Spotify Margins Hurt by Higher Dollar, Continues to Grow Subscribers and Podcasts

Spotify reported third-quarter earnings that narrowly beat analyst expectations on revenue but missed by $0.15 with a bigger loss than estimated. Spotify’s gross margin in Q3 came in below expectations at 24.7% down 201 bps Y/Y. Shares in SPOT fell 7% in extended trading Tuesday. Spotify came in with higher user numbers than it projected last quarter. The company reported 456 million monthly active users for the quarter, up 20% from the year-earlier period. SPOT posted 195 million paid subscribers, up 13% year over year.

Spotify Q3 22 Earnings

  • Operating loss of €228 million
  • Loss per share: 99 euro cents vs. an estimated loss of 85 euro cents per share as expected by analysts, according to Refinitiv
  • Revenue: 3.04 billion euros vs. 3.02 billion expected by analysts, according to Refinitiv. 21% year-over-year growth.
  • Gross margin in Q3 came in below expectations at 24.7% down 201 bps Y/Y
  • 456 million monthly active users (MAU) for the quarter, up 20% from the year-earlier period.
  • 195 million paid premium subscribers, up 13% year over year.
  • Premium revenue grew 22% to €2.7 billion
  • Ad-supported revenue grew 19% to €385 million
  • Free Cash Flow positive €35 million in the quarter.

“There is a lot of global uncertainty, but our business continues to perform very nicely around the world,” CEO Daniel Ek said in prepared remarks about the quarter. “With one quarter left in a year that has seen war, a lingering pandemic, inflation, supply chain disruption and threats of a global recession, I am really proud of all that we have accomplished and that despite all of this, we are precisely where we thought we’d be.”

Spotify’s gross margin in Q3 came in below expectations at 24.7%. The reasoning for this was the company was “affected by an accrual adjustment from an anticipated renewal of a large publishing contract outside the U.S.,” along with “some softness in advertising and currency fluctuations.”

Spotify attributed the operating loss to higher payroll costs with the expansion of its global ad sales team; platform investments; and the effect of recent acquisitions including interactive music trivia game,
Heardle, Podsights, Findaway, Sonantic, Chartable, and Whooshkaa.

On October 5th, Spotify announced the acquisition of Kinzen to further enhance it’s approach to platform safety

Growth in Podcasts

Spotify is continuing to invest in advertising, and its ad-supported revenue grew 19% year over year and made up 13% of total revenue. The company said growth was driven by podcasting.

Spotify introduced podcasts in 2015, and it is now home to more than 4.7 million of them, up from 4.4 million the previous quarter according to the report. In September SPOT launched the first iteration of
Audiobooks in the Spotify app for listeners in the United States. The company continues to diversify beyond music streaming to become an audio destination and competing with bigger rivals such as Amazon, Apple and Google. U.S. listeners are now able to purchase and listen to more than 300,000 different audiobook titles on its platform.

In August, Apple increased its in-house podcasting by signing a deal with Futuro Studios to fund and develop podcasts exclusively for the tech giant. The move puts Apple more into competition with Spotify and Amazon.

Outlook

For Q4, Spotify expects revenue of €3.2 billion and an operating loss of €300 million, which includes €95 million in additional expenses that the company said are due to unfavorable currency exchange rates. The company projected 202 million paid subs (up 7 million sequentially) and total MAUs of 479 million (up 23 million sequentially).

On the earnings call, Ek said Spotify is looking at raising prices on its U.S. subscription plans, following increases by Apple Music and YouTube Premium. “[I]t’s something we will [discuss] with our label partners,” he said. “I feel good about this upcoming year, and what it means about pricing for our service.”

On Monday, Apple Music raised its subscription price to $10.99 per month for individuals, with the family plan jumping two dollars to $16.99/month, among other plan increases. YouTube is raising the price of its U.S. Premium Family plan from $17.99 to $22.99 monthly. Deezer, which is a smaller player in the U.S. but the fourth or fifth largest globally (depending on whether one counts China-only Tencent) has raised its prices internationally.

Competitors

Spotify is the leading streaming service accounting for 35% of share in the global streaming paid subscription market.

Competitors include Apple Music, Amazon Music, YouTube Music, Google Play Music, Sound Cloud, Pandora, Deezer Music, Tidal, Napster, and Bandcamp.

In October, TikTok parent ByteDance was reportedly planning an expansion of its music-streaming service.

Apple Music is Spotify’s main competitor with 19% of the market share. Amazon is the fastest-growing music streaming service with a 15% of global market share. YouTube Premium service, YouTube Music is Spotify’s fourth competitor with 6% of global market share.

About Spotify

Spotify launched in 2008 and is based in the European ‘tax effective’ country Luxembourg. Spotify is a digital music, podcast, and video service that gives you access to millions of songs and other content from creators all over the world. Spotify is the world’s most popular audio streaming subscription service with 456m users, including 195m subscribers, across 183 markets.

Spotify says it has over 80 million tracks, including 4.7 million podcasts, for free, or upgrade to Spotify Premium to access exclusive features. Spotify is available across a range of devices, including computers, phones, tablets, speakers, TVs, and cars, and you can easily transition from one to another with Spotify Connect.

Competitors

 Source: Spotify Investors