Spotify reports record profitability in Q1 but user growth slows

Spotify reports record profitability in Q1 but user growth slows

Spotify’s long-term strategy was focused on growth rather than profitability for a long period.

But with major staffing cuts in December 2023, the streaming giant has now reached the point where it is aiming to “drive profitability and growth”, as Daniel Ek said at the time of that announcement.

In its Q1 financial results, Spotify has reported record quarterly profitability (operating income) at €168 million. Gross profit surpassed €1 billion in a quarter for the first time in the company’s history by just edging past that milestone.

Total revenue increased by 21% on a constant currency basis to €3.6 billion.

Spotify described their performance as a “solid start to the year as monetisation and efficiency take centre stage”.

Daniel Ek, Spotify founder & CEO, said: “We’ve talked about 2024 as the year of monetisation and we’re delivering on that ambition. Now as we’ve shifted to focus on strong revenue growth and margin expansion, we see a clear opportunity to ensure we are also continuing to grow the top of our funnel. I feel good about the changes we are implementing and remain very confident in our ability to reach the ambitious plans we’ve outlined.”

However, the company reported “greater MAU variability during the quarter amidst moderated marketing activity and organisational change”. Spotify had forecast an extra 16m monthly active users but ended the quarter with an additional 13m (up 19% year-on-year and 2% on the prior quarter).

In Q1 2023, MAUs were up by 26m (22% year-on-year, 5% quarter-on-quarter). In Q4 of 2023, MAUs were up 28m (23% year-on-year, 5% quarter-on-quarter).

During Q2 of 2024, Spotify is forecasting an additional 16m monthly users and an extra six million subscribers.

On the earnings call, Ek said: "We missed our target due to a bit of a slowdown at the start of the year. So I want to directly address the three main factors contributing to this outcome and how we're adjusting over the next few quarters. First, the MAU and subscription growth we achieved in 2023 not only surpassed our most ambitious forecast, but also set a record for the most significant user growth in Spotify's history. While we anticipate continuous robust growth going forward, 2023 was a truly standout year and should not be a based on expectation for every subsequent year.

"Another significant challenge was the impact of our December workforce reduction. Although there's no question that it was the right strategic decision, it did disrupt our day-to-day operations more than we anticipated. It took us some time to find our footing, but more than four months into this transition, I think we're back on track. I expect to continue improving on our execution throughout the year, getting us to an even better place than we've ever been.

"The third issue is related to marketing spend. In hindsight, we probably pulled back too significantly throughout 2023 and, as such, we're already correcting this as we move into Q2. To be clear, we're not going to go back to what we were doing before, we still continue to expect improving profitability over the course of this year and into the next. And new funds are being directed towards acquiring and reactivating high-value users to enhance our base with their deeper engagement and loyalty."

Premium subscriber growth of 14% year-on-year to 239m (an additional three million subscriptions) was in line with the company’s forecast.

On a constant currency basis, premium ARPU (Average Revenue Per User) grew 7% year-on-year.

We’ve talked about 2024 as the year of monetisation and we’re delivering on that ambition

Daniel Ek

Spotify expanded its audiobook offering during Q1, although Variety reported music industry concerns over a lower mechanical royalty rate for songwriters in the US based on those bundle plans. Music Week recently quizzed Spotify on the impact of audiobooks.

During the earnings call, Daniel Ek said: "You will see a lot more tiers that allow for more flexibilities to consumers to opt into the type of deal that they believe offers the greatest value for them in terms of how they're using Spotify. Now, specifically to our content partners, while I won't comment on any specifics, what I would say is that, of course, this is the sort of natural tension between suppliers and distributors. There's always a tension around payments. Now, to level set this, we did our Loud & Clear [report] a while ago, but I think it's important to note that Spotify in 2023 had record payouts to an entire creative community. And global publishing revenue will hit a record for 2023, and we will pay even more in 2024.

"So I feel really good about where we are relative to our partners and the fact that we are growing the creator ecosystem. And that still remains our goal. And I feel good about delivering on that goal too. So yeah, of course, there's always going to be tension between that supplier distributor thing. But I would say, we are on track for a better 2024 for songwriters and publishers. So I feel good about delivering lots and lots of value. And relative to the CD era, publishers and songwriters are faring way better in this streaming economy. So I feel good about that."

Music videos were launched on Spotify in 11 markets during the quarter. The company also expanded its strategic partnership with Universal Music Group.

Asked about the opportunity for Spotify around short form video and music discovery, particularly with the prospect of TikTok being banned by legislators in the US, Ek said: "I'm not going to comment on other companies and related on their strategy, what may happen with their regulatory proceedings. But obviously what I can say is that we are focused on winning discovery and we're going to add as many ways that we can to improve the discovery of Spotify. So you saw us in the quarter add music videos. You're going to see music clips in a bigger way. You can already today, if you open up the apps, start seeing more and more videos on the music side where artists are engaging with fans

"So short form music content is a big focus of ours. You're going to see more video on the music side, make its way into the product in 2024. And two other things, by the way, that you're going to see are, of course, more AI products in the music side as well. And in addition to that, I believe you're going to see an even more global music ecosystem than any time before in history. So we're excited about all these sort of three core trends in music."

PHOTO: Noam Galai/Getty Images for Spotify 

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