Spotify’s profit margins squeezed by slow ad growth; stock flows

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Oct 25 (Reuters) – Spotify Technology SA (SPOT.N) said on Tuesday third-quarter profit margins were squeezed by slow advertising growth, stoking concerns about the effect of the weak economy world on digital advertising. Shares of Spotify fell 4% in after-hours trading, stung by sector weakness after Google’s parent Alphabet Inc (GOOGL.O) missed market estimates for quarterly revenue as that advertisers were reducing their spending.

Spotify, whose stock has fallen 58.5% this year, said third-quarter margins were lower than it had expected, blaming “some softness in advertising”, currency fluctuations and payments retroactive royalties to songwriters and music publishers.

“This is an early indicator of corporate concerns about the economy,” Spotify CEO Daniel Ek told Reuters. “We’re not worried about the long term, but it’s definitely affecting us in the short term, and it’s also contributed to the gross margin impact we’ve had this quarter.”

The number of monthly active users rose to 456 million in the third quarter, an additional 23 million users in three months which exceeded Spotify’s forecast and analysts’ forecast of 448.6 million.

Premium subscribers, which make up the bulk of the company’s revenue, rose 13% to 195 million, beating analysts’ estimates of 194 million.

Spotify’s ad-supported revenue grew 19% in the quarter to €385 million ($383.7 million), with double-digit growth in all regions except Europe, where Spotify said he saw the impact of difficult economic conditions in the region.

Investors fear consumer spending on entertainment will suffer as the global economy reels from the lingering effects of the pandemic, Russia’s invasion of Ukraine, rising interest rates and recession fears.

Spotify’s third-quarter revenue reached €3 billion ($3 billion), up 21% from the same period last year and in line with analyst estimates of €3 billion ( $3 billion), according to IBES data from Refinitiv.

The company said gross margins fell to 24.7%, below expectations, citing a weak advertising market and a large publishing deal outside the United States.

Spotify posted a quarterly operating loss of 228 million euros ($227.3 million) in the quarter, higher than analysts’ forecast of 168.6 million euros ($167.9 million).

For the fourth quarter, the company estimated it would hit 479 million monthly active users, up from 23 million in the last three months of the year. He predicted that he would add 7 million premium subscribers, bringing the total number to 202 million.

Fourth-quarter revenue would reach 3.2 billion euros ($3.18 billion) with an operating loss of 300 million euros ($298.8 million).

Reporting by Dawn Chmielewski in Los Angeles; Editing by David Gregorio

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