Audio streaming giant Spotify has reported a landmark 252m premium subscribers and a healthy profit margin despite a slowdown in its advertising business.
The Swedish unicorn, now valued higher than compatriot brands Volvo, H&M and Ericsson, reported a 12% increase in premium (paid) subscribers, while free, ad-supported users were up 11% to 402m.
While ad revenue growth slowed to 6% to €472m (down from 13% growth in Q2), the company’s premium revenue grew by 21% to €3.52bn.
That helped deliver an operating profit of €454m in Q3, significantly up from €266m the previous quarter and €32m a year ago. The company’s turnover was in line with its forecast for €4bn of quarterly revenue.
Spotify missed its guidance to analysts last quarter on monthly active user (MAU) growth by 5m, although its premium subscribers that quarter were 1m above guidance. For Q3, the company surpassed its prediction of 639m MAUs (it was 1m above that) while also beating its guidance of 251m premium subscribers (also by 1m).
Analysis: A profitable combo of sticky users and cost cuts
There was much for the world’s biggest audio business to crow about in its latest earnings, so unsurprisingly shares in Spotify rose by about 8% following Tuesday’s Q3 financial update.
Notably, the company highlighted that Spotify is “well-positioned to sustainably grow towards the long-term goals outlined at our 2022 investor day”.
That presentation from June 2022 devoted substantial airtime to podcasts — specifically how unbundling podcasts from RSS-feed tech had paved the way for Spotify to generate revenue. This market has also been disrupted by Spotify inking big-money deals with stars such as Joe Rogan, Louis Theroux and Trevor Noah in return for exclusivity.
That has proven to be substantially additive for the Spotify business, with a 21% increase in an already huge €3.5bn subscription business. Users are also proving to be sticky, with subscription cost increases driving growth in average revenue per user, which has rebounded to its highest level for the last eight years.
Yet, growing an advertising proposition has proven more challenging, with Spotify blaming a “softness in pricing” and a “challenging brand environment” in its music and podcast ad business.
Its 6% ad revenue growth is down on 16% in the same period in 2023, which was also a challenging year. Online platforms face the double-edged sword of marketing demand changes hitting them first, as online advertising is typically quicker to dial up or down than an offline vertical like radio.
Remember when Spotify executives used to talk about making so much money from ads that they would become 20% of its overall business? You don’t hear that any more, because it’s gone backwards: ads are now 12% of total revenue, down from 13% last year.
As for profits, it’s hard to ignore the significant lay-offs Spotify announced at the end of last year (around 1,500 due to be culled from a 9,000 global headcount). Spotify ended Q3 with 7,242 full-time employees globally — nearly 2,000 fewer people than it said it had at the end of 2023.
The company will be pleased that negative effects from that large cost-cutting exercise have not filtered through yet. Unless, of course, those people really were sitting around doing very little — something that is highly unlikely.
Flat user growth in Europe and North America
Spotify’s largest region remains the “rest of world” segment (outside North America, Europe and Latin America) — that made up 33% of MAUs, up 26% year on year, while there were single percentage-point drops for Europe (to 27%) and North America (to 18%).
Europe and North America continue to be the biggest regions in terms of premium subscribers, though: Europe had 38% of Spotify’s paid users and North America 27%, compared with Latin America’s 22% and 14% for the rest of the world.
In an investor presentation following its Q3 earnings release, Spotify said it expects the all-important final quarter to yield 25m net new MAUs, mean it would end the year with 665m.
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