Spotify Technology shares tumbled on Tuesday after the streaming company gave a muted outlook for profit and subscriber growth in the current quarter.
The Stockholm-based company forecast gross profit margins of 31.5% in the second quarter, missing analysts’ average estimate for 31.6% according to data compiled by Bloomberg. Spotify sees monthly active users rising to 689 million, less than the 694.4 million analysts expected.
The stock slipped as much as 9.6% in New York to $540.10. It had risen 22% this year through the end of March and had more than doubled in the last 12 months.
Chief Executive Daniel Ek tried to reassure investors that Spotify’s business is strong, despite economic turbulence roiling other industries.
“There’s a lot of uncertainty in the world and when volatility rises, it’s natural to ask who might be affected and how,” Ek said on the company’s earnings call. “From where I sit, Spotify is faring better than most.” Ek added that nothing “we’re seeing today changes the long-term picture for Spotify. People still want to listen to music. They want to learn, and they want to be inspired.”
The outlook overshadowed a surprisingly strong gain in subscribers in the first three months of the year, showing that Spotify’s strategy of expanding beyond music into audiobooks and podcasts is luring more fans even as it raises prices. The company reported a 12% increase in subscribers to 268 million, ahead of both Spotify and analysts’ projections for about 265.2 million. Monthly active users, which include those who use the free, ad-supported service, increased 10% to 678 million, slightly below analysts’ expectations for 679 million.
Most analysts were largely positive on the results.
“Despite the overall uncertainty, the competitive moat is deepening and the long-term outlook is positive with several levers like potential price increases, a new superfan tier, a bigger ad push and new features like video podcasts,” Bloomberg Intelligence analyst Geetha Ranganathan wrote in a note.
Ek has been investing in Spotify’s growth, adding audiobooks and podcasts and recently making a push into video content to compete with YouTube. In January, Spotify launched a new partner program that compensates creators based on how much content paying subscribers consume, rather than through advertisements. Since the start of the year, it has paid $100 million to podcast publishers and creators through that program and ads Spotify places in their shows.
Including video podcasts has led to increased engagement, Ek said, particularly among Gen Z users.
The expansion into new formats dovetails with Spotify’s focus on raising prices and increasing profitability. The company bumped up subscription costs for several key markets last year — individual U.S. subscribers pay $12 a month — and is reportedly planning to hike prices in Europe and Latin America this year, the Financial Times reported.
After several years of expansion in the music industry, growth has begun to slow. Record labels have been on the hunt for new ways to profit from their artists by offering hardcore fans exclusive access to stars and other features. Spotify has been working on a significantly more expensive “Music Pro” tier that will include higher fidelity audio and other perks, though it has yet to formally launch that offering. Spotify executives said they need to align with, and get support from, industry partners such as Universal Music Group, but that their relationship is “better than ever.”
In the meantime, Spotify emphasized that the company can continue to attract users and increase revenue, even without more expensive subscription tiers.
Reflecting on Spotify’s 19 years as a company, Ek remembered when the goal was to get to 100 million subscribers. “Obviously we’re way past that now,” he said. “I don’t see it impossible to get to 1 billion subscribers,” he said. “It’s a much larger business than the one we are currently operating.”
For the second quarter, Spotify forecast it would add 5 million net new subscribers for a total of 273 million. Operating income is expected to be 539 million euros.
In the first quarter, operating income of 509 million euros ($579 million) came in below Spotify’s forecast for 548 million euros. Spotify said the figure was weighed down by more than 76 million euros in social charges, which it has defined as payroll taxes associated with employee salaries and benefits. The company said those charges were higher than expected due to the share price appreciation in the quarter. Revenue jumped 15% to 4.2 billion euros.
Carman writes for Bloomberg.