What happened

Heading into earnings this morning, analysts had predicted that Spotify (NYSE:SPOT) would report a $0.66-per-share loss on sales of $2.35 billion. In fact, the streaming company ended up losing 0.58 euro ($0.68) per share on 1.98 million euros ($2.31 million) in revenue.  

In other words, Spotify missed estimates -- on both the top and bottom lines -- and its stock is down 8.5% (as of 10:45 a.m. EDT) because of it.  

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

Despite the missed estimates, Spotify declared its fiscal Q3 a success, saying the business "performed at a high level," with "strong MAU [monthly active user] and subscriber growth, a recovery in global consumption hours, record low churn below 4%, better than expected Gross Margin, and Free Cash Flow of 103 million euros."

MAU during the quarter grew 29% year over year, and premium (i.e., paying) subscribers grew 27%. Gross profit margins declined year over year, but only by a tiny 10 basis points. And yes, Spotify lost money when profits are calculated according to generally accepted accounting principles (GAAP). Still, free cash flow was positive. More than that, it was nearly double the cash generated in the year-ago quarter.

Now what

Heading now into Q4 2020, Spotify told investors that it is looking to collect between 2 billion and 2.2 billion euros in revenue. The company expects gross margins to improve to a range between 24.2% and 26.2%. (At the midpoint, that would be better than Spotify scored in Q3.)

The company is still expecting to post an operating loss in Q4, however -- between 32 million and 112 million euros. At the midpoint, that works out to about 72 million euros, or $82.4 million.

Management didn't give a forecast for its GAAP net loss. But judging from the revenue number, it at least implies that Spotify is aiming to meet consensus forecasts, while the improved gross margin suggests Q4 losses might even be a bit better than Wall Street expects.

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