Spotify (SQUARE) released fourth-quarter financial results before the bell on Tuesday, presenting a mixed picture with a bigger-than-expected loss and a beating in gross margins.
Total monthly active users exceeded expectations, reaching 489 million against a forecast of 478 million, with premium and ad-supported subscribers beating estimates.
Spotify stock, which lost more than two-thirds of its value in 2022, had risen 6% in pre-market trading but gave up most of those gains after the earnings release.
Here are Spotify’s fourth quarter earnings compared to Wall Street consensus estimates, as compiled by Bloomberg:
Returned: 3.17 billion euros against 3.18 billion euros expected
Loss per share: –€1.40 against -€1.30 expected
Total number of monthly active users: 489 million against 478 million expected
Premium subscribers increased by 10 million in the quarter to 205 million; ad-supported users jumped 22 million to 295 million. Spotify said it expects first-quarter subscribers to reach 500 million, beating estimates of 492.2 million.
The company attributed the increased losses to higher personnel costs, mainly due to growth in the workforce and higher advertising costs, in addition to currency fluctuations.
Spotify shares, despite the post-earnings rally, are still down around 40% from a year ago and more than 65% below their all-time high close of $364.59 in February 2021.
Investors remained hyper-focused on Spotify decline in gross margins, which beat expectations of 24.5% in the fourth quarter to 25.3% “largely due to lower capital spending and the general popularity of music.” Spotify guided first-quarter gross margins down to 24.9% amid ‘severance charges’ after company laid off 6% of its workforce Last week.
Spotify said it expects gross margins to be between 30% and 35% over the long term as part of plans to further expand its podcasting and advertising businesses. However, the execution remains unclear amid macroeconomic challenges.
Free cash flow (FCF), another key metric for investors, turned negative in the fourth quarter amid higher medium- and long-term investments. After posting positive free cash flow of €35 million in the third quarter, the company posted negative FCF of -€73 million (against estimates of -€69 million) in the fourth quarter.
Spotify chief financial officer Paul Vogel, who previously rated 2022 as the peak investment year, warned of the reversal during the company’s third-quarter earnings call: “Given the timing of the quarters, we could see free cash flow turn negative in the fourth quarter, but we we still expect free cash flow to be positive for the year and move forward.”
Free cash flow for the full year indeed remained positive – a trend Spotify said it expects to continue on an annual basis.
One such heavily invested area has been podcasts, where Spotify has spent over $1 billion over the past four years.
Newly announced layoffs, coupled with a corporate reorganization focused on “efficiency”, suggest that Spotify may be looking to move away from that strategy, especially with Dawn Ostroff as chief content officer.
Under his leadership, Ostroff conducted high-profile, high-profile transactions, including a announced a $200 million deal with Joe Rogan.
Spotify said the company is actively considering raising prices on its US-based tiers. Apple Music and YouTube Premium price increase on their respective plans at the end of last year.
“That’s one of the things we’d like to do, and that’s a conversation we’ll be having in light of these recent developments with our label partners,” Ek told investors on the earnings call. Spotify’s third quarter. “I feel good about this coming year and what it means for our service pricing.”
Investors will be on the lookout for any price increase announcements during the company’s fourth quarter earnings call.
Alexandra is a senior entertainment and media reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at email@example.com
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