GP Bullhound Spotify Update October 2017

CONTENTS 03 EXECUTIVE SUMMARY 04 SCENARIO OVERVIEW 05 EXPLOSIVE SUBSCRIBER GROWTH 06 PREMIUM SUBSCRIBERS VS. TOTAL SUBSCRIBERS 07 ROOM TO INCREASE MARKET PENETRATION 08 TIMING OF PROFITABILITY 09 NEW CONTRACTS WITH LABELS WILL DRIVE GROSS MARGIN 09 STOCK MARKET INTRODUCTION & LONG TERM VALUATION 10 SPOTIFY VS. APPLE Dealmakers in Technology

Dealmakers in Technology 03 EXECUTIVE SUMMARY 04 SCENARIO OVERVIEW 05 EXPLOSIVE SUBSCRIBER GROWTH 06 PREMIUM SUBSCRIBERS VS. TOTAL SUBSCRIBERS 07 ROOM TO INCREASE MARKET PENETRATION 08 TIMING OF PROFITABILITY 09 NEW CONTRACTS WITH LABELS WILL DRIVE GROSS MARGIN 09 STOCK MARKET INTRODUCTION & LONG TERM VALUATION 10 SPOTIFY VS. APPLE CONTENTS

SPOTIFY: $55 BILLION BY 2020 3 SPOTIFY UPDATE October 2017 200M PREMIUM SUBSCRIBERS / $55BN VALUATION OUR UPDATED VALUATION THESIS BY 2020 TARGET STOCK MARKET INTRODUCTION VALUATION OVER $20BN OUR UPDATED STOCK MARKET INTRODUCTION THESIS EXECUTIVE SUMMARY » Given Spotify’s explosive growth we believe the firm will be valued at $55bn by 2020 » Our target stock market introduction valuation for Spotify is over $20bn » Spotify is trending towards 100m premium subscribers by mid-2018 – estimates point toward 200m by the end of 2020 » We expect emerging markets to drive future growth which will likely dilute average revenue per premium subscriber – we have therefore decreased our ARPPS estimates by 10% to $80 » As Spotify’s ambition evolves the company is now seeking to become the third largest player in terms of advertising – behind Google and Facebook – which will drive ad revenue from non-premium subscribers » Gross margin will steadily increase due to more beneficial agreements with labels – estimated levels are consistent with our previous research reports » Premium subscribers as a percentage of total subscribers is estimated to be 40% in 2020 – slightly below today’s level of 43% » Our valuation reasoning and multiples have not changed since the last report – subscriber growth has however been stronger than we anticipated

SCENARIO Overview Stock Market Introduction 2020 Implied Market Cap $23 Bn $55 Bn Premium subscribers (m) 70 200 Revenue per premium subscriber ($/year) 87 80 Total premium subscriber revenue ($m) 6,090 16,000 Non-premium subscribers (m) 100 300 Revenue non-premium subscriber ($/year) 5 12 Ad revenues ($m) 475 3,600 Ad revenue (%) 7% 18% TOTAL REVENUES 6,565 19,600 COGS premium subscriber -5,177 -12,320 COGS ad revenueus -285 -1,800 TOTAL COGS -5,462 -14,120 Gross margin 17% 28% R&D -460 -1,176 R&D 7% 6% SG&A -1,313 -1,764 SG&A 20% 9% EBIT -669 2,540 EBIT % -10% 13% Add back D&A 66 196 D&A 1% 1% EBITDA -603 2,736 EBITDA % -9% 14% EV/Sales multiple 3.5x 2.8x EV/EBITDA multiple n.m. 20x EV 22,650 54,720 Net debt -200 0 Market cap 22,850 54,720 NOSO FD (M) 4.5 4.5 Share price 5,078 12,160 RETURN FROM TODAY 1.4x 3.3x Implied EV/Revenue 3.5x 2.8x Implied EV/Gross profit multiple 20.5x 10.0x Implied EV/EBIT multiple n.m. 21.5x Source: Annual reports, CapitalIQ, GP Bullhound analysis Note: ‘return from today’ refers to the return an investor receives if purchasing a share in Spotify at the price of the latest secondary deal 4

