Spotify Tops Q3 Estimates, Offers Mixed Outlook

Spotify (SPOT) released its third-quarter earnings report on Tuesday, exceeding Wall Street’s estimates with a 12% year-over-year increase in total revenue. However, the streaming giant’s guidance for revenue and subscriber growth in the current quarter fell short of expectations, leading to investor concerns.

Shares of Spotify (SPOT) dipped 2% following the earnings announcement.

Key highlights from the report, compared to LSEG estimates, show a mixed performance:

• Earnings per share: 3.28 euros vs. 1.97 euros expected.
• Revenue: 4.27 billion euros vs. 4.23 billion euros expected.

While the platform saw a 12% increase in premium subscribers, reaching 281 million, this figure narrowly missed StreetAccount’s projection of 281.24 million.

The company’s decision to increase subscription prices in August, raising the rate from 10.99 euros to 11.99 euros in several key markets across South Asia, the Middle East, Africa, Europe, Latin America, and the Asia-Pacific region, appears to have had a limited impact on subscriber growth, at least in the short term. This pricing strategy, while aimed at boosting revenue, could potentially face headwinds from increasingly price-sensitive consumers and competition from alternative streaming services.

Premium revenue for the quarter grew by 9% (13% on a constant currency basis), while ad-supported revenue experienced a 6% decline (flat on a constant currency basis), totaling 446 million euros. This contrasts with StreetAccount’s expectation of 467.7 million euros in ad-supported revenue.

Despite the mixed results, CEO Daniel Ek remained optimistic, stating in a release, “The business is healthy. We’re shipping faster than ever. And we have the tools we need – pricing, product innovation, operational leverage, and eventually the ads turnaround – to deliver both revenue growth and profit expansion.” Ek’s emphasis on product innovation and operational leverage suggests a strategic focus on improving user experience and efficiency to drive long-term growth.

In September, Spotify announced that Daniel Ek would transition from his CEO role to become executive chairman at the beginning of January. He will be succeeded by co-presidents Gustav Söderström and Alex Norström.

Looking ahead, Spotify’s guidance for the fourth quarter projects revenue of 4.5 billion euros, falling short of the StreetAccount expectation of 4.56 billion euros. The streamer expects total premium subscribers to reach 289 million, also below the StreetAccount expectation of 291.1 million. This cautious outlook suggests potential challenges in acquiring and retaining subscribers amid growing competition and evolving consumer preferences.

On a brighter note, the company anticipates fourth-quarter operating income of 620 million euros and monthly active users (MAU) of 745 million, surpassing StreetAccount expectations of 610.2 million euros and 739.5 million MAU, respectively. These figures underscore the company’s ability to attract and engage a large user base, even as it navigates a dynamic market landscape.

The company reported a significant increase in total monthly active users for the third quarter, rising 11% to 713 million compared to the same period last year. This figure exceeded both the company’s prior guidance and LSEG analysts’ expectations of 710 million.

Spotify attributed this growth to enhancements in its mobile free tier implemented in September. These enhancements include enabling users to directly select, play, and share any song, a significant departure from the previous model, which restricted free users to shuffled playlists with limited skips. This strategic move aimed at attracting and retaining free users, potentially converting them into paying subscribers over time.

The company is also actively exploring the potential of artificial intelligence. In October, Spotify integrated its service with ChatGPT, allowing users to receive personalized music and podcast recommendations based on written prompts. This integration represents a step towards leveraging AI to enhance user experience and content discovery.

Further demonstrating its commitment to AI, Spotify announced partnerships with major music labels, including Sony Music Group, Universal Music Group, and Warner Music Group, to develop AI-powered products. These collaborations signify a broader industry trend towards leveraging AI to personalize content, optimize music production, and combat copyright infringement.

The company previously faced criticism following Ek’s leadership in a 600-million-euro funding round for defense technology startup Helsing. This investment prompted some musicians to remove their catalogs from Spotify in protest, highlighting the potential risks associated with aligning the brand with controversial sectors. This incident serves as a reminder of the importance of aligning corporate investments with the values of its users and content creators.