6-K 1 spot-20210930x6xk.htm 6-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of October, 2021
Commission File Number: 001-38438
Spotify Technology S.A.
(Translation of registrant's name into English)
42-44, avenue de la Gare
L-1610 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive office)
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F      Form 40-F  
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes      No  
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes      No  










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Spotify Technology S.A.
Interim condensed consolidated financial statements
For the three and nine months ended September 30, 2021




Table of contents
 
  Page
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Interim condensed consolidated statement of operations
(Unaudited)
(in € millions, except share and per share data)
 
  Three months ended September 30,Nine months ended September 30,
Note2021202020212020
Revenue52,501 1,975 6,979 5,712 
Cost of revenue1,833 1,486 5,100 4,272 
Gross profit668 489 1,879 1,440 
Research and development208 176 659 605 
Sales and marketing280 256 795 735 
General and administrative105 97 324 324 
593 529 1,778 1,664 
Operating income/(loss)75 (40)101 (224)
Finance income6101 14 226 90 
Finance costs6(14)(90)(70)(396)
Finance income/(costs) - net87 (76)156 (306)
Income/(loss) before tax162 (116)257 (530)
Income tax expense/(benefit)7160 (15)252 (74)
Net income/(loss) attributable to owners of the parent2 (101)5 (456)
Earnings/(loss) per share attributable to owners of the parent
Basic80.01 (0.53)0.02 (2.44)
Diluted8(0.41)(0.58)(0.85)(2.44)
Weighted-average ordinary shares outstanding
Basic8191,485,473 188,842,828 191,077,975 186,821,414 
Diluted8194,551,862 189,054,064 193,559,697 186,821,414 
 
The accompanying notes are an integral part of the interim condensed consolidated financial statements.

-1-

Interim condensed consolidated statement of comprehensive loss
(Unaudited)
(in € millions)
 
  Three months ended September 30,Nine months ended September 30,
Note2021202020212020
Net income/(loss) attributable to owners of the parent2 (101)5 (456)
Other comprehensive (loss)/income
Items that may be subsequently reclassified to
   condensed consolidated statement of operations
   (net of tax):
Change in net unrealized gain or loss on short term investments15, 21(1)(2)(4)
Change in net unrealized gain or loss on cash flow hedging instruments15, 21(1)
Change in foreign currency translation adjustment28 (23)52 (25)
Items not to be subsequently reclassified to
   condensed consolidated statement of operations
  (net of tax):
(Losses)/gains in the fair value of long term investments15, 21(654)72 (954)246 
Other comprehensive (loss)/income for the
   period (net of tax)
(625)46 (905)231 
Total comprehensive loss for the period
   attributable to owners of the parent
(623)(55)(900)(225)
 
The accompanying notes are an integral part of the interim condensed consolidated financial statements.

- 2 -

Interim condensed consolidated statement of financial position
(in € millions)
 
NoteSeptember 30, 2021December 31, 2020
(Unaudited) 
Assets  
Non-current assets  
Lease right-of-use assets9443 444 
Property and equipment10369 313 
Goodwill11869 736 
Intangible assets1191 97 
Long term investments211,090 2,277 
Restricted cash and other non-current assets1277 78 
Deferred tax assets713 15 
2,952 3,960 
Current assets
Trade and other receivables13571 464 
Income tax receivable
Short term investments21725 596 
Cash and cash equivalents2,512 1,151 
Other current assets14224 151 
4,037 2,366 
Total assets6,989 6,326 
Equity and liabilities
Equity
Share capital— — 
Other paid in capital4,681 4,583 
Treasury shares15(201)(175)
Other reserves15922 1,687 
Accumulated deficit(3,285)(3,290)
Equity attributable to owners of the parent2,117 2,805 
Non-current liabilities
Exchangeable Notes17, 211,175 — 
Lease liabilities9582 577 
Accrued expenses and other liabilities1937 42 
Provisions20
1,797 621 
Current liabilities
Trade and other payables18774 638 
Income tax payable10 
Deferred revenue440 380 
Accrued expenses and other liabilities191,751 1,748 
Provisions2016 20 
Derivative liabilities2184 105 
3,075 2,900 
Total liabilities4,872 3,521 
Total equity and liabilities6,989 6,326 
 
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
- 3 -

Interim condensed consolidated statement of changes in equity
(Unaudited)
(in € millions)
NoteShare
capital
Other paid in
capital
Treasury
Shares
Other
reserves
Accumulated
deficit
Equity attributable to
owners of the parent
Balance at January 1, 2021— 4,583 (175)1,687 (3,290)2,805 
Income for the period— — — — 23 23 
Other comprehensive income— — — 228 — 228 
Issuance of shares upon exercise of stock
    options, restricted stock units, and
    contingently issuable shares
16— 47 — — 51 
Restricted stock units withheld for employee taxes— — — (16)— (16)
Share-based compensation16— — — 49 — 49 
Income tax impact associated with
    share-based compensation
— — — 104 — 104 
Balance at March 31, 2021 4,630 (171)2,052 (3,267)3,244 
Loss for the period— — — — (20)(20)
Other comprehensive loss— — — (508)— (508)
Issuance of shares upon exercise of stock
    options and restricted stock units
16— 26 — — — 26 
Restricted stock units withheld for employee taxes— — — (12)— (12)
Share-based compensation16— — — 64 — 64 
Income tax impact associated with
    share-based compensation
— — — (95)— (95)
Balance at June 30, 2021 4,656 (171)1,501 (3,287)2,699 
Income for the period— — — — 
Other comprehensive loss— — — (625)— (625)
Issuance of shares upon exercise of stock
    options and restricted stock units
16— 25 — — — 25 
Repurchases of ordinary shares15— — (30)— — (30)
Restricted stock units withheld for employee taxes— — — (12)— (12)
Share-based compensation16— — — 58 — 58 
Balance at September 30, 2021 4,681 (201)922 (3,285)2,117 
- 4 -

NoteShare
capital
Other paid in
capital
Treasury
Shares
Other
reserves
Accumulated
deficit
Equity attributable to
owners of the parent
Balance at January 1, 2020— 4,192 (370)924 (2,709)2,037 
Income for the period— — — — 
Other comprehensive loss— — — (140)— (140)
Issuance of share-based compensation in
   conjunction with business combinations
4— (113)190 — — 77 
Issuance of shares upon exercise of stock
    options and restricted stock units
16— — — (3)— (3)
Share-based compensation16— — — 39 — 39 
Income tax impact associated with
    share-based compensation
— — — — 
Balance at March 31, 2020 4,079 (180)822 (2,708)2,013 
Loss for the period— — — — (356)(356)
Other comprehensive income— — — 325 — 325 
Issuance of shares upon exercise of stock
    options and restricted stock units
16— 96 — — 101 
Restricted stock units withheld for employee taxes— — — (5)— (5)
Share-based compensation16— — — 51 — 51 
Income tax impact associated with
    share-based compensation
— — — (6)— (6)
Balance at June 30, 2020 4,175 (175)1,187 (3,064)2,123 
Loss for the period— — — — (101)(101)
Other comprehensive income— — — 46 — 46 
Issuance of shares upon exercise of stock
    options and restricted stock units
16— 97 — — — 97 
Issuance of shares upon effective net
    settlement of warrants
15— 267 — — — 267 
Restricted stock units withheld for employee taxes— — — (11)— (11)
Share-based compensation16— — — 46 — 46 
Income tax impact associated with
   share-based compensation
— — — (1)— (1)
Balance at September 30, 2020 4,539 (175)1,267 (3,165)2,466 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.
- 5 -

