Spotify Technology (NYSE: SPOT) is a communication services company and the world’s most popular audio streaming subscription service. This year, Spotify is significantly outperforming the market and its sector. Shares are up 76%, while the Communication Services Select Sector SPDR Fund (NYSEARCA: XLC) is up 18%.
The company reported Q2 2024 earnings on July 23, 2024. Let's break down the company’s operations to get some context around the earnings release and dive into the release itself. We’ll then provide some outlook on the stock, including what Wall Street analysts expect.
Spotify: Dominating the Global Music Streaming Market
Spotify provides users access to over 100 million tracks and over 5 million podcasts. The company monetizes its service through both premium subscription and ad-supported models. The premium service provides uninterrupted listening for a monthly fee. This segment made up 87% of revenue in 2023, but it made up 98% of gross profit, with a gross margin of 29%.
The ad-supported model is free but has commercial breaks. It is a standalone product but also largely serves as a funnel to drive growth into the premium product. Revenue from this segment is dependent on the amount of time users spend listening. This segment makes up the rest of total revenue, but with only a 4% gross margin, it barely contributed to gross profit.
The firm has licensing agreements with record labels associated with the world’s largest music companies. These parties receive royalties from the company when their content is streamed. This is the primary component of its cost of revenue. The company has approximately 32% of the global music streaming market share, over double that of its nearest competitor.
Spotify: Surpassing Expectations Through Higher Prices and Reduced Costs
Spotify beat adjusted earnings per share (EPS) estimates handily, coming in at $1.44, compared to estimates of $1.14. This is an earnings surprise of 27%. Revenue grew 21% in constant currency from the previous year; this was in line with guidance, and gross margin increased by 510 basis points.
Operating margin has flipped from a year ago when it was -7.8% and now sits at 7.0%. The firm saw its largest decline in operating expenses over the last 12 quarters, dropping 16% year over year. Decreases in personnel and lower marketing spending influenced this. Full-time employee count decreased by 349 from the previous quarter, reducing the workforce by 4.5%.
The company has now achieved positive normalized net income, which excludes unusual charges, for the past four quarters after five quarters of negative net income. The firm also grew its free cash flow by about 54 times from the near-low level it reached in Q2 2023, 136% from Q1 2024.
One important metric Spotify provides is its Monthly Active Users (MAUs), which grew 14% from the previous year. The company also raised prices on its subscription plans in June, which increased its average revenue per user by 10%. Premium revenue grew 22%. It also raised prices for advertisers, which, along with increased user activity on the ad-supported platform, caused the segment’s revenue to increase 12%.
What to Watch for And Analyst Estimates
Spotify increasing its premium subscriber base above estimates while reducing costs and headcount is great to see. One wrinkle to watch is whether the firm will be able to keep newly acquired premium customers in the wake of its price increase, which took effect in June. Premium users typically get a one-month free trial, so we haven’t seen whether those new users will continue to pay higher prices over time.
In theearnings call CEO Daniel Ek briefly discussed an added tier of Spotify Premium, which the company is working on. It would cost about $5 more than the current tier. It should allow the firm to get more revenue from its most dedicated customers while allowing others to continue using the current tier. Investors should monitor news around its release.
Analyst price targets for Spotify's share price range widely from $230 to $412. After the earnings release, the price rose 12% to $332, now giving the highest target an implied upside of 24%. This is due to the firm's strong market share, commitment to lower costs, and strong ability to raise prices.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
