Spotify's User Growth Surpasses Profit Forecast Expectations
As a positive development for the streaming service Spotify, the company projected a fourth-quarter profit that exceeds Wall Street expectations. This optimistic forecast is attributed to strategic cost-cutting measures and a steady increase in user numbers during the important holiday season. Following the announcement, Spotify's shares rose by 7.7% in after-hours trading.
The Sweden-based firm has implemented various cost-cutting measures to enhance profitability over the past year. These include staff layoffs, reducing podcast investments, and cutting marketing expenditures. Additionally, Spotify adjusted its pricing strategy in the U.S. to capitalize on strong demand for its premium offerings by raising plan prices.
Spotify’s expected operating income for the fourth quarter stands at €481 million ($509.76 million), significantly higher than the average analyst estimate of €445.7 million compiled by LSEG. The monthly active user (MAU) estimate is also above expectations, projected at 665 million, surpassing Visible Alpha's estimate of 661 million. The company aims to gain around 8 million premium subscribers during the quarter, bringing the total to 260 million.
The company’s portfolio includes a free service with ads and limited features, as well as a paid subscription service that provides full access to premium functions. Spotify is enhancing its premium features to attract more users and expanded its AI-powered playlist creation tool in September to four new markets, including the U.S.
These initiatives contributed to a 12% increase in premium subscribers, reaching 252 million, slightly exceeding Visible Alpha's estimate of 251 million. MAUs rose by 11% to 640 million, also slightly above expectations.
However, Spotify's overall revenue growth was less robust than anticipated; it reached €3.99 billion in the third quarter, a 19% increase, but fell short of the expected €4.02 billion. This decline is attributed to a slowing digital advertising market. Furthermore, the strong dollar is expected to impact the company's fourth-quarter revenue, with an estimated revenue of €4.1 billion falling below the anticipated €4.26 billion.
Despite these challenges, Spotify's gross profit for the third quarter rose by 40% to €1.24 billion, slightly exceeding the forecast of €1.22 billion. The company also saw an improvement in its gross profit margin, which increased from 29.2% in the previous quarter to 31.1%.