Spotify Beats Estimates on Cost Cuts, Steady User Growth
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Spotify, the audio-streaming giant, has forecast fourth-quarter profit above Wall Street estimates, buoyed by cost cuts and strong subscriber growth in the crucial holiday season, reports Reuters.
The Swedish company has been actively pursuing a path to profitability, implementing cost-cutting measures including employee layoffs, reducing podcast spending, and trimming marketing expenses. It has also raised prices of its premium plans in the U.S. to capitalize on the demand for its premium features.
Spotify expects to achieve an operating income of 481 million euros ($509.76 million) in the fourth quarter, exceeding the average analysts' estimate of 445.7 million euros.
The company's forecast for monthly active users (MAUs) of 665 million also surpassed expectations of 661 million, according to Visible Alpha. Spotify anticipates adding approximately 8 million premium subscribers in the quarter, bringing the total to 260 million.
“The company is on track for its full-year profitability, which is a very important milestone that investors have been waiting on for us for a long time,” CEO Daniel Ek told Reuters.
Spotify's strategy involves offering a free, ad-supported service with limited features alongside a subscription-based paid service that unlocks premium functions.
The company has been expanding its premium features to attract users. In September, it expanded a tool that uses generative AI to create playlists to four new markets, including the U.S.
This effort has contributed to a 12% increase in premium subscribers to 252 million, exceeding Visible Alpha estimates of 251 million. MAUs also rose 11% to 640 million, slightly exceeding expectations.
However, overall revenue grew at a less-than-expected 19% to 3.99 billion euros in the third quarter, falling short of estimates of 4.02 billion euros. This shortfall is attributed to weakness in the digital advertising market.
This trend, coupled with a strong dollar, is expected to put pressure on fourth-quarter revenue, which is projected to be 4.1 billion euros, below estimates of 4.26 billion euros.
"We have been seeing pressure across the ad industry, where the industry is going from more of a brand spend to more of an automation and direct spend. This is an area we're investing in quite heavily," Ek said.
Despite this, Spotify's gross profit jumped 40% to 1.24 billion euros in the third quarter, surpassing estimates of 1.22 billion euros. This improvement is reflected in a rise in gross profit margin to 31.1% from 29.2% in the previous quarter.