Interim condensed consolidated statement of cash flows
(Unaudited)
(in € millions)
  Nine months ended September 30,
Note20212020
Operating activities  
Net income/(loss)(456)
Adjustments to reconcile net income/(loss) to net cash flows
Depreciation of property and equipment and lease right-of-use assets9, 1069 65 
Amortization of intangible assets1125 17 
Share-based compensation expense16173 133 
Finance income6(226)(90)
Finance costs670 396 
Income tax expense/(benefit)7252 (74)
Other
Changes in working capital:
Increase in trade receivables and other assets(182)(93)
Increase in trade and other liabilities45 243 
Increase in deferred revenue50 50 
(Decrease)/increase in provisions20(3)
Interest paid on lease liabilities9(37)(43)
Interest received
Income tax paid(5)(8)
Net cash flows from operating activities242 152 
Investing activities
Business combinations, net of cash acquired4(101)(137)
Purchases of property and equipment10(69)(43)
Purchases of short term investments21(385)(948)
Sales and maturities of short term investments21287 916 
Change in restricted cash12— 
Other(7)(28)
Net cash flows used in investing activities(274)(240)
Financing activities
Proceeds from exercise of stock options16103 274 
Proceeds from issuance of warrants2131 — 
Repurchases of ordinary shares15(24)— 
Payments of lease liabilities9(25)(16)
Lease incentives received913 
Proceeds from issuance of Exchangeable Notes, net of costs171,223 — 
Payments for employee taxes withheld from restricted stock unit releases16(40)(19)
Net cash flows from financing activities1,275 252 
Net increase in cash and cash equivalents1,243 164 
Cash and cash equivalents at beginning of the period1,151 1,065 
Net foreign exchange gains/(losses) on cash and cash equivalents118 (47)
Cash and cash equivalents at September 302,512 1,182 
Supplemental disclosure of cash flow information
Non-cash investing and financing activities
Deferred consideration liability recognized in conjunction with business combination419 32 
Recognition of lease right-of-use asset in exchange for lease liabilities921 23 
Purchases of property and equipment in trade and other liabilities1020 
Repurchases of ordinary shares in trade and other liabilities15— 
Issuance of shares upon effective net settlement of warrants21— 267 
 
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
- 6 -

Notes to the interim condensed consolidated financial statements
(Unaudited)

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, L-1610, Luxembourg, Grand Duchy of Luxembourg.
The principal activity of the Company and its subsidiaries (the "Group," "we," "us," or "our") 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 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.Basis of preparation and summary of significant accounting policies
The interim condensed consolidated financial statements of Spotify Technology S.A. for the three and nine months ended September 30, 2021 and 2020 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim financial information is unaudited. The interim financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim condensed consolidated financial statements should be read in conjunction with the Group's consolidated financial statements for the year ended December 31, 2020, as they do not include all the information and disclosures required in the annual consolidated financial statements. Interim results are not necessarily indicative of the results for a full year. The interim condensed consolidated financial statements are presented in millions of Euros.
New and amended standards and interpretations adopted by the Group
There are no new IFRS or IFRS Interpretation Committee ("IFRIC") interpretations effective for the nine months ended September 30, 2021 that have a material impact to the interim condensed consolidated financial statements.
New standards and interpretations issued not yet effective
In January 2020, the International Accounting Standard Board ("IASB") issued amendments to paragraphs 69 to 76 of IAS 1 Presentation of Financial Statements to specify the requirements for classifying liabilities as current or non-current, effective for annual reporting periods beginning on or after January 1, 2023. The amendment would require the Group to reclassify the Exchangeable Notes (as defined below) as a current liability if the exchange conditions are met, even if no noteholder actually requires us to exchange their notes.
There are no other IFRS or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Group's interim condensed consolidated financial statements.
3.Critical accounting estimates and judgments
Except as noted below, in preparing these interim condensed consolidated financial statements, the significant judgments made by management in applying the Group's accounting policies and the key sources of estimation and uncertainty were the same as those applied to the consolidated financial statements for the year ended December 31, 2020.
On March 2, 2021, the Company’s wholly owned subsidiary, Spotify USA Inc., issued US$1,500 million aggregate principal amount of 0% Exchangeable Senior Notes due 2026 (the “Exchangeable Notes”). See Note 17 for additional information including the accounting policy for the Exchangeable Notes.
The fair value of the Exchangeable Notes is estimated using a combination of binomial option pricing model and prices observed for the Exchangeable Notes in an over-the-counter market on the last trading day of the reporting period. See Note 21 for information regarding the key inputs and assumptions used to estimate the fair value of the Exchangeable Notes.
- 7 -

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events.
4.Business combinations
Podz
On June 17, 2021, the Group acquired 100% of Podz, Inc. (“Podz”), a technology company focused on the podcast discovery experience.

The fair value of the purchase consideration was €45 million with €36 million in cash paid at closing and €9 million in deferred consideration. The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €44 million was recorded to goodwill, €2 million to acquired intangible assets and €1 million to deferred tax liabilities.

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.
Betty Labs Incorporated
On March 29, 2021, the Group acquired 100% of Betty Labs Incorporated (“Betty Labs”), a technology and content creation company focused on creating groundbreaking live audio experiences. The acquisition allows the Group to accelerate its entry into the live audio space.
The fair value of the purchase consideration was €57 million in cash paid at closing. The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €52 million has been recorded to goodwill, €2 million to acquired intangible assets, €4 million to cash and cash equivalents, and €1 million to deferred tax liabilities.
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.
For the three and nine months ended September 30, 2021, revenues and operating results of the acquired businesses were not significant to the Group's condensed consolidated statement of operations.
The amount for business combinations, net of cash acquired, within the condensed consolidated statement of cash flows for the nine months ended September 30, 2021 includes €12 million of investing cash outflows for deferred and contingent consideration of previous business combinations.
5.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 for the Premium segment is generated through subscription fees. The Ad-Supported Service is free to the user. Revenue for the Ad-Supported segment is primarily generated through the sale of advertising across the Group's music and podcast content. Royalty costs are primarily recorded in each segment based on specific rates for each segment agreed to with rights holders. All podcast content costs are recorded in the Ad-Supported segment. The remaining costs 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 2020 and 2021 are included in the Ad-Supported segment. No operating segments have been aggregated to form the reportable segments.
- 8 -

