Spotify Technology (SPOT) reported fiscal fourth quarter earnings on Tuesday that beat expectations on both the top and bottom lines. The audio giant also posted another strong quarter of subscriber gains as churn levels remain low despite recent price increases.
Monthly active users (MUAs) rose by 35 million to hit a total of 675 million, ahead of the 665 million analysts polled by Bloomberg had expected. It was the largest fourth quarter increase in the company's history.
The company guided to first quarter MAUs of 678 million, also ahead of estimates.
Meanwhile, gross margins jumped to a record 32.2% as the company closed out a strong 2024, highlighted by its recent "efficiency" strategy. Shares rose in premarket trading immediately following the report, up around 7%.
Over the past year, shares have surged to all-time highs, up roughly 150% as of Monday's close.
The company's colossal run-up in shares follows an intense business overhaul that has included everything from mass layoffs and C-suite shakeups to a major strategic shift away from podcasts, an area it had aggressively pursued. Those efforts allowed the stock to stage a comeback from the record lows it faced in 2022.
At the company's 2022 Investor Day, Spotify set seemingly lofty objectives that included long-term gross margin targets between 30% and 35%. At the time, the company had been struggling to turn a profit, with its gross margin stuck at around 25%.
Spotify said it expects first quarter gross margins to hit 31.5%, a slowdown from Q4 but still ahead of Wall Street's 31.2% projection. Analysts have warned that the pace of margin expansion may slow in 2025 after the metric jumped by over 400 basis points in 2024.
"Even so, there are multiple catalysts on the horizon, including price hikes and the launch of new tiers for superfans," Bloomberg Intelligence senior media analyst Geetha Ranganathan wrote ahead of the results.
Last year, the company introduced a higher-priced audio "bundle" that includes music, podcasts, and audiobooks. It also rolled out an audiobooks-only plan and a music-only streaming tier in an effort to cater to a variety of consumers. The changes allowed the company to increase prices for the second time in less than a year.
A new multiyear distribution agreement between Spotify and Universal Music Group (UMG.AS) should also be a highlight on the earnings call. The deal, announced last week, includes compensation to artists for recorded songs and publishing rights. In exchange, Spotify will have access to certain upcoming releases and specialized products like video.
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The financial terms of the deal were not entirely clear. Some reports suggested the new terms may have eliminated Spotify’s bundle discount related to US mechanical royalties. Citi estimated the discount lowered Spotify’s costs by roughly $200 million per year.
"While investors are apt to view this news as a negative for Spotify (and a positive for Universal) we would suggest investors take this news with a grain of salt," Citi analyst Jason Bazinet wrote in reaction to the news. "The comprehensive nature of any agreement between a music label and a music distributor makes it nearly impossible to cogently assess the true financial implications of the new terms."
Analysts will seek greater clarity on the earnings call about how the deal will impact the company's economic profile, although most believe Spotify likely received value regardless of the specifics.
"We don’t believe that SPOT would do an early deal unless it was pleased with the outcome, and not surprisingly, the company is framing it as a 'win-win,'" JPMorgan analyst Doug Anmuth wrote last week, reiterating his Overweight rating and $555 price target on shares.
Wall Street analysts who cover Spotify have a median price target of just around $517 a share with 29 Buy ratings, nine Holds, and just three Sells, according to the latest Bloomberg consensus estimates.
Alexandra Canal is a Senior Reporter at chof360 Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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