Spotify (SPOT) reported fourth quarter financial results before the bell on Tuesday, presenting a mixed picture with a wider-than-expected loss and a beat on gross margins.
Total monthly active users topped expectations, coming in at 489 million against forecasts for 478 million with both premium and ad-supported subscribers surging past estimates.
Spotify stock, which lost more than two-thirds of its value in 2022, fluctuated in early premarket trading but has since climbed more than 9% as investors digested the results.
Here are Spotify's fourth quarter earnings compared to Wall Street's consensus estimates, as compiled by Bloomberg:
Revenue: €3.17 billion versus €3.18 billion expected
Loss per share: –€1.40 versus -€1.30 expected
Total monthly active users: 489 million versus 478 million expected
Premium subscribers grew 10 million in the quarter to reach 205 million; ad-supported users jumped by 22 million to total 295 million. Spotify said it expects first quarter subscribers to come in at 500 million, beating estimates of 492.2 million.
The company blamed widening losses on higher personnel costs primarily due to headcount growth and higher advertising costs, in addition to currency movements.
Spotify shares, despite the post-earnings bump, are still still off roughly 40% from last year and more than 65% below its record close of $364.59 in February 2021.
Investors have remained hyper-focused on Spotify's declining gross margins, which beat expectations of 24.5% in the fourth quarter to reach 25.3% "due primarily to lower investment spending and broad-based music favorability." Spotify guided a Q1 dip in gross margins to 24.9% amid "severance-related charges" after the company laid off 6% of its workforce last week.
Spotify said it expects gross margins to come in between 30% to 35% over the long term amid plans to further scale its podcasting and ads business. However, execution remains murky amid macroeconomic challenges.
Free cash flow (FCF), another key metric for investors, came in negative in the fourth quarter amid greater medium-to-long term investments. After reporting positive free cash flow of €35 million in Q3, the company reported negative FCF of -€73 million (versus estimates of -€69 million) in Q4.
Spotify CFO Paul Vogel, who previously categorized 2022 as a peak investment year, warned of the reversal during the company's Q3 earnings call: "Given the timing within quarters, we may see free cash flow turn negative in Q4, but we still expect to be free cash flow positive for the year and moving forward."
Full-year free cash flow did indeed remain positive — a trend Spotify said it expects to continue on a full-year basis.
One of those heavily invested areas has been podcasts, where Spotify has spent more than $1 billion over the past four years.
Newly announced layoffs, coupled with a company reorganization focused on "efficiency," suggest Spotify could be looking to pivot away from that strategy, especially with Dawn Ostroff out as chief content officer.
Under her leadership, Ostroff led pricey, A-list deals including a reported $200 million deal with Joe Rogan.
In a modest surprise, the company did not raise prices on its U.S.-based premium subscription plan, despite recent hikes at Apple Music (AAPL) and YouTube Premium (GOOGL).
"Nothing specific to announce at this point," Ek said on the earnings call, noting the company increased price points in 40 markets around the world in 2022 but has taken "a balanced portfolio approach" when it comes to its pricing strategy.
Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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