Spotify Technology S.A. (NYSE:SPOT) stock fell Tuesday after the music streaming company reported second-quarter results that missed Wall Street earnings and revenue estimates and issued weaker-than-expected guidance for third-quarter monthly active users.
The company posted second-quarter earnings of $3.03 per share, missing the analyst consensus estimate of $3.29. Revenue increased 14% year over year to $5.554 billion (4.78 billion euros), below the Street estimate of $5.600 billion.
The Financial Times reported that Spotify’s profits were pressured by higher spending on marketing and artificial intelligence, raising investor concerns about whether the music streaming giant can sustain its growth as the streaming market matures.
User Growth Continues Despite Earnings Miss
Spotify continued to add users during the quarter, with monthly active users rising 12% year over year to 777 million. Net additions totaled 16 million, slightly below the company’s guidance of 17 million.
Premium subscribers increased 9% to 300 million, with net additions of 7 million. Average revenue per Premium user rose 7% to 4.89 euros, while ad-supported revenue increased 1%.
Margins Improve Despite Higher Spending
Gross margin expanded 193 basis points to 33.4%, exceeding the company’s guidance, helped by improvements in both the Premium and ad-supported businesses. Premium gross margin increased to 34.9%, while ad-supported gross margin improved to 19.1%.
Operating income climbed 61% year over year to 655 million euros, representing an operating margin of 13.7%.
Adjusted operating expenses rose 19% to 941 million euros as Spotify increased spending on marketing and artificial intelligence initiatives aimed at supporting future growth.
The company ended the quarter with 9.4 billion euros in cash, cash equivalents and short-term investments and generated 797 million euros in free cash flow. Spotify employed 7,302 people at the end of the quarter.
The company is pursuing its next phase of growth through higher-priced subscription tiers, early concert-ticket access, AI-powered remix tools and AI-generated podcasts.
Q3 Outlook
For the third quarter, Spotify expects revenue of 5.0 billion euros, or about $5.813 billion, above the analyst consensus estimate of $5.770 billion.
The company expects Premium subscribers to reach 305 million, implying net additions of about 5 million. Monthly active users are projected to increase to 788 million, below analysts’ estimate of 793 million.
Spotify forecasts a gross margin of approximately 32.9% and operating income of about 670 million euros, including roughly 9 million euros in social charges linked to share price assumptions at quarter-end.
Investor Day Targets
At its recent investor day, Spotify said it has captured about 20% of the U.S. audiobook market and that global streaming hours per subscriber increased 10% between 2021 and 2025.
The company said more than 3% of the global population now pays for Spotify, while over 500 million users have streamed a video podcast.
Management reaffirmed its 2030 targets of 35% to 40% gross margin, operating margins above 20% and 1 billion subscribers.
SPOT Price Action: Spotify Technology shares were trading 1.81% lower at $477.54 at the time of publication on Tuesday, according to Benzinga Pro data.
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