Here's our initial take on Spotify's (SPOT +1.36%) fourth-quarter financial report.
Key Metrics
| Metric | Q4 2023 | Q4 2024 | Change | vs. Expectations |
|---|---|---|---|---|
| Revenue | 3.67 billion euros | 4.24 billion euros | +16% | Beat |
| Earnings per share | (0.36 euros) | 1.76 euros | N/A | Miss |
| Premium subscribers | 236 million | 263 million | +11% | n/a |
| Free cash flow | 396 million euros | 877 million euros | +121% | n/a |
Capping an Incredible Year
Spotify turned its attention to profits and free cash flow in 2024, and boy did it deliver. Through a combination of price increases and cost cutting, Spotify boosted profit margins considerably while maintaining solid subscriber growth. Revenue grew at a double-digit pace in the fourth quarter, and gross margin continued its ascent.
Spotify ended the year with 263 million premium subscribers, adding 11 million new subscribers in the fourth quarter. That was far above the company's guidance of 3 million net adds. Average revenue per premium subscriber jumped by 5% year over year thanks to price hikes. These two factors pushed up premium revenue by 17% in the fourth quarter.
NYSE: SPOT
Key Data Points
Spotify started getting serious about its costs in mid-2023, and the company has delivered steady improvements since then. Total operating expenses were down 16% year over year in the fourth quarter. On top of slashing operating costs, both the premium and ad-supported segments have become more efficient. Premium gross margin jumped by 5.6 percentage points in the fourth quarter, while ad-supported gross margin rose by 3.5 percentage points.
All of this added up to soaring free cash flow. Spotify more than doubled its fourth-quarter free cash flow compared to the prior-year period to 877 million euros, and its full-year free cash flow shot up to 2.3 billion euros. Two years ago, the company was essentially breaking even on a free cash flow basis.
Price increases haven't deterred Spotify's customers, and the company may have more pricing power up its sleeve in the years ahead. That could boost margins further as Spotify continues to focus on the bottom line.
Immediate Market Reaction
Shares of Spotify were up about 9% in pre-market trading as of 8 a.m. EDT. The company blasted past its own guidance and analyst estimates with its fourth-quarter results, and it definitively showed that it can raise prices without putting much pressure on subscriber growth. With a big gain likely on Tuesday, Spotify will add to the rally that has pushed the stock up nearly 150% over the past year.
What to Watch
While Spotify added an impressive number of premium subscribers in the fourth quarter, the company is being cautious with its guidance. Spotify expects to gain just 2 million net new premium subscribers in the first quarter of 2025, part of an expected gain of 3 million net new monthly active users.
One thing that could impact Spotify's business is the potential for a tariff-driven trade war. If household budgets in various countries where Spotify operates become stretched, the company's premium subscriptions may not be as appealing. While Spotify is right to be cautious, the company's guidance didn't deter investors from pushing up the stock on Tuesday morning.