Key financial performance measures of the segments including revenue, cost of revenue, and gross profit/(loss) are as follows:
  Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions)
Premium    
Revenue2,178 1,790 6,165 5,248 
Cost of revenue1,545 1,302 4,361 3,784 
Gross profit633 488 1,804 1,464 
Ad-Supported
Revenue323 185 814 464 
Cost of revenue288 184 739 488 
Gross profit/(loss)35 1 75 (24)
Consolidated
Revenue2,501 1,975 6,979 5,712 
Cost of revenue1,833 1,486 5,100 4,272 
Gross profit668 489 1,879 1,440 

Reconciliation of segment 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 income/(loss) before tax is as follows:
 
 Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions)
Segment gross profit668 489 1,879 1,440 
Research and development(208)(176)(659)(605)
Sales and marketing(280)(256)(795)(735)
General and administrative(105)(97)(324)(324)
Finance income101 14 226 90 
Finance costs(14)(90)(70)(396)
Income/(loss) before tax162 (116)257 (530)
 
Revenue by country
 
  Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions)
United States966 739 2,629 2,126 
United Kingdom259 208 723 611 
Luxembourg
Other countries1,274 1,027 3,622 2,972 
 2,501 1,975 6,979 5,712 
 
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 delivered. There are no countries that individually make up greater than 10% of total revenue included in "Other countries."
- 9 -

6.Finance income and costs
 Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions)
Finance income    
Fair value movements on derivative liabilities (Note 21)29 51 49 
Fair value movements on Exchangeable Notes (Note 21)51 — 117 — 
Interest income14 
Other finance income
Foreign exchange gains16 — 45 20 
Total101 14 226 90 
Finance costs
Fair value movements on derivative liabilities (Note 21)(3)(27)(3)(271)
Interest expense on lease liabilities(10)(10)(30)(31)
Transaction costs in relation to issuance of Exchangeable
     Notes
— — (18)— 
Other finance costs(1)(5)(7)(9)
Foreign exchange losses— (48)(12)(85)
Total(14)(90)(70)(396)
 
7.Income tax
The effective tax rates for the three months ended September 30, 2021 and 2020 were 99.1% and 13.3%, respectively. The effective tax rates for the nine months ended September 30, 2021 and 2020 were 98.2% and 13.9%, respectively. The Group operates in a global environment with significant operations in various jurisdictions outside Luxembourg. Accordingly, the consolidated income tax rate is a composite rate reflecting the Group's earnings and the applicable tax rates in the various jurisdictions where the Group operates.
For the three months ended September 30, 2021, the income tax expense of €160 million was due primarily to derecognition of deferred taxes of €193 million as a result of the unrealized decrease in the fair value of the Group's long term investment in Tencent Music Entertainment Group (“TME”), partially offset by recognition of deferred taxes of €40 million as a result of the unrealized increase in fair value of our long term investment in DistroKid. For the nine months ended September 30, 2021, the income tax expense of €252 million was due primarily to the derecognition of deferred taxes of €251 million as a result of the unrealized decrease in the fair value of the TME investment, partially offset by the recognition of deferred taxes of €42 million as a result of the unrealized increase in fair value of the DistroKid investment. In addition, current period share-based compensation deductions recognized in equity resulted in additional tax expense of €37 million. For the three and nine months ended September 30, 2020, the income tax benefit of €15 million and €74 million, respectively, was due primarily to additional recognition of deferred taxes as a result of the unrealized increase in the fair value of the TME investment.
Transactions recorded through other comprehensive (loss)/income have been shown net of their tax impact, as applicable.
We are subject to ongoing tax audits in several jurisdictions, and most of these audits involve transfer pricing issues. Tax authorities in certain jurisdictions have challenged our tax positions. We regularly assess the likely outcomes of these audits, taking into account any new information available, in order to determine the appropriateness of our tax reserves. If we conclude that it is not probable that our tax position will be accepted, the effect of that uncertainty is reflected at either the most likely amount or the expected value, taking into account a range of possible outcomes.
- 10 -

Tax provisions in the condensed consolidated statement of financial position were €7 million and €5 million as of September 30, 2021 and December 31, 2020, respectively. The year to date increase primarily reflects estimates of uncertain tax positions that have a gross impact of €39 million (before utilization of loss carry forwards). Interest and penalties included in income tax expense were not material in any of the periods presented. Due to the uncertainty associated with our tax positions, any future agreement with the tax authorities could have a significant impact on our results of operations, financial condition and cash flows.
Net deferred tax assets of €13 million and €15 million have been recorded in the condensed consolidated statement of financial position as of September 30, 2021 and December 31, 2020, respectively. In evaluating the probability of realizing the deferred tax assets, the Group considered all available positive and negative evidence of future tax profit, primarily past operating results. As of September 30, 2021 and December 31, 2020, deferred tax assets of €611 million and €535 million have not been recognized.
8.Earnings/(loss) per share
Basic earnings/(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 weighted-average number of outstanding ordinary shares and potential outstanding ordinary shares during the period. Potential ordinary shares, which are based on the weighted-average ordinary shares underlying outstanding stock options, restricted stock units, restricted stock awards, other contingently issuable shares, warrants, and Exchangeable Notes and computed using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted loss per share when their effect is dilutive. The computation of earnings/(loss) per share for the respective periods is as follows:
 Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions, except share and per share data)
Basic earnings/(loss) per share    
Net income/(loss) attributable to owners of the parent(101)(456)
Shares used in computation:
Weighted-average ordinary shares outstanding191,485,473 188,842,828 191,077,975 186,821,414 
Basic earnings/(loss) per share
   attributable to owners of the parent
0.01 (0.53)0.02 (2.44)
Diluted loss per share
Net income/(loss) attributable to owners of the parent(101)(456)
Fair value gains on dilutive warrants(30)(9)(51)— 
Fair value gains on dilutive Exchangeable Notes(52)— (117)— 
Net loss used in the computation
   of diluted loss per share
(80)(110)(163)(456)
Shares used in computation:
Weighted-average ordinary shares outstanding191,485,473 188,842,828 191,077,975 186,821,414 
Warrants154,889 211,236 229,029 — 
Exchangeable Notes2,911,500 — 2,252,693 — 
Diluted weighted-average ordinary shares194,551,862 189,054,064 193,559,697 186,821,414 
Diluted loss per share
   attributable to owners of the parent
(0.41)(0.58)(0.85)(2.44)
- 11 -

Potential dilutive securities that were not included in the diluted loss per share calculations because they would be anti-dilutive were as follows:
Three months ended September 30,Nine months ended September 30,
2021202020212020
Stock options9,461,907 9,502,640 9,461,907 9,502,640 
Restricted stock units1,505,269 1,373,192 1,505,269 1,373,192 
Restricted stock awards— 41,280 — 41,280 
Other contingently issuable shares108,720 156,190 108,720 156,190 
Warrants800,000 — 800,000 800,000 

