TLDR
- Spotify added 5 million premium subscribers in Q1, beating expectations but missed on earnings and revenue
- Q2 monthly active user guidance of 689 million fell below analyst expectations of 694 million
- Stock fell as much as 8% in premarket trading following the earnings report
- Gross margin was 31.6% in Q1, ahead of estimates but down from Q4’s record 32.2%
- The company paid over $100 million to podcast publishers and podcasters in Q1
Spotify Technology (SPOT) shares dropped Tuesday following the streaming giant’s first-quarter earnings report that painted a mixed picture of the company’s performance. While subscriber growth exceeded expectations, the company’s financial results and forward guidance left investors wanting more.
The music streaming leader reported adding 5 million premium subscribers during the quarter, more than double the 2 million analysts had expected. This marked the second-highest Q1 subscriber net addition in the company’s history, bringing its total subscriber count to 268 million worldwide.
However, Spotify’s monthly active users (MAUs) grew to 678 million, just short of Wall Street’s target of 679 million. The company offers both a subscription service and an ad-supported free tier.
The most concerning aspects of the report were the financial results. Spotify earned $1.13 per share on revenue of $4.41 billion in the first quarter. This fell well short of analyst expectations of $2.49 per share on sales of $4.77 billion.
Growth Challenges Ahead
Looking ahead to the second quarter, Spotify’s guidance also disappointed investors. The company forecast 689 million monthly active users for Q2, below the 694 million analysts had expected.
Spotify also projected Q2 revenue of $4.89 billion, which came in below the consensus estimate of $4.97 billion. The company expects to add 5 million more premium subscribers in the current quarter.
Gross margin was a bright spot at 31.6% for Q1, beating Wall Street expectations. However, this represented a slowdown from the record 32.2% the company reported in the previous quarter.
For Q2, Spotify guided to gross margins of 31.5%, slightly below consensus expectations of 31.6%. Analysts have warned that the pace of margin expansion may slow this year after jumping by over 500 basis points in 2024.
Spotify CEO Daniel Ek remained optimistic despite the mixed results. “The underlying data at the moment is very healthy: engagement remains high, retention is strong, and thanks to our freemium model, people have the flexibility to stay with us even when things feel more uncertain,” Ek said in the earnings release.
He added, “So yes, the short term may bring some noise, but we remain confident in the long-term story, and the direction we’re heading in feels clearer than ever.”
The stock reaction was swift. In premarket trading, Spotify shares fell nearly 9% to $545, after closing at $597.73 the previous day. By the time the market opened, the stock had pared some losses but was still trading down about 6%.
Business Evolution Continues
The earnings report comes after a period of major transformation for Spotify. The company has undergone an intense business overhaul, including mass layoffs, leadership changes, and a shift away from podcast exclusivity.
After aggressively pushing into podcasts between 2019 and 2021 with investments of around $1 billion, Spotify has scaled back its podcast strategy. Nevertheless, the company remains committed to the medium, reporting that it paid more than $100 million to podcast publishers and podcasters worldwide in the first quarter.
Spotify has been working to improve its profitability through price increases and new service tiers. The company raised prices for the second time in less than a year and introduced a higher-priced audio “bundle” that includes music, podcasts, and audiobooks.
It also rolled out an audiobooks-only plan and a music-only streaming tier to appeal to different consumer preferences. These moves have helped the company achieve its first full year of profitability in 2024.
Despite the recent stock decline, Spotify shares have performed exceptionally well over the past year, climbing approximately 110% as of Monday’s close. This represents a dramatic recovery from the record lows the company faced in 2022.
In February, Spotify reached all-time highs of around $652 per share after reporting its first full year of profitability and setting quarterly records for revenue, gross margin, operating income, and free cash flow.
Some analysts view Spotify as a defensive play during economic uncertainty. Bank of America analyst Jessica Reif Ehrlich noted before the earnings release, “It is our view that SPOT’s subscription model should be more defensive/utility-like amid the current macro uncertainty.”
Advertising revenue, which currently makes up about 12% of Spotify’s total revenue, will be closely watched in future quarters, especially given the weak macroeconomic environment.
For Q1 2025, Spotify reported revenue of $4.41 billion, up from $3.89 billion in the same period last year.
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