Spotify Technology SA reported a major milestone in its financial performance, with gross profit exceeding €1 billion ($1.1 billion) for the first time. This success came as a result of the company strategically reducing its marketing spend.
However, this cost-cutting measure also led to the music streaming service missing its monthly active user (MAU) target.
The company, known for its music streaming service, has been on a growth trend for years with promotional offers and investments in podcasts and audiobooks. Spotify reduced its operational costs, including marketing budgets and staff, last year to increase its profitability.
Following the release of quarterly results, Spotify’s shares on NYSE:SPOT initially fell but rebounded to rise more than 8% in premarket trading on Tuesday.
CEO Daniel Ek stated that the company plans to increase its marketing budget throughout the year to continue growth. Ek acknowledged that the reduction in marketing could be too aggressive in some areas.
The company’s gross margin rose to 27.6% in the quarter, from 25.2% a year ago, as its podcast business contributed to profitability. Spotify has invested heavily in its podcast platform, including securing exclusive rights to popular shows like “The Joe Rogan Experience,” which has now become a profit center for the company.
Spotify’s quarterly revenue rose 20% to €3.64 billion, beating estimates of €3.61 billion. This increase in revenue was partially attributed to price increases and testing of various subscription models. Ek also announced plans to offer a music-only subscription tier that caters primarily to users interested in music content.
Despite these positive financial results, Spotify’s MAU in the first quarter increased 19% to 615 million, falling short of both the company’s forecasts and analysts’ expectations of 618 million. For the upcoming second quarter, Spotify predicts MAUs will reach 631 million, falling short of the expected 636.3 million, based on LSEG’s IBES data. The company also predicts that gross margin will increase to 28.1% in the next quarter.
The number of premium subscribers increased by 14% in the first quarter, reaching 239 million, an increase in line with market forecasts. This growth in premium subscribers is an important factor in Spotify’s revenue generation strategy.