9.Leases
The Group leases certain properties under non-cancellable lease agreements that relate to office space. The expected lease terms are up to thirteen years. The Group currently does not act in the capacity of a lessor.
Below is the roll-forward of lease right-of-use assets:
Right-of-use assets 
 (in € millions)
Cost 
At January 1, 2021581 
Increases21 
Decreases(2)
Exchange differences22 
At September 30, 2021622 
Accumulated depreciation
At January 1, 2021(137)
Depreciation charge(39)
Decreases
Exchange differences(5)
At September 30, 2021(179)
Cost, net accumulated depreciation
At January 1, 2021444 
At September 30, 2021443 
Below is the roll-forward of lease liabilities:
Lease liabilities20212020
(in € millions)
At January 1608 628 
Increases21 23 
Payments(62)(59)
Interest expense30 31 
Lease incentives received13 
Increases in lease incentives receivable(1)(1)
Exchange differences23 (23)
At September 30626 612 
- 12 -

Below is the maturity analysis of lease liabilities:
Lease liabilitiesSeptember 30, 2021
Maturity Analysis(in € millions)
Less than one year88 
One to five years354 
More than five years446 
Total lease commitments888 
Impact of discounting remaining lease payments(257)
Lease incentives receivable(5)
Total lease liabilities626 
Lease liabilities included in the condensed consolidated
   statement of financial position
Current44 
Non-current582 
Total626 
Excluded from the lease commitments above are short term leases. Expenses relating to short term leases were approximately €1 million and €2 million for the three months ended September 30, 2021 and 2020, respectively, and €5 million and €7 million for the nine months ended September 30, 2021 and 2020, respectively. Additionally, the Group has entered into certain lease agreements with approximately €10 million of commitments, which had not commenced as of September 30, 2021, and as such, have not been recognized in the condensed consolidated statement of financial position.
The weighted-average incremental borrowing rate applied to lease liabilities recognized in the condensed consolidated statement of financial position as of September 30, 2021 was 6.3%.
10.Property and equipment
Property and equipmentLeasehold
improvements
Total
 (in € millions)
Cost   
At January 1, 202156 346 402 
Additions11 60 71 
Disposals(1)(1)(2)
Exchange differences16 18 
At September 30, 202168 421 489 
Accumulated depreciation
At January 1, 2021(36)(53)(89)
Depreciation charge(7)(23)(30)
Disposals
Exchange differences(1)(2)(3)
At September 30, 2021(43)(77)(120)
Cost, net accumulated depreciation
At January 1, 202120 293 313 
At September 30, 202125 344 369 
The Group had €69 million and €59 million of leasehold improvements that were not placed into service as of September 30, 2021 and December 31, 2020, respectively.  
- 13 -

11.     Goodwill and intangible assets
 Internal
development
costs and
patents
Acquired
intangible
assets
TotalGoodwillTotal
 (in € millions)
Cost     
At January 1, 202164 91 155 736 891 
Additions12 — 12 — 12 
Acquisition, business combination (Note 4)— 95 99 
Exchange differences— 38 42 
At September 30, 202176 99 175 869 1,044 
Accumulated amortization
At January 1, 2021(31)(27)(58) (58)
Amortization charge(12)(13)(25)— (25)
Exchange differences— (1)(1)— (1)
At September 30, 2021(43)(41)(84) (84)
Cost, net accumulated amortization
At January 1, 202133 64 97 736 833 
At September 30, 202133 58 91 869 960 

Amortization charges related to intangible assets of €6 million and €5 million are included in research and development in the condensed consolidated statement of operations during the three months ended September 30, 2021 and 2020, respectively. Amortization charges related to intangible assets of €19 million and €12 million are included in research and development in the condensed consolidated statement of operations during the nine months ended September 30, 2021 and 2020, respectively. There were no impairment charges for goodwill or intangible assets for the three and nine months ended September 30, 2021 and 2020, respectively.
12.     Restricted cash and other non-current assets
 
September 30, 2021December 31, 2020
(in € millions)
Restricted cash  
Lease deposits and guarantees49 48 
Other
Other non-current assets27 29 
 77 78 

 
13.Trade and other receivables
 September 30, 2021December 31, 2020
 (in € millions)
Trade receivables416 323 
Less: allowance for expected credit losses(6)(4)
Trade receivables - net410 319 
Other receivables161 145 
 571 464 

- 14 -

14.     Other current assets

September 30, 2021December 31, 2020
(in € millions)
Content assets148 92 
Prepaid expenses and other 67 47 
Derivative assets12 
224 151 

Content asset amortization of €34 million and €12 million is included in cost of revenue in the condensed consolidated statement of operations for the three months ended September 30, 2021 and 2020, respectively. Content asset amortization of €83 million and €26 million is included in cost of revenue in the condensed consolidated statement of operations for the nine months ended September 30, 2021 and 2020, respectively.

15.     Equity and other reserves
As of September 30, 2021 and December 31, 2020, the Company had 194,614,910 and 193,614,910 ordinary shares issued and fully paid, respectively, with 3,060,488 and 3,402,063 ordinary shares held as treasury shares, respectively.
On August 20, 2021, the Company announced that the Board of Directors had approved a program to repurchase up to $1.0 billion of the Company’s ordinary shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The repurchase program will expire on April 21, 2026. Through September 30, 2021, 157,510 shares were repurchased for €30 million under this program.
For the three and nine months ended September 30, 2021, the Company repurchased 157,510 and 1,157,510 of its own ordinary shares and reissued 355,920 and 1,499,085 treasury shares, respectively, upon the exercise of stock options, restricted stock units, and contingently issuable shares. For the three and nine months ended September 30, 2020, the Company repurchased 2,026,000 of its own ordinary shares and reissued 1,166,443 and 4,176,163 treasury shares, respectively, upon the exercise of stock options, restricted stock units, and contingently issuable shares.
As of September 30, 2021 and December 31, 2020, the Group's founders held 355,287,570 and 365,014,840 beneficiary certificates, respectively.

- 15 -

Other reserves
 20212020
 (in € millions)
Currency translation  
At January 1(54)(11)
Currency translation52 (25)
At September 30(2)(36)
Short term investments
At January 15 1 
(Losses)/gains on fair value that may be subsequently reclassified to
   condensed consolidated statement of operations
(4)
Gains reclassified to condensed consolidated statement of operations(1)(3)
Deferred tax(1)
At September 301 6 
Long term investments
At January 11,059 444 
(Losses)/gains on fair value not to be subsequently reclassified to
   condensed consolidated statement of operations
(1,185)310 
Deferred tax231 (64)
At September 30105 690 
Cash flow hedges
At January 1(3)(4)
(Losses)/gains on fair value that may be subsequently reclassified
   to condensed consolidated statement of operations
(8)11 
Losses/(gains) reclassified to revenue39 (13)
(Gains)/losses reclassified to cost of revenue(30)
Deferred tax— (2)
At September 30(2)1 
Share-based compensation
At January 1680 494 
Share-based compensation171 136 
Income tax impact associated with share-based compensation(5)
Restricted stock units withheld for employee taxes(40)(19)
At September 30820 606 
Other reserves at September 30922 1,267 
 
