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- Spotify Q3 2023 Earnings Update
Spotify’s third-quarter earnings results were released on Tuesday, October 24, 2023, and there was a lot of progress toward the “own your ears” thesis I set out in the Spotify Spotlight.
Spotify’s Results
Below is a screenshot of the executive summary data Spotify always gives investors.
The big takeaways are that user growth continued to be strong — now on a pace to pass 1 billion by ~ late 2026/early 2027 and margins are improving. We haven’t seen advertising revenue become the growth driver, but if you squint you can see a near-record quarter ahead of the seasonally strong Q4 for advertising.
A big part of the margin and free cash flow improvement was operating cost reductions that started early this year. And we knew this was coming, as I covered in the Q2 2023 earnings recap, but the market still seemed surprised.
The headcount reductions that started earlier this year will take some time to work their way through the system. As will podcast content cost cuts, including parting ways with Meghan and Harry in June and the Obamas earlier in the year. Combine that with some of the exclusives now being distributed on other platforms (which increases ad revenue) and we should see both gross margin and operating margin improvements by the end of the year.
The next impact we know is coming is price increases. Price hikes need to be shared with record labels, so the gross margin in percentage terms isn’t likely to increase much in Q4 2023, but the absolute gross margin dollars should increase sharply.
This quarter, my takeaways were more pronounced from the conference call.
“We need to become a great business”
This sounds a little crazy, but Spotify appears to realize that it needs to be — and CAN be — a great business.
as we walked into the year, just to level set and remind everyone, we talked about having a great product but also needing to become a great business and to prove that out to investors.
A few takeaways from the conference call that management seemed genuinely surprised about.
Premium price increases have not increased churn
Lower sales and marketing spending hasn’t led to slower growth
“You saw it also very clearly in our marketing spend. We were able to deliver better top line numbers but with less spend because we're now focused on this efficiency goal“ - Daniel Ek
Maybe lower operating costs are sustainable after all? And if that’s true, growing revenue and gross profit could actually lead to better free cash flow and net income.
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