Spotify profit margins squeezed by slow ad growth; stock sinks

Spotify shares slid 4% in after-hours trading, stung by sector-wide weakness after Google parent Alphabet Inc missed market estimates for quarterly revenue as advertisers cut spending.

Spotify, whose stock has fallen 58.5% this year, said third-quarter margins were less than it had expected, blaming “some softness in advertising,” currency fluctuations and retroactive royalty payments to songwriters and music publishers.

“This is an early indicator of the concerns businesses are having about the economy,” Spotify CEO Daniel Ek told Reuters. “We’re not concerned long term, but it’s definitely impacting us in short term, and it contributed to the gross margin hit that we had this quarter, too.”

The number of monthly active users rose to 456 million in the third quarter, an addition of 23 million users in three months that beat Spotify’s guidance and analysts’ forecasts of 448.6 million.

Premium subscribers, who account for most of the company’s revenue, grew 13% to 195 million, topping analyst estimates of 194 million.

Spotify’s ad-supported income grew 19% in the quarter to 385 million euros ($383.7 million), with double-digit growth across all regions except Europe, where Spotify said it saw the impact of challenging economic conditions in the region.

Investors have worried that consumer spending on entertainment would suffer as the global economy reels from the lingering effects of the pandemic, Russia’s invasion of the Ukraine, rising interest rates and recession fears.

Spotify revenue for the third quarter reached 3 billion euros ($3 billion), up 21% from the same time last year and consistent with analyst estimates of 3 billion euros ($3 billion), according to IBES data from Refinitiv.

The company said gross margins dropped to 24.7%, below expectations, citing softness in the ad market and a large publishing contract outside of the United States.

Spotify posed a quarterly operating loss of 228 million euros ($227.3 million) in the quarter, higher than analyst projections of 168.6 million euros ($167.9 million).

For the fourth quarter, the company estimated it would reach 479 million monthly active users, up 23 million over the last three months of the year. It predicted it would add 7 million premium subscribers, bringing the total number to 202 million.

Revenue for the fourth quarter would reach 3.2 billion euros ($3.18 billion) with an operating loss of 300 million euros ($298.8 million).