16.     Share-based compensation
The expense recognized in the condensed consolidated statement of operations for share-based compensation is as follows:
  Three months ended September 30,Nine months ended September 30,
 2021202020212020
 (in € millions)
Cost of revenue
Research and development30 22 90 63 
Sales and marketing10 31 26 
General and administrative14 12 45 38 
 57 46 173 133 
- 16 -

During the nine months ended September 30, 2021, the Company implemented a new restricted stock unit (“RSU”) program for executives and employees of the Group and for members of its Board of Directors (the “2021 RSU Plan”). Both are accounted for as equity-settled share-based compensation 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 2021 RSU Plan 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.
Activity in the Group's RSUs and other contingently issuable shares outstanding and related information is as follows:
 RSUsOther
 Number of
RSUs
Weighted
average
grant date
fair value
Number of
Awards
Weighted
average
grant date
fair value
  US$ US$
Outstanding at January 1, 20211,320,193155.98 156,190145.19 
Granted648,794284.83 22,988261.00 
Forfeited(89,570)189.64 — 
Released(374,148)173.02 (70,458)182.98 
Outstanding at September 30, 20211,505,269205.28 108,720145.19 
 
In the table above, the number of RSUs and other contingently issuable shares released include ordinary shares that the Group has withheld for settlement of employees' tax obligations due upon the vesting of RSUs and other contingently issuable shares.

During the nine months ended September 30, 2021, the Company implemented a new Employee Stock Option Plan and Director Stock Option Plan (the “2021 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. For options granted under the 2021 Stock Option Plan, 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 2021 Stock Option Plan 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.
Activity in the Group's stock options outstanding and related information is as follows:
  Options
 Number of
options
Weighted
average
exercise price
  US$
Outstanding at January 1, 20219,041,288138.60 
Granted1,944,436321.60 
Forfeited(260,257)190.22 
Exercised(1,251,727)98.84 
Expired(11,833)184.00 
Outstanding at September 30, 20219,461,907179.99 
Exercisable at January 1, 20214,022,751113.91 
Exercisable at September 30, 20214,685,252137.74 
The weighted-average contractual life for the stock options outstanding at September 30, 2021 was 2.8 years. The weighted average share price at exercise for options exercised during the nine months ended September 30, 2021 was US$285.05. The weighted average fair value of options granted during the nine months ended September 30, 2021 was US$79.45 per option.
- 17 -

The following table lists the inputs to the Black-Scholes option-pricing models used for share-based compensation for the three and nine months ended September 30, 2021 and 2020:
 Three months ended September 30,Nine months ended September 30,
 2021202020212020
Expected volatility (%)35.4 - 42.933.4 - 38.634.1 - 42.930.0 - 38.6
Risk-free interest rate (%)0.3 - 0.80.1 - 0.30.2 - 0.80.1 - 1.7
Expected life of stock options (years)2.6 - 4.82.6 - 4.82.6 - 4.82.6 - 4.8
Weighted average share price (US$)243.23 277.49 287.48 154.21 

17.     Exchangeable Notes
On March 2, 2021, the Company’s wholly owned subsidiary, Spotify USA Inc. (the “Issuer”), issued US$1,500 million aggregate principal amount of 0% Exchangeable Notes due 2026, which included the initial purchasers’ exercise in full of their option to purchase an additional US$200 million principal amount of the Exchangeable Notes. The Exchangeable Notes will mature on March 15, 2026, unless earlier repurchased, redeemed or exchanged. The Exchangeable Notes are fully and unconditionally guaranteed, on a senior, unsecured basis by the Company.
The net proceeds from the issuance of the Exchangeable Notes were €1,223 million after deducting transaction costs of €18 million. The transaction costs were immediately expensed and included in finance costs in the condensed consolidated statement of operations for the nine months ended September 30, 2021.
The Exchangeable Notes are the Issuer’s senior unsecured obligations and are equal in right of payment with the Issuer's future senior, unsecured indebtedness, senior in right of payment to the Issuer’s future indebtedness that is expressly subordinated to the Exchangeable Notes and effectively subordinated to the Issuer’s future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Exchangeable Notes will be structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent the Issuer is not a holder thereof) preferred equity, if any, of the Issuer’s subsidiaries.
The noteholders may exchange their Exchangeable Notes at their option into consideration that consists, at the Issuer’s election, of cash, ordinary shares of the Company, or a combination of cash and ordinary shares, but only in the following circumstances:
 (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per ordinary share exceeds 130% of the exchange price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Exchangeable Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and the exchange rate on such trading day;
(3) upon the occurrence of certain corporate events or distributions on the ordinary shares as set forth in the indenture governing the Exchangeable Notes (the “Indenture”);
(4) if the Issuer calls such Exchangeable Notes for redemption; and
(5) at any time from, and including, December 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.
The initial exchange rate is 1.9410 ordinary shares per US$1,000 principal amount of Exchangeable Notes, which represents an initial exchange price of approximately US$515.20 per ordinary share. The exchange rate and exchange price will be subject to customary adjustments upon the occurrence of certain events as set forth in the Indenture. In addition, if certain corporate events that constitute a make-whole fundamental change occur as set forth in the Indenture, then the exchange rate will, in certain circumstances, be increased for a specified period of time.
- 18 -

The circumstances required to allow the noteholders to exchange their Exchangeable Notes were not met during the nine months ended September 30, 2021.
The Exchangeable Notes will not be redeemable prior to March 20, 2024, except in the event of certain tax law changes as set forth in the Indenture. The Exchangeable Notes will be redeemable, in whole or in part, at the Issuer’s option at any time, and from time to time, on or after March 20, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Exchangeable Notes to be redeemed, plus accrued and unpaid special and additional interest, if any, but only if the last reported sale price per ordinary share exceeds 130% of the exchange price on:
(1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Issuer sends the related redemption notice; and
(2) the trading day immediately before the date the Issuer sends such notice.
In addition, the Issuer will have the right to redeem all, but not less than all, of the Exchangeable Notes if certain changes in tax law as set forth in the Indenture occur. In addition, calling any Exchangeable Note for redemption will constitute a make-whole fundamental change with respect to that Exchangeable Note, in which case the exchange rate applicable to the exchange of that Exchangeable Note will be increased in certain circumstances if it is exchanged after it is called for redemption.
Upon the occurrence of a “fundamental change” as set forth in the Indenture, noteholders may require the Issuer to repurchase their Exchangeable Notes at a cash repurchase price equal to the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid special and additional interest, if any, to, but excluding, the fundamental change repurchase date as set forth in the Indenture.
The Group accounted for the Exchangeable Notes at fair value through profit and loss using the fair value option in accordance with IFRS 9, Financial Instruments. Under this approach, the Exchangeable Notes are accounted for in their entirety at fair value, with any change in fair value after initial measurement being recorded in finance income or cost in condensed consolidated statement of operations, except that changes in fair value that are due to changes in own credit risk are presented separately in other comprehensive (loss)/income and will not be reclassified to the condensed consolidated statement of operations.
The fair value of the Exchangeable Notes as of September 30, 2021 was €1,175 million. See Note 21 for information regarding the key inputs and assumptions used to estimate the fair value of the Exchangeable Notes.

