Investors eye margin improvements amid podcast pivots
Spotify Technology (SPOT) reported fiscal fourth quarter earnings on Tuesday that missed expectations. But strong guidance helped boost shares in early trading as the music-streaming platform continues to focus on profitability amid recent price hikes and changes to its podcasting strategy.
The company reported an operating loss of 75 million euros ($80.6 million) in the quarter amid severance and real estate related charges, but guided to strong Q1 operating income of 180 million euros. Spotify reported an operating loss of 231 million euros in the year-ago period.
Spotify’s stock jumped in premarket trading immediately following the results, up nearly 10%.
The streaming service reported a net loss of 70 million euros ($75.2 million), or a loss of 0.36 euros per share. That missed analyst expectations of a loss of 0.31 euros per share. It also compares with the year-earlier period loss of 430 million euros, or a loss of 2.23 euros a share.
The losses come after the company turned a profit in Q3 for the first time in over a year.
Gross margins, however, came in stronger than expected at 26.7%, slightly beating company guidance of 26.6%. The streamer said it expects margins to tick down slightly to 26.4% in the first quarter, primarily driven by year-over-year improvements in music and podcasting.
Spotify has previously said it expects the metric to come in between 30% and 35% over the long term amid plans to further scale its podcasting and ads business. With the exception of Q3, margins have been stuck between 21% and 25% in recent quarters.
Revenue, meanwhile, totaled 3.67 billion euros — 16% higher compared with the fourth quarter of 2022, but slightly below Wall Street expectations of 3.72 billion euros. Spotify guided to first quarter revenue of 3.6 billion euros.
User figures
Total monthly active users (MAUs) beat company estimates of 601 million to hit 602 million in the quarter — a 23% improvement compared with the total in the year-ago period. The streaming service anticipates Q1 MAUs to come in at 618 million.
Premium subscribers also surpassed Wall Street expectations of 224 million — a 15% year-over-year jump. Spotify expects that subscriber count to increase to 239 million in the first quarter. Q4 net additions of 10 million contributed to record full year net additions of 31 million, the company said.
Free cash flow, another key metric for investors, jumped on both a yearly and quarterly basis, coming in at 396 million euros compared to 216 million euros in the prior quarter and negative 73 million euros in the year-ago period.
Average revenue per user, or ARPU, for Premium subscriptions increased 1% to 4.60 euros (or 5% year-over-year, excluding foreign exchange headwinds.) ARPU was driven by price increase benefits that was partially offset by discounted plans and lower prices in emerging markets, the company said.
Profit pledge
Overall, analysts have been bullish on Spotify after the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis.
Spotify spent $1 billion pushing into the podcast market over the past four years with splashy A-list deals and $400 million-plus studio acquisitions.
That spending took a significant bite out of gross margins and weighed heavily on profitability. In response, Spotify committed to several rounds of layoffs — three in 2023 alone. The company also announced CFO Paul Vogel will step down from his position on March 31.
In addition to layoffs, Spotify raised prices, changed up its royalty structure, and made audiobooks free to paying subscribers.
But more changes are expected as Spotify further revamps its podcast strategy to focus more on distribution rather than exclusivity.
Late last week, Spotify announced a new deal with its most popular podcaster: Joe Rogan.
The company revealed Rogan’s podcast, which was previously exclusive to Spotify, will be available on additional services like Apple Podcasts (AAPL), Amazon Music (AMZN), and YouTube (GOOGL) for the first time in years.
The multiyear deal, which the Wall Street Journal pegged at $250 million, represents Spotify’s broader podcast distribution push, which it first began to roll out last year.
Under the new agreement, Spotify will handle distribution and ad sales as it works to maximize revenue. Rogan, meanwhile, will receive a guaranteed minimum rate and cut of the advertising revenue.
The company recently renegotiated a similar contract with Alexandra Cooper of “Call Her Daddy”.
The podcast, which Spotify purchased for a reported $60 million in 2021, will now be available on all major audio platforms after more than two years as a Spotify exclusive. The company will maintain the exclusive rights to the podcast’s video portion.
Spotify shares have surged about 80% over the past year and are up more than 15% year to date. The stock is still off about 40% from its record high of $364.59 a share in February 2021.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance