Spotify’s share price rose 12.7% to $112.71 on Tuesday (Jan. 31) following the company’s earnings release for 2022’s fourth quarter earlier in the day.
Now with a market capitalization of $21.8 billion, Spotify has more than overcome the investor exodus following its underwhelming third-quarter earnings results. After delivering a weaker-than-expected gross margin on Oct. 25, Spotify’s share price fell 13% to $84.42 and bottomed out at $69.29 on Nov. 4. Tuesday’s closing price marked a 62.7% improvement in fewer than three months.
Investors want Spotify to continue adding subscribers while improving its margins. Tuesday’s earnings results delivered on both fronts. Its fourth-quarter subscriber growth of 10 million handily beat guidance of 7 million, giving the company 205 million subscribers globally. The company’s monthly active user base of 489 million was 10 million ahead of guidance.
In the fourth quarter, Spotify’s gross margin of 25.3% was 80 basis points — eight-tenths of a percentage point — above guidance “due primarily to lower podcast spend along with broad-based favorability in our core music business,” said CFO Paul Vogel during Tuesday’s earnings call.
Spotify’s licensing deals with record labels and publishers give it little room for improvement on recorded music margins, which were 28% in 2021. Podcasting, however, gives Spotify an opportunity to attract advertising dollars with meaningfully better margins. During a June 2022 presentation to investors, Spotify executives said they expect podcast margins to reach 30-35% within three to five years and 40-50% further in the future.
Just last week, investors were shown a new commitment to cost-cutting when Spotify announced on Jan. 23 that it would lay off 6% of its global headcount. Among the departures — though technically not part of the layoffs — was chief content officer Dawn Ostroff, the engineer of the company’s strategy to build its podcast business by attracting marquee names such as Joe Rogan, Kim Kardashian and Barack and Michelle Obama. Her exit could signal an end to an era of expensive content deals that helped make Spotify the most popular podcast platform in many markets.
For the first quarter of 2023, Spotify forecasts 3.1 billion euros ($3.37 billion) of total revenue and gross margins of roughly 25% excluding severance charges, and an operating loss of 194 million euros ($211 million), including 35 million euros to 45 million euros ($38 million to $49 million) in severance charges.
“Gross margins and operating expenses are expected to improve throughout the year,” said Vogel, adding that first-quarter margins will be the low point for 2023 because “some of the investments we made in the back half of [2022] is still slightly impacting Q1.” In addition, with the recent 6% reduction in headcount, “we see our operating expenses growing slower with a material improvement in our operating loss compared with 2022,” he added.
