Spotify Technology SA's move into podcasting is starting to pay off.
The company reported a 75% jump in advertising sales for the third quarter on Thursday and projected it would eclipse 1 billion euros ($1.16 billion) in advertising sales for the first time on an annual basis. The company reported overall sales of 2.5 billion euros and operating income of 75 million euros, both surpassing analysts' forecasts.
Investors have been waiting for Spotify's multibillion dollar investment in podcasting and advertising technology to turn its money-losing music service into a profitable audio service. After shares of Spotify spiked for most of 2020, they've sagged this year as investors soured on the podcasting gambit.
The company has urged patience and said that podcasting is still a drag on profit margins. But Chief Executive Officer Daniel Ek said the company's efforts to build a podcasting business are now ahead of schedule, and projected advertising would one day account for more than 20% of its total sales. Advertising generated 323 million euros of revenue in the third quarter, which is about 13% of total sales.
"Our advertising business continues to surpass even our own optimistic expectations," Ek said on a call with investors. The company's shares spiked as much as 10%, the most isince December.
Podcasting isn't the only reason for Spotify's advertising growth. The company has also convinced record labels to pay to put their songs in front of certain listeners using an array of tools. Spotify dubs this business the two-sided marketplace.
Advertising had been an afterthought at Spotify for many years. The music streaming app used the free version of its service as a funnel to convert people into paying customers. But its interest in advertising has surged recently. The company is targeting billions of dollars in marketing budgets that currently go to linear radio. The majority of audio advertising dollars is still being spent on traditional mediums.
For Spotify to draw more of that advertising money, it will need to continue growing. The company's user growth had slowed in the first half of the year, which Ek blamed on the pandemic. Ek said Thursday that the choppiness of the year's first half was over, and the company forecast it will surpass 400 million users by the end of 2021.
Asian markets are driving a lot of Spotify's user growth. The company added 16 million users in the quarter, seven million of whom are paying subscribers. The company said it performed better than expected in South Korea, Pakistan, Bangladesh, Indonesia and the Philippines. To help satisfy those listeners, Spotify is also investing more in international podcasts. The company released 76 original and exclusive podcasts from outside the U.S., compared to just 32 in the U.S.