18.Trade and other payables
  September 30, 2021December 31, 2020
 (in € millions)
Trade payables528 434 
Value added tax and sales taxes payable223 181 
Other current liabilities23 23 
 774 638 

- 19 -

19.Accrued expenses and other liabilities
 September 30, 2021December 31, 2020
 (in € millions)
Non-current  
Other accrued liabilities37 42 
37 42 
Current
Accrued fees to rights holders1,299 1,265 
Accrued salaries, vacation, and related taxes91 65 
Accrued social costs for options and RSUs92 169 
Other accrued expenses269 249 
 1,751 1,748 

20.Provisions
 Legal
contingencies
Indirect taxOtherTotal
 (in € millions)
Carrying amount at January 1, 20214 11 7 22 
Charged/(credited) to the condensed statement of operations:
Additional provisions— 
Reversal of unutilized amounts— (4)(1)(5)
Utilized— (1)(1)(2)
Carrying amount at September 30, 20214 8 7 19 
As at January 1, 2021
Current portion4 11 5 20 
Non-current portion  2 2 
As at September 30, 2021
Current portion4 8 4 16 
Non-current portion  3 3 
 
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.
21.Financial instruments
Foreign exchange forward contracts
Cash flow hedges
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. The notional principal of foreign exchange contracts hedging the revenue and cost of revenue line items in the condensed consolidated statement of operations was approximately €1,138 million and €804 million, respectively, as of September 30, 2021, and approximately €993 million and €703 million, respectively, as of December 31, 2020.
 
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. All other financial assets and liabilities are accounted for at fair value.
- 20 -

 
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:
 Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable Inputs (Level 3)September 30, 2021
 (in € millions)
Financial assets at fair value    
Cash equivalents:
Money market funds1,866 — — 1,866 
Time Deposits22 — — 22 
Short term investments:    
Money market funds25 — — 25 
Government securities206 18 — 224 
Corporate notes— 300 — 300 
Collateralized reverse purchase agreements— 66 — 66 
Fixed income funds110 — — 110 
Derivatives (designated for hedging):
Foreign exchange forwards— — 
Long term investments885 — 205 1,090 
Total financial assets at fair value3,114 393 205 3,712 
Financial liabilities at fair value
Exchangeable Notes— — 1,175 1,175 
Derivatives (not designated for hedging):
Warrants— — 72 72 
Derivatives (designated for hedging):
Foreign exchange forwards— 12 — 12 
Contingent consideration— — 17 17 
Total financial liabilities at fair value 12 1,264 1,276 


- 21 -

 Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable Inputs (Level 3)December 31, 2020
 (in € millions)
Financial assets at fair value    
Cash equivalents:
Money market funds685 — — 685 
Short term investments:    
Money market funds25 — — 25 
Government securities198 31 — 229 
Agency securities— — 
Corporate notes— 276 — 276 
Collateralized reverse purchase agreements— 62 — 62 
Derivatives (designated for hedging):
Foreign exchange forwards— 12 — 12 
Long term investments2,228 — 49 2,277 
Total financial assets at fair value3,136 385 49 3,570 
Financial liabilities at fair value
Derivatives (not designated for hedging):
Warrants— — 89 89 
Derivatives (designated for hedging):
Foreign exchange forwards— 16 — 16 
Contingent consideration— — 30 30 
Total financial liabilities at fair value 16 119 135 
 
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 nine months ended September 30, 2021, there were no transfers between levels in the fair value hierarchy.
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 (loss)/income. The fair value of ordinary shares of TME is based on the ending New York Stock Exchange American depository share price. The fair value of the investment in TME 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:
 20212020
 (in € millions)
At January 12,228 1,481 
Changes in fair value recorded in other
   comprehensive (loss)/income
(1,343)301 
At September 30885 1,782 
The impact on the fair value of the Group's long term investment in TME with a decrease or increase of 10% of TME's share price used to value the Group's equity interest results in a range of €797 million to €974 million at September 30, 2021.
- 22 -

The following sections describe the valuation methodologies the Group uses to measure its Level 3 financial instruments at fair value on a recurring basis.
Long term investments - Other
The Group has interests in certain long term investments, the most significant of which is our equity investment in Kid Distro Holdings, LLC ("DistroKid"), an independent digital music distribution service. These long term investments primarily represent unlisted equity securities carried at fair value through other comprehensive (loss)/income. The fair values of these equity investments are generally determined using business enterprise values based on market transactions or by (i) applying market multiples to the projected financial performance and (ii) discounting the future value to its present value equivalent. The key assumptions used to estimate the fair value of these equity investments include the exit multiple used to estimate business enterprise value and discount rate. A 10% decrease or increase in the business enterprise value of our largest equity investment held as of September 30, 2021 could result in a €20 million change on the fair value of these long term investments.
The fair value of the long term investments may vary over time and is subject to a variety of risks including company performance, macroeconomic, regulatory, industry, USD to Euro exchange rate, and systemic risks of the overall equity markets.
The table below presents the changes in the other long term investments:
20212020
(in € millions)
At January 149 16 
Initial recognition of long term investment — 
Changes in fair value recorded in other comprehensive (loss)/income159 
Changes in fair value recognized in condensed consolidated statement of operations(4)(4)
Effect of changes in foreign exchange rates(1)
At September 30205 29 

On October 1, 2021, the Group completed the sale of two thirds of its equity interest in DistroKid, realizing a gain of €132 million, which has been reflected as an unrealized increase in fair value as of September 30, 2021. Proceeds from the sale were €144 million.
Warrants
On August 23, 2021, the Company issued, for €31 million, warrants to acquire 800,000 ordinary shares to Daniel Ek, the Company’s Chief Executive Officer, through D.G.E. Investments Limited (“D.G.E. Investments”), an entity indirectly wholly owned by him. The exercise price of each warrant is US$281.63, which was equal to 1.3 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through August 23, 2024.
As of September 30, 2021 and December 31, 2020, the number of outstanding warrants was 1,600,000 and 800,000, respectively.
The outstanding warrants are valued using a Black-Scholes option-pricing model. Assumptions used to estimate the fair value of the warrants in the option pricing model are as follows:
 September 30, 2021
Expected term (years)0.75 - 2.9
Risk free rate (%)0.07% - 0.50%
Volatility (%)45% - 50%
Share price (US$)225.34 
 
- 23 -

The table below presents the changes in the warrants liability:
 20212020
 (in € millions)
At January 189 98 
Issuance of warrants for cash31 — 
Issuance of ordinary shares upon effective net settlement of warrants— (267)
Changes in fair value recognized in condensed consolidated statement of operations(53)226 
Effect of changes in foreign exchange rates(4)
At September 3072 53 
 
The impact on the fair value of the outstanding warrants with a decrease or increase in the Company's ordinary share price of 10% results in a range of €53 million to €91 million at September 30, 2021.
Contingent consideration
On April 1, 2019, the Group acquired Cutler Media, LLC ("Parcast"), a premier storytelling podcast studio. 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 change in the fair value of the contingent consideration is recognized within general and administrative expenses in the condensed consolidated statement of operations.
 
The table below presents the changes in the contingent consideration liability:
 20212020
 (in € millions)
At January 130 27 
Contingent consideration payments(17)(7)
Changes in fair value recognized in condensed consolidated statement of operations
Effect of changes in foreign exchange rates— 
At September 3017 27 
As of September 30, 2021, the remaining maximum potential contingent consideration payout is €17 million over the next year.
Exchangeable Notes
On March 2, 2021, Spotify USA, Inc. issued US$1,500 million principal amount of 0% Exchangeable Notes due in 2026. The Exchangeable Notes are measured on a recurring basis in the condensed consolidated statement of financial position and are Level 3 financial instruments recognized at fair value through the condensed consolidated statement of operations.
The table below presents the changes in the Exchangeable Notes:
2021
(in € millions)
At January 1 
Initial recognition1,232 
Changes in fair value recognized in condensed consolidated statement of operations(117)
Effect of changes in foreign exchange rates60 
At September 301,175 
The change in estimated fair value is recognized within finance income/(costs) in the condensed consolidated statement of operations, excluding changes in fair value due to changes in the Group’s own credit risk, which are recognized in other comprehensive (loss)/income and will not be reclassified to the condensed consolidated statement of operations.
The fair value of the Exchangeable Notes was estimated using a combination of a binomial option pricing model and prices observed for the Exchangeable Notes in an over-the-counter market on the last trading day of the reporting period. A weight of 75% was applied to the binomial option pricing model and a weight of 25% was applied to the price of the
- 24 -

Exchangeable Notes in the over-the-counter market on the last trading day of the reporting period. The key assumptions used in the binomial option pricing model for the Exchangeable Notes were as follows:
September 30, 2021
Risk free rate (%)0.9 
Discount rate (%)3.7 
Volatility (%)40.0 
Share price (US$)225.34
The impact on the fair value of the Exchangeable Notes of using reasonably possible alternative assumptions with a decrease or increase in volatility of 10% results in a range of €1,144 million to €1,210 million at September 30, 2021. The impact on the fair value of the Exchangeable Notes of using reasonably possible alternative assumptions with a decrease or increase in share price of 10% results in a range of €1,161 million to €1,191 million at September 30, 2021.
22.     Commitments and contingencies
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:

 September 30, 2021December 31, 2020
 (in € millions)
Not later than one year499 317 
Later than one year but not more than five years2,409 3,259 
2,908 3,576 

In addition, the Group is subject to the following various non-cancelable purchase obligations and service agreements with minimum spend commitments, including a service agreement with Google for the use of Google Cloud Platform and certain podcast commitments:

September 30, 2021December 31, 2020
(in € millions)
Not later than one year435 279 
Later than one year but not more than five years439 619 
874 898 


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.
 
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, we 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
- 25 -

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 us 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.

On August 11, 2020, the United States Court of Appeals for the D.C. Circuit issued an opinion which, as of the issuance of the formal “mandate” on October 26, 2020, vacated the Copyright Royalty Board’s determination of the royalty rates for applicable mechanical rights in the United States for calendar years 2018 to 2022. These rates apply both to compositions that we license under compulsory license in Section 115 of the Copyright Act of 1976 and to a number of direct licenses that we have with music publishers. Until the rates are determined, our recorded royalty costs both retrospectively and prospectively will be based on management estimates of the rates that will apply. When the rates are determined anew, these could either benefit or adversely affect our results of operations and financial condition.

- 26 -

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements

This discussion and analysis reflects our historical results of operations and financial position and 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, user listening time, and advertisers;
risks associated with our international expansion and our ability to manage our growth;
our ability to predict, recommend, and play content that our users enjoy;
our ability to effectively monetize our Service;
our ability to generate sufficient revenue to be profitable or to generate positive cash flow and grow on a sustained basis;
risks associated with the expansion of our operations to deliver non-music content, including podcasts, including increased business, legal, financial, reputational, and competitive risks;
potential disputes or liabilities associated with content made available on our Service;
risks relating to the acquisition, investment, and disposition of companies or technologies;
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 the compositions embodied in sound recordings in order to obtain necessary licenses or perform obligations under our existing license agreements;
new copyright legislation and related regulations that may increase the cost and/or difficulty of music licensing;
assertions by third parties of infringement or other violations by us of their intellectual property rights;
our ability to protect our intellectual property;
the dependence of streaming on operating systems, online platforms, hardware, networks, regulations, and standards that we do not control;
potential breaches of our security systems or systems of third parties, including as a result of our Work From Anywhere program;
interruptions, delays, or discontinuations in service in our systems or systems of third parties;
changes in laws or regulations affecting us;
risks relating to privacy and protection of user data;
our ability to maintain, protect, and enhance our brand;
payment-related risks;
ability to hire and retain key personnel, and challenges to productivity and integration as a result of our Work From Anywhere program;
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;
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;
risks associated with accounting estimates, currency fluctuations and foreign exchange controls;
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the impact of the COVID-19 pandemic on our business and operations, including any adverse impact on advertising sales or subscriber revenue.
risks related to our debt, including limitations on our cash flow for operations and our ability to satisfy our obligations under the Exchangeable Notes;
our ability to raise the funds necessary to repurchase the Exchangeable Notes for cash, under certain circumstances, or to pay any cash amounts due upon exchange;
provisions in the indenture governing the Exchangeable Notes (the “Indenture”) delaying or preventing an otherwise beneficial takeover of us; and
any adverse impact on our reported financial condition and results from the accounting method for the Exchangeable Notes.

We operate in an evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible 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. For additional information, refer to the risk factors discussed under Part II, Item 1A. "Risk Factors" below, Part I, Item 3.D. "Risk Factors" in our Annual Report on Form 20-F for the year ended December 31, 2020 ("Annual Report on Form 20-F"), and in our other filings with the U.S. Securities and Exchange Commission ("SEC").

You should read this discussion and analysis completely and with the understanding that our actual future results may be materially different from our expectations.

Investors and others should note that we announce material financial information to our investors using our Investors website (investors.spotify.com), SEC filings, press releases, public conference calls, and webcasts. We use these channels, as well as social media, to communicate with our users and the public about our company, our Service, and other issues. It is possible that the information we post on these channels could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our Company to review the information we post on the channels listed on our Investors website.

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 178 countries and territories and growing, including our February 2021 launch in South Korea and 85 other countries and territories across Asia, Africa, the Caribbean, Europe and Latin America. Our platform includes 381 million monthly active users ("MAUs") and 172 million Premium Subscribers (as defined below) as of September 30, 2021.

