Spotify Q3 Revenue Up 21.4% to $3B as Subscriber Growth Beats Estimates

In the third quarter of 2022, Spotify revenue improved to 3.04 billion euros ($2.98 billion at the Sept. 30 exchange rate), marking an increase of 12% at constant currency and 21.4% as reported, the company reported Tuesday (Oct. 25). Subscription revenue grew 13% (22% as reported) to 2.5 billion euros ($2.46 billion) while subscribers improved 13.4% to 195 million — 1 million ahead of guidance. Led by podcasting, the company’s ad-supported revenue grew just 3% at constant currency (19% as reported) to 385 million euros ($378 million).

Spotify’s gross margin of 24.7% — which is 50 basis points below guidance — was slightly better than the 24.6% registered in the second quarter, but it was still two percentage points lower than 26.7% in the prior-year period. The company attributed the decline to its spending on non-music content and product enhancements, increased publishing rates and an adjustment to prior-period accruals. Those negative effects served to offset a favorable revenue shift to podcasting and continued growth in Marketplace, Spotify’s hub for artist services.

The declining margin shouldn’t have been a surprise, however. During Tuesday‘s earnings call, CEO Daniel Ek repeatedly reminded analysts and investors they were warned about podcast margins in the June 8 investor day presentation. “As we’ve said, we expect this drag on margins to start to reverse in 2023” as revenue growth improves and spending growth slows, said Ek. “We’ve been transparent that 2022 was going to be an investment year,” he added later, “which would result in a drag on our gross margin in the short term.”

It all played out “largely as we expected,” he continued.

Currency fluctuations also ate into Spotify’s gross margin. Spotify is based in Sweden and reports its financial statements in euros, which traded for roughly $0.979 U.S. dollars on Sept. 30 of this year and $1.16 one year earlier.

“Historically, currency has had a big impact on operating expense and a somewhat minimal impact on cost of revenue,” said CFO Paul Vogel. “However, given the significant strength of the dollar, it does start to impact gross margin as well.”

One thing getting in the way of better margins is one of Spotify’s toughest competitors in audio streaming: Apple. This month, Spotify introduced audiobook downloads to capitalize on their relatively fat gross margins but cannot sell them inside the iOS app on Apple devices without Apple taking a 30% fee. Echoing a press release that Spotify issued on Tuesday, Ek blasted Apple for “putting up roadblocks” that prevent Spotify from offering a seamless purchasing experience inside the app. Buying an audiobook on Spotify on a competing Android phone, said Ek, “is a beautiful experience.”

Spotify filed a complaint against Apple with the European Commission in March 2019 over such limitations. On Tuesday, with a pressing urgency to improve Spotify’s margin, Ek sounded exasperated. “I just think it’s absurd, frankly, that they’re allowed to keep doing this,” he said. “So, yes, I’m probably more vocal about it because it’s insane that it’s been taking four years to get the resolution for something that’s just absurd and holding everyone back. It holds developers back and holds creators back. And it’s bad for consumers.”

Spotify shares fell 6.7% to $90.54 in after-hours trading.

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