Spotify posts record gross margin, profit and cash flow for Q2
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Spotify on Tuesday reported its most profitable quarter ever, a signal to investors that its efficiency efforts are working and its business is growing, despite a slowdown in the ad market.
Why it matters: It marks the second consecutive quarter of record profit growth for the company, following several quarters of heavy losses last year.
Catch up quick: Spotify has consistently delivered positive user growth over the past few years, but investments in podcasting and overhead costs ate at its profit growth, drawing frustration from Wall Street.
- The company took sweeping measures to address those two issues, cutting staff by 17% in late December and shifting its podcast distribution strategy.
State of play: Spotify now believes it's on track to remain solidly profitable for the foreseeable future.
- The Swedish tech giant forecasts delivering on its goal of achieving a 30% gross margin on its business next quarter, well ahead of the 2025 deadline it gave investors last year.
Zoom in: Spotify said it's started to invest more heavily in attracting users that are more likely to pay for a premium subscription.
- As such, the company came in slightly shy of its guidance to Wall Street for monthly active user (MAU) growth, but beat its guidance handily on premium subscriber growth.
- That feat is notable, given that Spotify announced U.S. price increases in early June. (A third-party analysis of U.S. subscriber churn suggests Spotify has one of the stickiest products in the media and tech sector.)
By the numbers: Spotify beat investor expectations across most of its business, but posted particularly strong results on its bottom line, which will allow for additional future product investments.
- Monthly active users: For the second quarter, Spotify said it grew its monthly active user base by 14% year-over-year to 626 million globally, shy of its previous guidance of 631 million.
- Premium subscribers: It beat investor estimates on premium subscriber growth, growing that user base by 12% to 246 million users globally, slightly ahead of investor guidance.
- Revenue/Earnings: Spotify reported a top line result of €3.8 billion for the quarter, a 20% year-over-year increase that was in line with investor expectations. It beat Wall Street consensus on earnings per share, delivering €1.33.
- Operating income/gross margin: The company reported a record operating income of €266 million. Its gross margin came in at a record 29.2%, above its Wall Street guidance of 28.1%, thanks to margin improvements across both its music and podcasting businesses.
- Operating expenses: Expenses declined by 16% year-over-year, thanks mostly to headcount reductions related to layoffs late last year.
- Net income/free cash flow: Spotify had a record €490 in free cash flow last quarter. It posted a record net income of €274 million for the quarter.
The big picture: The Swedish tech giant has nearly recovered all of its post-pandemic era stock losses, which is notable given that many advertising and subscription-focused media businesses have not.
- While Spotify isn't immune from the industry-wide slowdown in ads, investments in its ad products and growth across its ad network, called the Spotify Audience Network, still boosted its ad business 13% year-over-year.
What to watch: While Spotify continues to invest in its legacy music and podcast businesses, it's starting to invest more in its newer audiobooks offering.
- Spotify last year made audiobooks available to U.S. premium subscribers. It expanded that offering to several other countries last quarter.
