Spotify (SPOT) announced its fiscal Q3 earnings on Tuesday, surpassing expectations on both the top and bottom lines. The music streaming platform is focused on improving profitability by reducing podcasting investments and implementing price increases.
In Q3, Spotify achieved a net income of 65 million euros, or 0.33 euros per share, marking a significant improvement compared to the previous year’s loss of 166 million euros, or a loss of 0.86 euros per share. Analysts had predicted a loss of 0.20 euros per share.
This is the company’s first quarterly profit in over a year, driven in part by recent price hikes and lower costs related to personnel and marketing expenses.
The company also reported strong gross margins of 26.4% in the quarter, slightly exceeding the guidance of 26%. Spotify expects margins to increase further to 26.6% in Q4.
In the long term, Spotify aims to achieve gross margins between 30% and 35% through the expansion of its podcasting and ads business.
Revenue for the quarter totaled 3.36 billion euros, an 11% increase compared to Q3 2022, surpassing Wall Street’s expectations of 3.3 billion euros. Spotify projects Q4 revenue to reach 3.7 billion euros.
However, average revenue per user for premium subscriptions, or ARPU, declined by 6% to 4.34 euros due to discounted plans and lower prices in emerging markets. This was partially offset by the price increases implemented late in the quarter.
Spotify exceeded estimates for monthly active users (MUAs), reaching 574 million in the quarter, representing a 26% improvement compared to the previous year. The company expects MUAs to reach 601 million in Q4.
Premium subscribers also surpassed expectations, growing by 16% year-over-year to reach 226 million. Spotify anticipates reaching 235 million Premium subscribers in Q4.
Free cash flow, a key metric for investors, significantly increased to 216 million euros in Q3 compared to 9 million euros in the previous quarter and 35 million euros in the same period last year.
Although Spotify’s stock initially saw gains in pre-market trading following the results, it later reversed, declining by over 4%.
Last quarter, Spotify raised the prices of its ad-free premium subscription plan as part of its ongoing effort to improve profitability. Prices for the Duo and family plans also increased. This move follows similar price increases by competitors Apple Music, Amazon Music, and YouTube Music.
Analysts have generally expressed optimism about Spotify’s prospects after the company committed to enhancing profitability in 2023 through gross margin and operating income improvements.
Spotify allocated extensive resources to enter the podcast market over the past four years, including high-profile deals and studio acquisitions totaling more than $1 billion. These investments affected gross margins and profitability. However, the company has now achieved its promise of improving profitability through various cost-cutting initiatives, such as layoffs and restructuring of the podcast division. Additionally, Spotify recently made audiobooks free to paying subscribers.
Despite experiencing a 70% decline in stock value in 2022, Spotify’s stock has rebounded and has increased by about 100% year-to-date and approximately 75% year-over-year. However, shares remain more than 50% below their record close in February 2021.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].
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