Spotify reported its most profitable quarter ever on Tuesday, demonstrating the effectiveness of its recent efficiency measures and growth strategies despite challenges in the advertising market.
This milestone is significant because it is continuous. It marks Spotify's second consecutive quarter of record profit growth after several challenging quarters of significant losses last year.
Spotify has consistently seen positive user growth over the past few years. However, heavy investments in podcasting and high overhead costs previously hindered its profit growth, causing frustration among investors. The company implemented significant changes in response, including a 17% staff reduction in late December and a shift in its podcast distribution strategy.
Spotify is confident in its ability to maintain solid profitability moving forward. The company expects a 30% gross margin next quarter, well ahead of the 2025 target set for investors last year.
Spotify has begun focusing more on attracting users who are likely to subscribe to its premium service. While this resulted in slightly lower-than-expected monthly active user (MAU) growth, the company surpassed expectations for premium subscriber growth. This achievement is noteworthy, especially given the recent price increases in the U.S.
By the numbers, Spotify exceeded investor expectations in most areas. The company's monthly active users grew by 14% year-over-year to 626 million globally, just below the guidance of 631 million. However, premium subscribers grew by 12% to 246 million globally, slightly ahead of investor guidance. Revenue for the quarter was €3.8 billion, a 20% year-over-year increase, in line with investor expectations. Spotify also beat Wall Street's earnings per share estimates, delivering €1.33.
Operating income reached a record €266 million, and the gross margin hit 29.2%, exceeding Wall Street's guidance of 28.1%. Operating expenses dropped by 16% year-over-year due to headcount reductions from last year's layoffs. The company also reported a record €490 million in free cash flow and a record net income of €274 million for the quarter.
Spotify has nearly recovered all its post-pandemic stock losses, a significant achievement given that many advertising and subscription-focused media companies have not. Despite the industry-wide slowdown in ads, Spotify's investments in ad products and growth across its Spotify Audience Network boosted its ad business by 13% year-over-year.
Looking ahead, Spotify continues investing in its core music and podcast businesses while expanding its newer audiobook offerings. Last year, the company made audiobooks available to U.S. premium subscribers and expanded this offering to several other countries in the previous quarter.