By Anne Steele
Generation Z and overseas listeners helped Spotify notch its strongest ever quarter for new users, while the streaming giant reported steeper losses from podcasting cuts and higher music royalty costs.
The audio company is in the throes of an effort to improve profitability, which includes right-sizing its investments in podcasting and raising prices.
On Monday, Spotify said it is raising prices for its premium subscription to $10.99 a month in the U.S. from its longstanding price of $9.99, confirming an earlier report by The Wall Street Journal. The company had told investors it would raise prices this year as part of a continuing push to consistently turn a profit.
Spotify shares fell 12% Tuesday after the company reported steeper losses from podcasting cuts and higher music royalty costs.
The Stockholm streaming giant notched its strongest-ever quarter for new users, yet missed its revenue target and offered a weaker-than-expected outlook for the current quarter.
The audio giant said it would soon raise prices in dozens of other markets around the world, including the U.K., France, Mexico, Peru, Singapore and Hong Kong.
Asked about the company's ability to raise prices longer term, Chief Executive Daniel Ek said Spotify continues to improve its product, increase podcasting and expand its audiobooks offering. "If we're doing that, I believe that we have the ability to then raise prices to keep the value to price ratio at an appropriate level," he said.
How many new subscribers did Spotify add?
-- Overall, the streamer reported 551 million monthly active users, a 27%
jump from a year earlier, 21 million ahead of guidance and a record high
for the company. The company said it was helped by successful marketing
and improved retention.
-- Spotify's base of paying subscribers -- its most lucrative type of
customer -- rose 17% to 220 million, topping the company's expectations
by three million.
-- User growth was stronger than expected in all regions, with particular
strength in Latin America, the company said. The company also added more
younger, Generation Z listeners.
Is the company profitable?
-- The company posted a wider loss of EUR302 million, equivalent to about
$335 million, or EUR1.55 a share, for the quarter ended in June, compared
with EUR125 million, or 85 European cents, in the year-earlier period.
Its gross margin fell to 24.1% as a result of EUR44 million in charges
related to canceling podcast shows, staff layoffs and the impairment of
excess real estate.
-- Spotify said it incurred higher music royalty costs in the period and saw
some improvement in podcast profitability. It reached new licensing
agreements with major-label partners after the quarter's end that, among
other things, allowed the streamer to raise subscription prices. The
company pays out about 70% of revenue to music rights holders.
-- Ek said in an interview that the new agreements and the company's price
increases are a "win-win for Spotify and the music industry."
-- For years, executives have said the company will give priority to
investment in growth over profit as Spotify tried to attract users around
the world and expand into new forms of audio. Last fall, the company
indicated that profitability is expected to improve this year as it moves
on from that period of heavy investment.
-- Free cash flow, a measure of the cash a company generates from operations
that is viewed by many investors as a proxy for performance, was EUR9
million, compared with EUR37 million a year earlier and EUR57 million in
the prior quarter.
What about revenue?
-- Overall revenue for the second quarter was up 11% to EUR3.18 billion, shy
of the company's forecast.
-- Subscriptions, the largest contributor to Spotify's top line, rose 11% to
EUR2.77 billion. Revenue from advertising rose 12% to EUR404 million. Ad
revenue has become increasingly important to the future of Spotify's
podcast business and accounted for nearly 13% of its overall revenue
during the second quarter.
-- Average revenue per user for the subscription business in the quarter
slipped 6% to EUR4.27. That metric declined as a result of Spotify
drawing new subscribers through discounted plans and lower prices in
emerging markets.
How is its podcast business?
-- In June, Spotify said it would cut about 200 jobs, or 2% of its workforce,
after struggling to make money in podcasting. The company has
consolidated some of its premier Gimlet and Parcast studios and axed many
of its original shows.
-- Ek told investors Tuesday that the company made the "right bet" on
podcasts four years ago before there was much data available on the
market, and that Spotify is now the top platform for that format. As it
cuts costs, "we're coming at this with the process of rightsizing some
deals, doubling down on some of the things that worked really nicely and
then stepping out of some deals and relationships that hasn't worked out,
" he said.
-- Spotify also loosened exclusivity arrangements with some of its podcasts,
and has begun distributing them to other platforms in a move aimed at
increasing the audience and ad potential of those shows. Exclusive deals
with its biggest stars, including Joe Rogan, Alex Cooper and Emma
Chamberlain, remain in place.
News Corp's Dow Jones & Co., publisher of The Wall Street Journal, has a content partnership with Spotify's Gimlet Media unit.
Write to Anne Steele at anne.steele@wsj.com
(END) Dow Jones Newswires
July 25, 2023 11:07 ET (15:07 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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