Spotify shares surge on bullish outlook as more users tune in

Spotify Technology SA told investors Tuesday it would tighten spending and work to become efficient after a year of investments in technology and content.

Chief Executive Daniel Ek said the “macro environment” changed dramatically over the course of last year, setting the stage for belt-tightening.

“In hindsight, I probably got a little carried away and over-invested relative to the uncertainty we saw shaping up in the market,” Ek said during the company’s fourth-quarter investor call.

Spotify invested heavily in building up its podcast and audiobook business in 2022, with operating expenses growing at twice the speed of its revenue. That set the stage for Spotify to lay off 600 employees this month and trim other costs.

The company said it expected gross margins to improve throughout the year, with an increased focus on efficiency and forecasts of growth in monthly active users. Spotify projected the number of listeners would reach 500 million in the current quarter.

The Spotify logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2018. REUTERS/Brendan McDermid

“We always knew that 2022 would be an investment year and 2023 would be a year where we would slow down the investments and thereby operating expenditure while revenue keeps on climbing,” Chief Financial Officer Paul Vogel said in an interview.

Shares in the company rose 9% in early morning trading.

The number of monthly active users rose to 489 million in the quarter, beating Spotify’s guidance and analysts’ forecasts of 477.9 million, helped by marketing campaigns and growth in India and Indonesia.

Premium subscribers, who account for most of the company’s revenue, increased 14% to 205 million, topping estimates of 202.3 million, according to IBES data from Refinitiv.

Apart from the forecast of half a billion users, Spotify expects premium subscribers to reach 207 million in the current quarter and a revenue of 3.1 billion euros ($3.35 billion). Analysts were expecting 202 million subscribers and revenue of 3.05 billion euros.

“Q1 is always the smallest quarter with respect to user growth. We don’t have the same level of marketing campaign, as we do in Q2 to Q4,” Ek said.

Spotify last year laid out plans to get 1 billion users by 2030 and to reach $100 billion in revenue annually. It also promised high-margin returns from its costly expansion into podcasts and audiobooks.

The company has invested more than $1 billion in building out its podcast business which currently has more than 4 million titles. But those investments have hit gross margins.

Ek told investors he expects to see improvements as podcasting grows and attracts more advertising revenue, and the company invests in a more targeted way.

In autumn, Spotify canceled 11 original podcasts from Parcast and Gimlet, two studios the company acquired in 2019, shifting focus to original and exclusive shows that attract listeners, such as Warner Bros’ “Batman Unburied” or the thriller “Caso 63.”

Dawn Ostroff, the head of content and advertising that helped shape Spotify’s podcast business, was leaving the company after four years.

“Spotify will double down on things that worked well and stop doing the things that don’t work,” Ek told Reuters. “We are a lot more focused on efficiency.”

In 2023, the company expects revenue to grow faster than operating expenses, which have jumped due to headcount growth and higher advertising costs.