SPOTIFY: $55 BILLION BY 2020 5 EXPLOSIVE Subscriber Growth During 2017 streaming overtook sales for the first time as the leading driver of revenue for the US recorded music industry. In fact, streaming grew so much last year, that it now accounts for more revenue than downloads, CDs and vinyl combined in the US market. Spotify is one of the dominant players driving this development and will have an instrumental impact on the industry going forward. 60 30% 40 20% 20 10% 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 0% Spotify Premium Subscribers Share of Global Music Revenue (%) Spotify announced in July that it had grown to 60 million premium subscribers – effectively adding 10 million premium subscribers in less than four months. In comparison it took Spotify five months to grow from 40 million to 50 million premium subscribers. Growth has been explosive to say the least. In our previous investment reports published back in 2015 and 2016 we estimated that Spotify in a blue sky scenario would reach 100m premium subscribers by 2020. At the time of the analysis these forecasts were seen as quite aggressive, but we whole heartedly believed that it would be possible given the right overall circumstances. Spotify has truly thrived since our last report and delivered well above even our expectations. With the current market dynamics and growth rates Spotify is trending towards 100m premium subscribers by mid-2018. This would imply Spotify reaching our previous best case scenario more than two years earlier than we previously estimated in our research report published in September 2016. Overall there is still significant growth potential going forward as there are several markets with a large addressable user base but with low levels of penetration, such as Thailand, Japan and Indonesia.

PREMIUM SUBSCRIBERS VS. Total Subscribers In our analysis we have estimated a total subscriber base of 500m – of which 200m are premium subscribers. This would imply a quarterly growth rate of 10% until 2020 and adding an average of 11m new premium subscribers each quarter. Even though this is in line with current growth rates in terms of absolute value, as a percentage of total subscribers this will decrease over time. 600 Quarterly 500 Growth 10% 400 300 200 100 0 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Subscribers Premium Subscribers With the latest available information provided by Spotify, the total number of premium subscribers as a percentage of total subscribers is roughly 43%. Our analysis assumes that 40% of the total subscriber base will be premium subscribers in 2020. A slight decrease in this ratio is expected as emerging markets will drive significant growth going forward and thus we assume more non-premium subscribers will emerge. As the first wave of adopters are converted to premium subscribers we will start to witness a slow down in growth unless subscription fees are decreased. This has been the trend in more mature markets such as Sweden where the opportunity has largely been utilized. Similarly in other mature markets such as US, UK and Canada growth will begin to slow. Emerging markets will be the key driver for future growth which in turn means that eventually the $9.99 subscription price will likely be utilized there as well relatively soon. Spotify have introduced family plans and student discounts and if we factor in that emerging markets have a much lower average revenue per premium subscriber we believe that Spotify will see a steady decline in revenue per premium subscriber moving towards 2020 compared to today’s value. This is the reason why we have decreased our estimated average revenue per premium subscriber to $80 – compared to $88 in 2015 and $89 in 2016. Seeing that Spotify’s long-term ambition revolves around becoming the third largest player in terms of advertising – behind Google and Facebook who have an average revenue per user of $15 - $20 – we estimate a somewhat higher revenue per non-premium subscriber than previously anticipated. In 2015 we forecast revenue per non-premium subscriber between $5-$10, whilst in 2016 we estimated $10-$14. Because of Spotify’s recently communicated vision we have upgraded our estimates of revenue per non-premium subscriber to $12 in 2020 and $16 as the target for the firm’s long term potential. 6

