To The Moon

$Spotify Technology S.A. (SPOT)$ reported Q2 earnings on the 23rd pre-market.All things considered, it was an earnings report that exceeded expectations, and to make a 15% pre-market jump, there must have been something that made investors very happy.

1. Profit margins exceeded expectations.Q2 is very typical of a turnaround to enjoy more incentives.Looking at the proactively announced gross margins this quarter, the company seems to have made a big improvement in content costs, and it could be sustainable.Of course, the June price hike could pull margins up further in the coming quarters, which would leave more ample room for valuation.

2. Expectations for new business are more optimistic.Since the company launched audiobooks, it also took the opportunity to raise prices at the same time, giving customers more choices on the one hand, and revitalizing the new business on the other, directly boosting subscribers.And judging from the company's guidance for Q3, the price hike probably won't have much of an impact on the company's subscribers.Because Spotify's package price is already higher than its Apple Music counterpart, the ability to retain subscribers in this case is also more because of the product itself.

3. Potential advertising boost.Spotify's revenue from its non-subscription channel is primarily advertising, similar to $NFLX 's advertising packages that charge per click, and the company may develop "ad-containing" packages for different types of users in the future.

Earnings Overview

1. Overall revenue levels are expected to be essentially flat, but the turnaround increases the score.

   1. Q2 revenue of $3.807 billion, +19.8% y/y, was slightly below expectations of $3.813 billion.However a number of the expectations were for a June price increase, so market consensus was relatively high.

   2. Revenue growth is mainly coming from the expansion of the user base (MAU and paying subscriber uplift), as well as revenue diversification, such as the ongoing expansion of the audiobook service, which could create additional revenue streams and increase user engagement;

   3. The company's net profit was €274 million, compared to a loss of €302 million in the same period last year, continuing the turnaround and making a turnaround for the full year 2024 imperative.

      

      

2. Active users tend to stabilize but the growth rate is declining.

   1. Overall MAUs of 626 million were slightly below the company's own guidance, though +14% y/y, although Q2's YoY incremental growth was still a bit more than Q1.

   2. Paid subscribers also reached a new high of 246 million, beating expectations of 245 million, which is related to the company's bundling of audiobook channels starting in June

   3. But the corresponding growth in ad tier subscribers became slower.

   4. ARPU rose accordingly to $4.62, higher than the market expectation of $4.59.

      

      

3. Optimistic guidance, implying management's stronger confidence in the price hike.

   1. The company raised Q3 revenue guidance to $4 billion and operating profit to $405 million, a margin of more than 10%, which is a further boost to the market's expectations of the company's margin ceiling.

   2. Q3 MAU guidance was 639 million and paid subscriber guidance was 251 million, a level that also shows management's confidence given the June price hike.