The Business Times

Spotify tops subscriber forecasts, sees margin pressure this quarter

Published Wed, Oct 26, 2022 · 08:27 AM

SPOTIFY Technology tumbled as much as 10 per cent in late trading after the company, the leader in music streaming, said profit margins may narrow this quarter because of programming costs, and that it’s considering raising prices in the US.

Shares of Spotify fell as low as US$87 after reporting results on Tuesday (Oct 25) before partly rebounding. The stock rose 2.5 per cent to US$97.05 at the close on Tuesday.

The sell-off shows how investors have become less interested in the pace of subscriber growth and more focused on whether Spotify becomes profitable. That has put pressure on management to make a strong case for investments in newer businesses like original podcast programming.

On a conference call with investors Tuesday, chief executive officer Daniel Ek said he was mulling a price increase for its streaming product in the US, but wanted to first discuss the move with the record labels that provide the company’s music.

Apple, a rival in music streaming, raised the price of its service this week by US$1 to US$10.99 a month for individuals, citing costs. Spotify, based in Stockholm, charges US$10.

Earlier, Spotify reported third-quarter ad revenue increased 19 per cent but said sales were slower than expected due to a “challenging macro environment”. The company joins other tech giants, including Alphabet and Snap, in reporting slower ad sales.

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On the call, Ek said he wasn’t worried about ad sales slowing because the business is still a small one for Spotify.

Spotify’s gross margin in the quarter failed to meet the average 25.2 per cent estimate of analysts, coming in at 24.7 per cent, which Spotify attributed to the ad slowdown and increased content spending - like its recent move into audiobooks.

The company forecast a gross margin of 24.5 per cent in the fourth quarter, and an operating loss of 300 million euros, both below consensus expectations.

The company has been taking steps to diversify its revenue. Spotify began selling audiobooks in September in an effort to enter the “substantially untapped” market, according to Nir Zicherman, global head of audiobooks and gated content.

Spotify continues to wrestle with its podcasting business, terminating employees at its Gimlet Media and Parcast studios this month, following layoffs of other podcast staff in September.

The company reported 456 million monthly average users for the third quarter, beating analysts’ projections of 450.7 million. It surpassed paid subscriber predictions as well, confirming some investors’ beliefs that the business can weather a shaky economy and inflationary environment.

Third-quarter revenue reached 3.04 billion euros (S$4.3 billion), exceeding analysts’ expectations of 3.02 billion euros. Paid subscribers totalled 195 million, beating Wall Street projections of 194.2 million. The company generated 385 million euros in advertising sales in the quarter, representing 13 per cent of its revenue. BLOOMBERG

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