Spotify user growth soars, but social charges impact profit

Yes, but: The company also reported its first quarterly loss in a year, citing "social charges," or higher taxes in certain countries related to employee compensation awards.

• Shares of the audio giant fell 10% in early trading in response to weaker third-quarter forecasts due to those social charges.

Zoom in: Spotify chief financial officer Christian Luiga said the social charges will fluctuate with the company's stock price, making it hard to predict. Still, Luiga said he supported Spotify's compensation plan.

• "We think it's a good model to have a share-based program with our employees, and it's been successful over the years," he said.
• The company's third-quarter profit forecasts are based on the company's share price at the end of the second quarter.
• Shares of Spotify have surged more than 50% so far this year.

Zoom out: Spotify posted its first full year of profitability in 2024, a huge feat for the Swedish company, which was founded nearly two decades ago.

• Investors have been eager to see how well the tech firm can maintain and grow its margins as it invests more in new products and technology, such as audiobooks and artificial intelligence.

Between the lines: One area that the company is hoping will help drive margins are improvements to its ads businesses.

• "We missed our internal expectations on ads," Ek said, reflecting on the quarter. "We're not too happy about that, so we're taking actions there."
• On Monday, Spotify parted ways with its ads lead Lee Brown, which sources said was a mutual decision. Brown led Spotify's ads team for nearly six years. While the business has grown to roughly $2 billion in annual revenue, it hasn't grown as fast as Spotify's premium business.
• Premium subscriber revenue grew 12% year-over-year last quarter, while ad-supported revenue declined 1%.
• "I still feel great about the strategy, but on the execution side, we should have been able to do better," Ek said. "In the spirit of transparency, that was perhaps the biggest low point of the quarter, relative social charges and currency [exchange rates], which are out of our control."

By the numbers: Spotify's premium subscriber base jumped 12% year-over-year last quarter to 276 million globally, ahead of analyst expectations.

• Its monthly active user base grew 11% year-over-year to 696 million globally, also ahead of analyst expectations.
• The company attributed that growth to successful marketing campaigns in select developing markets and favorable competitive dynamics in certain markets, like TikTok Music shutting down.
• Its revenue and operating income came in short of investor expectations, mostly due to social charges and currency exchange headwinds.
• Because the company is Swedish and reports in euros, currency exchange rates tend to impact its earnings more than U.S. companies.

Between the lines: A bright spot for Spotify's financials last quarter was that its gross margin finished at 31.5%, up 227 bps year-over-year, driven mostly by revenue growth outpacing music and audiobook costs.

• Short-term financial headwinds such as currency exchange rates and social charges have less of an impact on the company's gross margin, Luiga said.
• Long term, the company has said that it wants its gross profit margins to land between 30%-35% consistently. It's achieved that goal for the past four quarters.

What to watch: Spotify spent more on marketing last quarter, but Ek said that investment was worth it because the company is becoming more efficient in how it spends its customer acquisition dollars.

• "We don't care about optimizing [marketing spend] per quarter," Ek said, but rather optimizing the lifetime value of its users and subscribers "and optimizing for the long-term growth of the franchise."