, 2019, the Company issued 1,600,000 ordinary shares and 16,000,000 beneficiary certificates to Mr. Ek, through
D.G.E. Investments Limited, upon the exercise of 1,600,000 warrants that were granted on October 17, 2016, for cash of €74 million.
On October 17, 2019, the Company issued 905,285 ordinary shares and 9,052,850 beneficiary certificates to Mr. Ek, through
D.G.E. Investments Limited, upon the effective net settlement of the remaining 1,600,000 warrants that were granted on October 17,
2016.
On October 17, 2019, the Company issued 1,086,342 ordinary shares and 10,863,420 beneficiary certificates to Martin
Lorentzon, a member of the Board of Directors of the Company, through Rosello Company Limited, an entity indirectly wholly
owned by him, upon the effective net settlement of 1,920,000 warrants that were granted on October 17, 2016.
F-52
26. Group information
The Company’s principal subsidiaries as at December 31, 2019 are as follows:
Name
Spotify AB
Spotify USA Inc.
Spotify Ltd
Spotify Norway AS
Spotify Spain S.L.
Spotify GmbH
Spotify France SAS
Spotify Netherlands B.V.
Spotify Canada Inc.
Spotify Australia Pty Ltd
Spotify Brasil Serviços De Música LTDA
Spotify Japan K.K
Spotify India LLP
Spotify Singapore Pte Ltd.
Principal activities
Main operating company
USA operating company
Sales, marketing, contract
research and development,
and customer support
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Sales and marketing
Marketing
Proportion of
voting rights
and shares
held (directly
or indirectly)
100 %
100 %
Country of
incorporation
Sweden
USA
UK
100 %
Norway
100 %
Spain
100 %
Germany
100 %
100 %
France
100 % Netherlands
Canada
100 %
Australia
100 %
Brazil
100 %
Japan
100 %
100 %
India
Singapore
100 %
There are no restrictions on the net assets of the Group companies.
27. Events after the reporting period
Subsequent to year-end, the Group entered into an agreement to acquire Bill Simmons Media Group, LLC. for cash
consideration totaling approximately €130 to €180 million, a portion of which is deferred, subject to closing adjustments.
Subsequent to year-end, the Group signed license agreements with certain music labels and publishers and podcast agreements
with creators. Included in these agreements are minimum guarantee and spend commitments of approximately €186 million over the
next three years.
F-53