Shares in Spotify jumped as much as 17.3% on Tuesday (April 23) after the company's first-quarter earnings report showed the company is starting to deliver better earnings and margins. The stock closed at $303.49, up 11.5%, after hitting a new 52-week high of $319.30 earlier in the day.
Investor expectations for future quarters often lead to large swings in share prices when a company delivers results for previous quarters. For Spotify, cost cutting and new financial discipline are expected to produce tangible results next quarter. The company's guidance for second-quarter operating income of 250 million euros ($268 million) was well above Guggenheim analysts' estimate of 179 million euros ($192 million) and JP Morgan's estimate of 199 million euros ($213 million dollars) and it was a huge improvement. of the 247 million euros ($264 million) in operation loss in the second quarter of 2023. Gross margin guidance of 28.1% was well above Guggenheim's estimate of 26.6% and JP Morgan's estimate of 26.9%, and would be nearly four percentage points above gross margin 24.3% of the previous period.
First-quarter results often exceeded Spotify's guidance three months ago. Revenue of 3.63 billion euros ($3.9 billion) was slightly above the high of 3.6 billion euros. Gross margin of 27.6% was more than a percentage point above guidance of 26.4%, although operating income of 168 million euros ($180 million) was under guidance of 180 million euros ($192 million).
Gross margin was 243 basis points — 2.43 percentage points — better than the 25.2% gross margin in the year-ago period. Spotify said the improvement came from improved music and podcast profitability partially offset by costs from its growing audiobook business. Operating income was impacted by 82 million euros ($89 million) in social charges and helped by lower staff costs and marketing expenses.
“We think this is a real trend” and not the result of isolated events, the interim chief financial officer said Ben Kung during Tuesday's earnings call when asked by an analyst what to expect from margin growth for the rest of 2024.
While Spotify didn't beat forecasts for subscriber growth, it met expectations and generated more revenue, on average, from each paying customer. Average revenue per user improved 5% to €4.55 ($4.94) thanks to price increases in July 2023. Total monthly active users of 615 million were slightly below Spotify's guidance of 618 million, but the 239 million subscribers matched the company's forecast.
“It's really a new Spotify and we're relentlessly inventive in all our costs,” CEO Daniel Ek he said during Tuesday's earnings call. Second-quarter margins were helped by reductions in streaming delivery costs and other costs of revenue, Ek explained. The podcast segment, which turned profitable in 2023, is expected to be profitable in 2024, he added.
The long-standing knock against Spotify was that it had a great product, but it wasn't a great business. The financial demands of streaming music, which require Spotify to pay music rights holders the bulk of its revenue, have left little for R&D, marketing, salaries, and general and administrative expenses. Although the company has amassed more than 600 million monthly users — 239 million of them paid subscribers — it has been consistently unprofitable.
Spotify's fortunes began to change in 2023 after the company went under, laying off 17% of its global workforce in December and shedding several expensive celebrity podcast deals — namely parting ways with Prince Harry and Meghan Markle's Archewell Studio and struck a non-exclusive deal with the previously exclusive to Spotify The Joe Rogan Experience.