We currently monetize our Service through both subscriptions and advertising. Our Premium Subscribers have grown 19% year-over-year, as of September 30, 2021, to 172 million. Our 381 million MAUs have grown 19% year-over-year, as of September 30, 2021.
Our results reflect the effects of our trial programs, both discounted and free trials, 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 such trial programs. Historically we have run two programs per year during the second and fourth quarters. In September, 2021 we launched our second program of the year, about two months earlier than in prior years.

For our Ad-Supported segment, typically we experience higher advertising revenue 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.
Acquisition
On March 29, 2021, we acquired Betty Labs for a total purchase consideration of €57 million. The acquisition allows us to accelerate our entry into the live audio space.
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Exchangeable Notes
On March 2, 2021, Spotify USA Inc. issued US$1,500 million in aggregate principal amount of 0% Exchangeable Notes due 2026. Net proceeds from the issuance of the Exchangeable Notes were €1,223 million after deducting the transaction costs. See Note 17 to our interim condensed consolidated financial statements for further information regarding our Exchangeable Notes.
Employee Matters
During the nine months ended September 30, 2021, we entered into collective bargaining agreements with the employees of Ringer.com LLC and Gimlet LLC, respectively. As of September 30, 2021, we are in the process of negotiating a collective bargaining agreement with the employees of Parcast LLC.
During 2021, we adopted a Work From Anywhere program which allows most employees to elect their work location from physical office space and home mix options.
Long term investment - Tencent Music Entertainment Group
During the nine months ended September 30, 2021, the fair value of our holdings in TME decreased by €1,343 million from €2,228 million as of December 31, 2021 to €885 million as of September 30, 2021 due to the decline in TME's share price during this period. The market value of our investment in TME fluctuates due to volatility in the share price used to measure the investment. Furthermore, the value of our investment is subject to the risks associated with TME’s business, as well as any changes by the Chinese government in foreign investment laws or elevated scrutiny or regulation of foreign investments in Chinese companies.

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 users of our Ad-Supported Service ("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 Part I, Item 3.D. "Risk Factors" in our Annual Report on Form 20-F, and in our other filings with the SEC.
 
The table below sets forth our monthly active users as of September 30, 2021 and 2020.
 As of September 30  
 20212020Change
(in millions, except percentages)
MAUs381 320 61 19 %
 
MAUs were 381 million as of September 30, 2021 and 320 million as of September 30, 2020, which represented an increase of 19%. MAUs benefited from our continued investment in driving the growth of our Service, both through geographic expansion and consumer marketing. MAUs 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 user engagement and customer satisfaction.

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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 and Duo 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. Our Duo Plan consists of one primary subscriber and up to one additional sub-account, allowing up to two Premium Subscribers per Duo 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 September 30, 2021 and 2020.
 As of September 30  
 20212020Change
(in millions, except percentages)
Premium Subscribers172 144 28 19 %

Premium Subscribers were 172 million as of September 30, 2021 and 144 million as of September 30, 2020, which represented an increase of 19%. The increase was due primarily to our free trial offers and global campaigns related to our standard plan, while the Family Plan also accounted for a significant portion of gross added Premium Subscribers. In addition, there was an increase in the number of Premium Subscribers on our Duo Plan.

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 September 30, 2021 and 2020.
 As of September 30  
 20212020Change
(in millions, except percentages)
Ad-Supported MAUs220 185 35 19 %

Ad-Supported MAUs were 220 million as of September 30, 2021 and 185 million as of September 30, 2020, which represented an increase of 19%. Ad-Supported MAUs benefited from our continued investment in driving the growth of our Ad-Supported Service, both through geographic expansion and consumer marketing. Ad-Supported MAUs 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 average revenue per user ("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. Fiscal year-to-date figures are calculated by averaging Premium ARPU for the quarters in such period.

The table below sets forth our average Premium ARPU for the three and nine months ended September 30, 2021 and 2020.
 Three months ended September 30,  Nine months ended September 30,  
 20212020Change20212020Change
Premium ARPU4.34 4.19 0.15 %4.25 4.33 (0.08)(2)%

For the three months ended September 30, 2021 and 2020, Premium ARPU was €4.34 and €4.19, respectively, which represented an increase of 4%. This increase of €0.15 is primarily attributable to an increase in ARPU for the Family Plan, as a result of price increases, as well as changes in Premium Subscriber mix driving an increase in ARPU for the Duo Plan.

For the nine months ended September 30, 2021 and 2020, Premium ARPU was €4.25 and €4.33, respectively, which represented a decrease of 2%. The decrease was due principally to movements in foreign exchange rates reducing Premium ARPU by €0.11.
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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 the chief operating decision maker to monitor performance and make operating decisions. See Note 5 to our interim condensed consolidated financial statements for additional information regarding our reportable segments.

Premium
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 also bundle the Premium Service with third-party services and products.

Ad-Supported
We generate revenue for our Ad-Supported segment from the sale of display, audio, and video advertising delivered through advertising impressions and podcast downloads. We generally enter into arrangements with advertising agencies that purchase advertising on our platform on behalf of the agencies' clients and directly with some large advertisers (collectively, "direct channels"). Additionally, we generate Ad-Supported revenue through arrangements with certain advertising automated exchanges, internal self-serve, and advertising marketplace platforms to distribute advertising inventory for purchase on a cost-per-thousand basis (collectively, "programmatic channels").
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 relevant revenue, although certain agreements are based on the greater of a percentage of relevant revenue and an amount for each time a sound recording and musical composition are streamed. We have negotiated lower per user amounts for our lower priced subscription plans such as Family Plan, Duo 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. 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 the amortization of podcast content assets (both produced and licensed). Amortization of podcast content assets is recorded over the shorter of the estimated useful economic life or the license period (if relevant) and begins at the release of each episode. Cost of revenue also includes discounted trial costs.

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 drive organic growth in 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. Expenses primarily comprise costs incurred for the 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 are difficult to forecast.
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Sales and Marketing. Sales and marketing expenses primarily comprise employee compensation and benefits, public relations, branding, consulting expenses, customer acquisition costs, advertising, marketing 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 our Premium Service. 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.

Results of Operations

Impact of COVID-19 pandemic
The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption. In response to the COVID-19 pandemic, we have taken a number of actions focused on protecting the health and safety of our employees, maintaining business continuity, supporting the global music community, and providing the ability to work-from-home for our employees.

The full impact of the COVID-19 pandemic on our business, financial condition, and results of operations will depend on numerous evolving factors that we may not be able to accurately predict and that will vary by market, including the duration and scope of the pandemic, including any resurgences, the impact of the pandemic on economic activity, and actions taken by governments, businesses, and individuals in response. We will continue to actively monitor and respond accordingly to the changing conditions created by the pandemic. Refer to Part I, Item 3.D. "Risk Factors" in our Annual Report on Form 20-F for further discussion of the impact of the COVID-19 pandemic on our business, operating results, and financial condition.

Revenue
Three months ended September 30,