Spotify technology (STAIN) reported fiscal second-quarter results on Tuesday that beat expectations as the audio giant reported record profit, gross margin and free cash flow in the quarter following its recent “efficiency strategy”..
Revenue came in line with estimates while monthly active user metrics disappointed, both investors shrugged off as the stock rose more than 10% in afternoon trade.
In June, Spotify announced that they would raise the prices of its premium subscriptions in the United States, with increases taking effect this month. Spotify previously increased prices last summer.
In addition to price adjustments, the company has committed to several rounds of layoffs and initiatives to increase revenue growth and improve margins, as a music-only streaming tier and audiobooks only plan. It also introduced a more expensive audio package that includes music, podcasts and audiobooks.
The audio giant reported operating income of 266 million euros ($289 million), compared with a loss of 247 million euros in the previous year. This was above the company’s guidance of 250 million euros, driven by “lower personnel and related expenses and lower marketing expenses.”
It also led to a strong third-quarter operating profit of 405 million euros ($440 million), well above Wall Street consensus expectations of 298.1 million euros.
The streaming service reported a net profit of 274 million euros ($298 million), or earnings of 1.33 euros ($1.44) per share. It was well above analysts’ expectations of a profit of 1.04 euros per share. That also compares with the loss the previous year of 302 million euros ($327.77 million), or a loss of 1.55 euros ($1.68) per share.
Gross margins came in stronger than expected at a record 29.2%, beating the company’s guidance of 28.1%. The streamer said it expects margins to tick up to 30.2% in the third quarter, well ahead of forecasts, driven primarily by year-over-year improvements in music and podcasting.
Spotify has previously said it expects the metric to be between 30% and 35% long-term amid plans to further scale its podcasting and advertising business.
Revenue, meanwhile, met expectations at 3.81 billion euros ($4.14 billion) — 20% higher than the second quarter of 2023. The company expects revenue to reach 4 billion euros in the third quarter, compared with 3.4 billion euros a year earlier .
Wall Street analysts credited Spotify’s gross margin beat and better-than-expected guidance for Q3 operating profit and gross margins as key catalysts for the positive stock reaction.
User figures
Total monthly active users (MAUs) came in below the company’s estimates of 631 million to reach 626 million in the quarter — but that was still a 14% improvement over the year-ago total. The streaming service expects Q3 MAU to come in at 639 million.
Premium subscribers topped the company’s expectations of 245 million to reach 246 million — up 12% year over year. Spotify expects that the number of subscribers will increase to 251 million during the third quarter.
Free cash flow, another key measure for investors, landed at a record 490 million euros in the quarter compared to 9 million euros for the same period a year earlier.
Average revenue per user, or ARPU, for Premium subscriptions increased 8% year-over-year to €4.62 (or 10% year-over-year, excluding foreign currency headwinds). ARPU was driven by price increase benefits partially offset by discounted plans and lower prices in emerging markets, the company said.
Profit promise
Spotify spent 1 billion dollars pushed into the podcast market over the past four years with splashy A-list deals and $400 million plus studio acquisitions.
That the expenses took a significant bite outside the gross margins and weighed heavily on profitability.
After the stock fell, the audio giant promised to improve its profitability starting in 2023 on gross margin and operating income.
The company also said Earlier this year it plans to be more deliberate about future investments. It has since then adjusted its podcast strategy to focus more on distribution rather than exclusivity.
Spotify too changed its royalty structuredone audiobooks free for paying subscribersand locked up new offers with popular podcasters such as Joe Rogan and Alexandra Cooper from “Call Her Daddy”.
The stock has rallied as a result, with shares up more than 50% since the start of the year and up about 70% year-to-date.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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