SPOTIFY: $55 BILLION BY 2020 7 ROOM TO INCREASE Market Penetration Today the five largest countries in terms of subscribers – US, Brazil, UK, Mexico and Germany – make up ~75% of the total subsriber base. Penetration within these countries range from 10% to 20%. For reference, Spotify’s penetration in the Swedish market is estimated to be over 50%. We do not however believe this level of penetration to be realistic in other markets. Current 2020 Country Total Premium Total Subs Prem Subs % Prem Total Premium Total Subs Prem Subs % Prem Penetration Penetration (M) (M) Penetration Penetration (M) (M) 20% 10% 58 29 50% 35% 20% 102 58 57% 10% 5% 14 7 50% 35% 15% 48 21 43% 20% 10% 12 6 50% 35% 20% 22 12 57% 15% 5% 11 4 33% 35% 15% 27 11 43% 15% 10% 11 7 67% 40% 20% 30 15 50% Other 33 7 21% 275 118 43% (#56) Total 140 60 43% 500 200 40% * All values above are based on GP Bullhound analysis Spotify has a strong presence in the Swedish market due to an early market entry. There are advantages of being number 1 – it does however not necessarily mean that it is a winner takes all type of game. With regards to the above-mentioned markets we do however believe that there is significant room to increase penetration. The remaining 56 markets currently make up ~25% of the total subscriber base. We believe there is significant growth potential within these markets as many of the countries have a large total addressable market but with a low degree of penetration, for example Japan. If Spotify’s total penetration in Japan increased to 35% this would imply 42m new subscribers. We believe that the other 56 markets will make up over 50% of the total subscriber base by 2020. The analysis above has not taken into account any new market entry, for example market entry in countries such as India, Malaysia and China would pave the way for strong growth.

TIMING OF Profitability As previously mentioned, the long-term case is more about timing of profitability. Seeing that Spotify has a superior subscription model with sticky revenue streams there is relatively clear visibility of the value that each premium subscriber and non-premium subscriber adds. As of 2017 our analysis shows that for every dollar invested in a premium subscriber Spotify gets three dollars in return. This ratio is forecast to increase in the future as revenue per premium subscriber stabilizes, churn decreases and gross margin steadily increases. Furthermore, customer acquisition cost as a percentage of revenue is estimated to decrease slightly. If these trends continue our estimates point towards that for every dollar that Spotify invests in premium subscribers the firm gets five dollars in return. As Spotify gears up for a stock market introduction this becomes one of the most important metrics for investors to analyze. As it will take some time for the contracts with the different labels to materialize, Spotify will most likely continue to report an operating loss in the short-term which in turn may distract investors from the true value that is being created. $180 $150 $120 $90 5x $60 $30 $0 2013 2014 2015 2016 2017 2018 2019 2020 LTV* SaC* * LTV: Lifetime value, SaC: Subscriber acquisition cost 8

SPOTIFY: $55 BILLION BY 2020 9 NEW CONTRACTS WITH LABELS Will Drive Gross Margins As Spotify continues to accumulate a significant number of subscribers its bargaining power with labels dramatically increases. In 2017 alone the firm struck critical deals with both Universal and Sony Music and have therefore signed new deals with all four big labels. These deals – along with those to come – will help to positively increase its gross margin as costs related to labels will steadily decline. Costs associated with labels are by far Spotify’s most crucial cost item in its path towards profitability. The gross margin estimates are in line with our previous published research reports at 28% for 2020 and 30% in a blue sky scenario. STOCK MARKET INTRODUCTION OVER $22BN $55bn by 2020 & Long-term Potential of $100bn Our valuation reasoning and valuation multiples have not changed since the last report published in September 2016 – subscriber growth, however, has been stronger than we anticipated. We therefore believe Spotify will be valued at over $20bn at a stock market introduction. In this scenario we have estimated 70m premium subscribers and 100m non-premium subscribers. Given that this will most likely take place in the coming months we do believe these user values to be conservative as the latest released values were accounted for in July – thus paving the way for subsequent strong growth. In our scenario Spotify is valued at 3.5x revenue which – when looking at Spotify’s closest comparable companies – can also be seen as quite conservative. E.g. Netflix which many analysts see as Spotify’s closest comparable is currently trading at 7.3x 2017 revenue and 5.9x 2018 revenue. Given the reasoning above we believe there is room for an increase in valuation multiples once the firm is publicly traded. Our previous best case valuations of ~$50bn from reports published in 2015 and 2016 has now become our base case valuation estimate for 2020. The difference is mainly due to stronger than expected subscriber growth – as revenue per premium subscriber, revenue per non-premium subscriber and gross margin are relatively in line with previous research. Given that Spotify’s growth continues and that emerging market growth keeps average revenue per premium subscriber relatively in shape we envision that Spotify has a long term potential of being valued at $100bn. There is a long way to go for Spotify and the streaming music industry in general. But the most efficient way to get there is by continuing to create a product that hundreds of millions of diverse users fall in love with every day.

