Here's our initial take on Spotify Technology's (SPOT 5.18%) fiscal 2025 second-quarter financial report.
Key Metrics
| Metric | Q2 2024 | Q2 2025 | Change | vs. Expectations |
|---|---|---|---|---|
| Revenue | 3.81 billion euros | 4.19 billion euros | +10% | Missed |
| Earnings per share | 1.33 euros | (0.42 euros) | N/A | Missed |
| Premium subscribers | 246 million | 276 million | +12% | n/a |
| Free cash flow | 490 million euros | 700 million euros | +43% | n/a |
A Big Earnings Miss for Spotify
Music streaming leader Spotify came up well short of expectations on Tuesday with its second-quarter report. Revenue of 4.19 billion euros grew by 10% year over year but missed analyst expectations. Earnings per share tumbled to an unexpected loss of 0.42 euros, far below the average analyst estimate of a 2.02 euro profit.
Spotify reported solid subscriber gains during the second quarter. The company ended the quarter with 276 million premium subscribers, up 12% year over year, and 433 million ad-supported users, up 10% year over year. Premium revenue jumped by 10%, although ad-supported revenue dropped by 1%. Overall gross margin improved to 31.5%, driven by gross margin gains in both the premium and ad-supported businesses.
Revenue was negatively impacted by currency fluctuations. The company noted that currency led to a 104 million euro hit to revenue, accounting for the entirety of its revenue miss. Operating costs also rose, driven by currency, social charges, and higher personnel costs. Social charges, which are tied to the value of stock-based compensation, totaled 115 million euros in the second quarter. Spotify recorded finance costs of 358 million euros, which include foreign currency losses, interest expense, and fair value adjustment losses on financial instruments.
While Spotify's earnings tumbled, free cash flow soared 43% to 700 million euros.
Immediate Market Reaction
While much of Spotify's weak revenue and profit was tied to currency fluctuations and the impact of stock price appreciation on the company's social charges, investors pulled back in premarket trading. Share prices of Spotify were down more than 5% with 90 minutes left until market open. Going into the second-quarter report, Spotify stock was up around 57% year to date.
What to Watch
Spotify expects currency to hurt revenue growth by nearly half a percentage point in the third quarter. The company expects to produce revenue of 4.2 billion euros, barely higher than its second-quarter revenue. Spotify also sees gross margin dipping to 31.1% due to a regulatory charge, and it expects to add just 5 million net premium subscribers. In the second quarter, Spotify added 8 million net premium subscribers.
While Spotify stock has been on quite a run this year, a disappointing quarterly report and somewhat weak guidance could put an end to the rally.
