Spotify (SPOT) reported fourth quarter financial results before the bell on Tuesday, presenting a mixed picture with a wider-than-expected loss and a beat on gross margins.
Total monthly active users topped expectations, coming in at 489 million against forecasts for 478 million with both premium and ad-supported subscribers surging past estimates.
Spotify stock, which lost more than two-thirds of its value in 2022, had been up 6% in premarket trading but gave up most of those gains after the results became public.
Here are Spotify’s fourth quarter earnings compared to Wall Street’s consensus estimates, as compiled by Bloomberg:
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Revenue: €3.17 billion versus €3.18 billion expected
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Loss per share: –€1.40 versus -€1.30 expected
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Total monthly active users: 489 million versus 478 million expected
Premium subscribers grew 10 million in the quarter to reach 205 million; ad-supported users jumped by 22 million to total 295 million. Spotify said it expects first quarter subscribers to come in at 500 million, beating estimates of 492.2 million.
The company blamed widening losses on higher personnel costs primarily due to headcount growth and higher advertising costs, in addition to currency movements.
Spotify shares, despite the post-earnings bump, are still still off roughly 40% from last year and more than 65% below its record close of $364.59 in February 2021.
Investors have remained hyper-focused on Spotify’s declining gross margins, which beat expectations of 24.5% in the fourth quarter to reach 25.3% “due primarily to lower investment spending and broad-based music favorability.”
Small figurines are seen in front of displayed Spotify logo in this illustration taken February 11, 2022. REUTERS/Dado Ruvic/Ilustration
Spotify said it expects gross margins to come in between 30% to 35% over the long term amid plans to further scale its podcasting and ads business. However, execution remains murky amid macroeconomic challenges.
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Free cash flow (FCF), another key metric for investors, came in negative in the fourth quarter amid greater medium-to-long term investments. After reporting positive free cash flow of €35 million in Q3, the company reported negative FCF of -€73 million (versus estimates of -€69 million) in Q4.
Spotify CFO Paul Vogel, who previously categorized 2022 as a peak investment year, warned of the reversal during the company’s Q3 earnings call: “Given the timing within quarters, we may see free cash flow turn negative in Q4, but we still expect to be free cash flow positive for the year and moving forward.”
Full-year free cash flow did indeed remain positive — a trend Spotify said it expects to continue on a full-year basis.
One of those heavily invested areas has been podcasts, where Spotify has spent more than $1 billion over the past four years.
Newly announced layoffs, coupled with a company reorganization focused on “efficiency,” suggest Spotify could be looking to pivot away from that strategy, especially with Dawn Ostroff out as chief content officer.
Under her leadership, Ostroff led pricey, A-list deals including a reported $200 million deal with Joe Rogan.
Spotify indicated the company is actively exploring raising prices on its U.S.-based tiers. Both Apple Music and YouTube Premium raised prices on their respective plans late last year.
“It is one of the things that we would like to do, and this is a conversation we will have in light of these recent developments with our label partners,” Ek told investors during Spotify’s Q3 earnings call. “I feel good about this upcoming year, and what it means about pricing for our service.”
Investors will be looking out for any price increase announcements during the company’s Q4 earnings call.
Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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