Spotify (SPOT) reported second-quarter earnings before the bell on Tuesday that missed expectations as gross margins, a key metric of profitability, declined while subscribers surged in the quarter.
Monthly active users (MUAs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.
Premium subscribers also surpassed expectations of 217 million, jumping another 17% year-over-year to hit 220 million.
The results come one day after Spotify confirmed long-awaited price hikes, which caused the stock to close at its lowest level since mid-December on Monday as investors weighed concerns over what the increases could mean for subscriber numbers.
Spotify shares initially bounced back in premarket trading on Tuesday immediately following the results but have since erased all gains — plunging more than 10%.
Here are Spotify's second-quarter results compared to Wall Street's consensus estimates, as compiled by Bloomberg:
Revenue: 3.18 million billion euros versus 3.21 billion euros expected
Loss per share: -1.55 euros versus -0.66 euros expected
Total monthly active users (MUAs): 551 million versus 530 million expected
The company guided that monthly active users will grow to 572 million in the third quarter, significantly above consensus calls for 548 million, with premium subscribers anticipated to reach 224 million. It also guided revenue of 3.3 billion euros. Spotify said the announced price increases are expected to have a minimal impact on total revenue in Q3.
The company missed gross margin estimates of 25.5% to hit 24.1% in the second quarter amid greater losses from cuts in its podcast division, coupled with higher music royalty costs. Spotify guided to a Q3 boost in gross margins to 26% "primarily driven to year-over-year improvement in podcasting and other costs of revenue."
In the earnings release, Spotify said gross margins and operating loss, which came in at -247 million euros in the quarter, "were both primarily impacted by charges related to our actions to streamline operations and reduce costs."
"Excluding these items, adjusted gross margin of 25.5% was in-line and up 22 bps Y/Y (consistent with how we guided the quarter)," the company added.
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.
Free cash flow, another key metric for investors, declined on a quarter-over-quarter basis but was still positive, coming in at 9 million euros compared to 57 million euros in the prior quarter and 37 million euros in the year-ago period.
FILE - In this Feb. 11, 2012, file photo, Spotify CEO Daniel Ek arrives at the Pre-Grammy Gala & Salute to Industry Icons with Clive Davis honoring Richard Branson, in Beverly Hills, Calif. The Swedish company will make its stock market debut Tuesday, casting a spotlight on its early lead in music streaming. Ek sought to manage expectations, saying he expects a bumpy road. (AP Photo/Vince Bucci, File)On Monday, the music streamer confirmed previously reported price hikes will officially hit subscription plans in the US and a number of other territories, including the UK, Spain, France, New Zealand, Hong Kong, and Peru.
Spotify increased the price of its ad-free premium subscription plan by $1 to $10.99 a month — a long-awaited change as the company continues its profitability push. The company's Duo plan will rise by $2 to $14.99, while the family plan will increase by $1 to $16.99. The student plan will also go up by $1 to $5.99 a month.
Existing subscribers will get a one-month grace period before the new pricing goes into effect, Spotify said on its website. The news comes as competitors Apple Music (AAPL), Amazon Music (AMZN), and most recently YouTube Music (GOOGL) have all announced higher prices.
Spotify reported second-quarter earnings before the bell on Tuesday. (AP Photo/Patrick Semansky, File)Analysts, overall, 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.
The music streamer, which categorized 2022 as a peak investment year, 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. Investors punished the company as a result, and the stock was down a whopping 70% in 2022.
Flash forward to today, however, and the company seems to be fulfilling that profitability promise. In addition to the price hikes, Spotify has committed to various cost-cutting initiatives over the past year, which have included layoffs and a realignment of its podcast division.
Last month, Spotify announced a weekly podcast deal with comedian Trevor Noah, days after the company said it was parting ways with Prince Harry and Meghan Markle.
The audio giant also announced it would be eliminating 200 jobs, or 2% of its workforce, within its podcast unit. The company cut 6% of its workforce, or about 600 employees, earlier this year.
The stock, which lost more than two-thirds of its value in 2022, is up more than 100% year-to-date and up about 50% on a year-over-year basis. Still, shares remain more than 50% below their record close of $364.59 in February 2021.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at the latest financial and business news from Yahoo FinanceClick Here To Get Funded!