SPOTIFY vs. Apple At the forefront of the music streaming revolution stand Spotify and Apple Music – the disruptor who fundamentally changed the way we consume music and one of the world’s most recognised brands. Together these firms are fueling the development of music streaming. 10

SPOTIFY: $55 BILLION BY 2020 11 SUBSCRIBER COUNT 94 40 100 80 60 20 40 20 5 3 0 12 0 2009 2010 2011 2012 2013 2014 2015 2016 2017* Yearly Subscriber Additions Months to Add 10M Subscribers *2017 GP Bullhound analysis Spotify’s latest public figures touts 140 million subscribers (June 2017) and over 60 million premium subscribers (July 2017). In May 2014 the first major milestone was reached when the firm announced it had amassed 10m premium subscribers. Since then the time needed to add 10m premium subscribers has decreased significantly from 94 months to three months. The user growth has been explosive to say the least. Apple announced in the September that the firm had surpassed 30 million premium subscribers – a milestone that took the firm two years to reach. For reference - it took Spotify just shy of 10 years to reach 30 million premium subscribers. The two achievements are not perfectly comparable as Apple Music’s integration with Apple products significantly helped fuel the growth and the music streaming industry had evolved considerably since Spotify’s debut. Apple is however closely mimicking the growth trend of Spotify. We do not anticipate Apple will outgrow Spotify any time soon. 60 30m 40 20 0 2015 - H1 2015 - H2 2016 - H1 2016 - H2 2017 - H1 Spotify Apple Music

MUSIC LIBRARY As the first major player in music streaming Spotify has amassed more than 30 million tracks on its service and contains quite a depth in the song catalogue. Even though there historically have been some major holes in the catalogue - e.g. The Beatles and Taylor Swift - these voids were filled in 2015 and 2017. Furthermore, Spotify’s service is very agile in bringing the latest releases and hottest live sessions to its new releases tab on Fridays which in turn is a great tool for music discovery and retaining users. Apple’s service however claims to have over 40 million songs in its music catalogue - ca. 30% more than Spotify. Over the years Apple Music have been successful in receiving exclusivity on newly released albums – such as Frank Ocean’s Blonde and Drake’s Views – which in turn has helped push the premium subscriber base and increase retention. Together with the integration of iTunes library, previous purchases and older songs automatically appear on your mobile device – which is an awesome feature for long term iTunes users. Another player that is difficult to exclude when discussing the sheer quantity of music is YouTube. YouTube is foremost a video portal and while the library on YouTube is made up of videos it has in practice simultaneously become the world’s most popular music streaming service through the YouTube Music application. The app itself is free and you can use the service for free in an ad- supported mode. However, YouTube also offers the service as a subscription similar to both Apple Music and Spotify through YouTube Red. In terms of quantity more is not necessarily better – but exclusives is a game changer. UI & UX When first released in mid 2015 Apple Music’s interface was somewhat unintuitive to use. Navigating through the library, music discovery and arranging your playlist never felt as easy as it should – especially compared to the simplicity of Spotify. However, with the update on iOS 10, Apple unveiled a streamlined interface that was meant to redesign Apple Music from the ground up. This is the same UI that users interact with today and is a significantly smoother experience. In terms of aesthetics it should be noted that there is a difference between the Apple app and the Android app. Apple has integrated Siri with Apple Music which facilitates the ease of use by allowing users to control their music through voice commands from their iPhone or Mac. In itself, the feature is quite impressive and will become a feature of growing importance. Spotify on the other hand has been leading the industry through its clear and simplistic usability. Both the mobile and the desktop versions are easy to navigate, access your music library and browse playlists. Spotify supports integration with Amazon’s Echo - which allows users to control their music through voice control from their smart home system. In addition to Amazon Echo, Spotify also supports integration with Google Home, Sonos and other devices both in the home and the car. Spotify also possesses a significant amount of social data – in turn this is an important tool to increase user experience. This allows Spotify to analyse what your friends and social acquaintances are listening to and accurately recommend new songs and playlists. This will become a core feature as we move towards voice dominated input and output. It is difficult to compete with the redesigned, bright, aesthetic interface – the same feel that mesmerized Apple users after the release of iOS 7 – of Apple Music. However, the sheer ease of use and simplicity with Spotify is what we believe sets the company ahead in terms of UI / UX. 12

