Spotify (SPOT 1.28%), the world's largest audio streaming platform, released its second-quarter earnings this week. Plagued by worse-than-expected user growth, the stock dropped as much as 10% following the report.
However, underneath the headline numbers were a few important details that should have investors excited. Here's what the recent earnings report means for the company's future.
Image source: Getty Images.
Q2 at a glance
Before diving into some of the promising developments going on under the hood, it's worth taking a quick look at the company's overall financial performance.
During the second quarter, Spotify reached 365 million total monthly active users (MAUs) -- a 22% increase year over year. While 22% growth is still quite strong, the figure came in just below the company's own guidance of 366 million to 373 million MAUs.
However, this worse-than-expected user growth was partially attributable to a temporary intake problem that the company resolved during the period. Due to a hiccup with Spotify's email verification process, CFO Paul Vogel estimates the company missed out on one million to two million potential users who would have put the company within its guidance range.
The rest of the company's financial results came in better than expected. Overall revenue jumped 23% year over year, driven by strong growth in the company's ad-supported category, while user retention improved even amid price increases in its more mature markets -- a good indicator of the company's pricing power.
As for profitability, Spotify continues to reinvest heavily back into its business. The company spent 98% of its gross profit dollars on operating expenses, with most of that spending comprised of either sales and marketing or research and development costs.
Look out for podcasts
It's no secret that Spotify has been investing heavily in the podcast market. In fact, the company has spent more than $1 billion on podcast-related acquisitions in the last few years, including $60 million in the most recent quarter to bring the popular podcast Call Her Daddy exclusively to its platform.
Since Jan. 1, 2020, the company has been categorizing all of these podcast expenses into its cost of revenue for the ad-supported segment. This structure of accounting has led to a bit of a misleading gross margin number because Spotify has been attempting to bolster its podcast catalog. However, these investments are beginning to bear fruit.
In the second quarter, ad-supported revenue jumped 110% year over year, led by 627% growth in podcast revenue. While part of that growth comes from the company's recent acquisitions, organic podcast revenue growth exceeded 200% as well.
The company has long touted its goal of becoming a one-stop shop for all things audio, and in this latest quarter, that began to show. Ad-supported revenue now makes up roughly 12% of the company's overall top line versus just 7% a year ago. CEO Daniel Ek even said, "It's now safe to say [the ads business is] becoming a second big revenue driver for Spotify." And despite growing from just a small base, "the potential is significant."
The big picture
While missing quarterly guidance can always feel concerning, investors should be cautious not to focus too much on the short term.
In the past six years, Spotify has seen its total monthly active user count increase by roughly 300% while gross margin has more than doubled. But the growth doesn't stop there. Ek reiterated during the company's conference call that he believes the platform can be home to one billion MAUs and more than 50 million creators. That's a sizable increase from current levels.
As Spotify continues to make headway on its user goal and bolsters its platform with non-music content, its control of the audio ecosystem should expand. This quarter was yet another step in that direction.
