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Spotify turns a profit as earnings and revenue beat estimates

Spotify Technology (SPOT) reported fiscal first quarter earnings on Tuesday that beat expectations on both the top and bottom lines. The audio giant also swung to a profit as it continues to implement its recent "efficiency" strategy.

Over the past year, Spotify has committed to multiple rounds of layoffs in addition to price increases and other initiatives to boost top-line growth and improve margins. The company said it will be more intentional about future investments after spending billions on its push into the crowded podcast market.

The audio giant reported operating income of 168 million euros ($179 million), compared with a loss of 156 million euros in the prior-year period. This was below company guidance of 180 million euros as social charges came in higher than expected, "driven by share price appreciation during the quarter", according to Spotify.

It also guided to a strong Q2 operating income of 250 million euros, well ahead of Wall Street consensus expectations. Revenue guidance for the second quarter also came in ahead of estimates — 3.8 billion euros versus the 3.76 billion euros that was expected.

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On top of more deliberate spending, Spotify will reportedly once again raise prices after hiking the cost of certain subscription plans last summer.

According to Bloomberg, Spotify plans to raise prices by about $1 to $2 a month in five markets, including the UK, Australia, and Pakistan. The changes are expected to come at the end of April, with US prices to rise "later this year." The report also said Spotify plans to introduce a cheaper option that does not include audiobooks.

The stock moved as much as 15% higher in early trading on Tuesday following the results.

The streaming service reported net income of 197 million euros ($210 million), or earnings of 0.97 euros per share. That was ahead of analyst expectations of earnings of 0.65 euros per share. It also compares with the year-earlier period loss of 225 million euros, or a loss of 1.16 euros a share.

Gross margins came in stronger than expected at 27.6%, beating company guidance of 26.4%. The streamer said it expects margins to tick up to 28.1% in the second quarter, primarily driven by year-over-year improvements in music and podcasting.

Spotify has previously said it expects the metric to come in between 30% and 35% over the long term amid plans to further scale its podcasting and ads business.

Revenue, meanwhile, totaled 3.64 billion euros ($3.88 billion) — 20% higher compared with the first quarter of 2023 and above Wall Street expectations of 3.61 billion euros.

Total monthly active users (MAUs) came in below company estimates of 618 million to hit 615 million in the quarter — but it was still a 19% improvement compared with the total in the year-ago period. The streaming service anticipates Q2 MAUs to come in at 631 million.

Premium subscribers met Wall Street expectations of 239 million — a 14% year-over-year jump. Spotify expects the subscriber count to increase to 245 million in the second quarter.

Free cash flow, another key metric for investors, came in at 207 million euros in the quarter compared to 57 million euros in the year-ago period.

The average revenue per user, or ARPU, for Premium subscriptions increased 7% to 4.55 euros (or 5% year over year, excluding foreign exchange headwinds.) ARPU was driven by price increase benefits that were partially offset by discounted plans and lower prices in emerging markets, the company said.

Overall, analysts have been bullish on Spotify after the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis.

Spotify stock has surged more than 100% over the past year and is up 43% year to date.

Spotify spent $1 billion pushing into the podcast market over the past four years with splashy A-list deals and $400 million-plus studio acquisitions.

That spending took a significant bite out of gross margins and weighed heavily on profitability. In response, Spotify committed to several rounds of layoffs — three in 2023 alone.

Spotify CFO Paul Vogel stepped down from his position on March 31. He will be replaced by Christian Luiga, previously at Swedish aerospace and defense company Saab. Luiga will take over in the third quarter, the company said.

FILE - Wall Street analysts have been bullish on Spotify after the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis. (AP Photo/Patrick Semansky, File)
Wall Street analysts have been bullish on Spotify after the audio giant pledged to improve its profitability. (AP Photo/Patrick Semansky, File) (ASSOCIATED PRESS)

In addition to layoffs and price increases, Spotify also changed up its royalty structure, made audiobooks free to paying subscribers, and locked in new deals with popular podcasters like Joe Rogan and Alexandra Cooper of "Call Her Daddy."

The new deals come as Spotify further revamps its podcast strategy to focus more on distribution rather than exclusivity.

The audio giant announced that Rogan's podcast, its most popular on the platform, will be available on additional services like Apple Podcasts (AAPL), Amazon Music (AMZN), and YouTube (GOOGL) for the first time in years. Spotify will handle distribution and ad sales as it works to maximize revenue. Rogan will receive a guaranteed minimum rate and cut of the advertising revenue.

Cooper's "Call Her Daddy" deal will have a similar structure with the podcast now available on all major audio platforms after more than two years as a Spotify exclusive. The company will maintain the exclusive rights to the podcast's video portion.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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