SPOTIFY: $55 BILLION BY 2020 13 THOUGHTS ON The Future One of Spotify’s main issues revolves around the user experience when shifting between different environments e.g. when a user leaves their apartment and enters a taxi. This will become a challenge for the firm as partnerships increase, Spotify is used more dynamically and there is significant development potential for multi-case usage. This can further be combined with creating a more collaborative and adapted experience for the user in where Spotify adapts to the mood the user is in or what they are doing. It is key that Spotify focus on the above- mentioned areas to further improve the overall user experience. Furthermore, as the industry may adopt more voice dominated input / output and an improved user experiences – there will be both advantages and challenges awaiting Spotify. One advantage is that Spotify will be an independent software company thus being able to independently supply speaker manufacturers with software. This is exemplified by the recent events in which Microsoft chose to retire Groove Music Pass and instead partner with Spotify. On the other hand, a potential challenge with this move is that Spotify’s advantage over competitors within UI/UX will cease to exist because the landscape will get a complete overhaul. As Spotify to our knowledge does not have any hardware in the pipeline they should view Apple’s HomePod as a serious threat. Partnerships with HD speaker manufacturers like Bose and Sonos is however one step that could make sense as briefly touched upon above. Furthermore, Spotify does not have a ready to use voice assistant like Siri and Alexa. Both points mentioned above could in turn require significant investment in both capital and time to properly address the challenges faced ahead.

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SPOTIFY: $55 BILLION BY 2020 15 THE GP BULLHOUND TEAM HUGH CAMPBELL MANISH MADHVANI PER ROMAN SIR MARTIN SMITH STAFFAN INGEBORN MARK SEBBA GRAEME BAYLEY Managing Partner Managing Partner Managing Partner Chairman Non-Executive Director Non-Executive Director Partner & Group CFO ROBERT AHLDIN GUILLAUME BONNETON ALEC DAFFERNER SIMON NICHOLLS SVEN RAEYMAEKERS JULIAN RIEDLBAUER ANDRE SHORTELL Partner Partner Partner Partner Partner Partner Partner CLAUDIO ALVAREZ JONATHAN CANTWELL ALESSANDRO CASARTELLI CHRIS GRAVES OSKAR HERDLAND NICK HORROCKS PER LINDTORP Director Director Director Director Director, Equity Capital Markets Director Director SEBASTIAN MARKOWSKY ALEXIS SCORER CARL WESSBERG NIKOLAS WESTPHAL JOAKIM DAL ALON KUPERMAN MAX BERNARD Director Director Director Director Investment Manager Principal Vice President IMAN CRISBY RAVI GHEDIA JAVED HUQ OLOF RUSTNER JOY SIOUFI JOHANNES ÅKERMARK MARVIN MAERZ Vice President, Marketing Vice President Vice President Vice President Vice President Vice President Associate SIMON MIREMADI CHRIS PARK JAIME SENDAGORTA DIAZ REDA BEN LARBI KARL BLOMSTERWALL ELENA BOCHAROVA KYLE BOOYSENS Associate Associate Associate Analyst Analyst Analyst Analyst FELIX BRATELL CARL ELFVING JOFFREY EZERZER MATTEW FINEGOLD PAUL GAILLARD CHRISTOPH GRUNEWALD HAMPUS HELLERMARK Analyst Analyst Analyst Analyst Analyst Analyst Analyst OKAN INALTAY PIERCE LEWIS-OAKES JACOB LOVENSKIOLD ADAM PAGE ED PRIOR HARRI NEEDHAM DAVE NISH Analyst Analyst Analyst Analyst Analyst Group Finance Manager Technology Manager LINDA NORDMARK ANN GREVELIUS CHRISTIAN LAGERLING LORD CLIVE HOLLICK BEN PRADE CECILIA ROMAN Finance Manager Senior Advisor Co-Founder & Senior Advisor Senior Advisor Senior Advisor Senior Advisor

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