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Increasing gross profits and shrinking operating losses strongly suggest that the company is growing more efficient over time. At the same time, Spotify kept posting operating losses, but its operating margins improved from (15.4%) to (0.9%). In the first quarter of 2017, its gross margin was a mere 11.7% by the first quarter of 2020, gross margin had increased to 25.5%. Obviously, streaming music comes with very high costs of service, and Spotify has worked hard since it went public to increase its margins.

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Only once in nine years did the company's FCF go negative, purportedly owing to timing shifts in license payments for its music segment. However, it has largely maintained positive free cash flow (FCF), which seems earmarked for further self-investments. So it may not be a surprise that the company has posted net losses for years now, despite growing total revenues. In order to stay ahead of its fierce competitors, Spotify invests heavily every quarter in content acquisition and production, as well as improving user experience. 1 source for podcasts provides a huge added value, which can entice potential users over to Spotify's platform instead of its competition. Embracing digital media has let us consume more songs and podcasts faster than ever, and our desire for content on meaningful, educational subjects is growing by leaps and bounds. This supports the idea that podcasts are a huge draw for listeners. Indeed, recent quarterly data indicates that workday morning consumption of podcasts has increased to resemble previous weekend levels.

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Why is this important? In fiscal 2019, Spotify's podcast listening hours increased by 200%, suggesting that podcast streaming is a growing driver of increasing engagement and retention. Accordingly, over the past three years, the number of paying subscribers has increased threefold, contributing heavily to its increasing revenues. As a result, the company successfully manages to convert an eye-popping 60% of its free users to higher-margin premium accounts.

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While the company employs several conversion tactics, the most notable is its subtle and insistent interruption of the immersive, free user experience, which encourages users to upgrade to premium in order to make their experience perfect.

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Spotify also has a strong strategy for converting ad-supported free users to premium subscribers, which is significant since the gross margin for premium users is higher than for free users. From 2017 to 2020, the company's total monthly active users grew from 131 million to 286 million, and its total revenue doubled. Rather than waiting for traditional TV broadcasts and radio shows to air at set times, people are moving toward enjoying those programs on-demand. Over the past year alone, for example, Spotify experienced a 31% increase in overall users. The coronavirus pandemic has meant more time at home for all of us - and highlighted a long-term shift in how we watch and listen to the things that entertain us. Yet Spotify offers more than just music its focus on expanding content categories mirrors how we are changing the way we consume information. And that change makes all the difference for Spotify's future. Well recognized for its streaming music platform, Spotify ( SPOT 0.44%) has proven a great success story so far this year, as its stock price has nearly doubled on the back of strong subscription data.

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