Spotify swings to profit after cutting costs and raising prices

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Spotify’s recent price rise and a cost-cutting drive paid off as the streaming service swung to a profit in the third quarter, with results that chief executive Daniel Ek said “proved” that his company would become a “great business”.

The music streaming service reported net income of €65mn on €3.4bn in revenue in the three months to September 30. Operating expenses were down 13 per cent from the same period a year ago, when Spotify lost €166mn. 

Spotify has been on a tear in terms of growth over the past few years, adding tens of millions of subscribers and defying a recent slowdown seen at Netflix. But the music service has long struggled to make a consistent profit. It has been under pressure to curb costs after an expensive push into podcasting that tried investors’ patience. Activist investor ValueAct in February acquired a stake in Spotify, saying that its expenses had “exploded”. 

“As we walked into the year, we talked about having a great product but also needing to become a great business, and to prove that out to investors,” said Ek during a call with investors. “That’s been the challenge . . . throughout this year. You’re really starting to see this proved out with the delivery of this quarter’s result”.

Spotify’s gross profit margins in the third quarter rose to 26.4 per cent, from 24.7 per cent in the previous year, helped by lower spending on marketing and personnel. Shares in the company rose 6 per cent in pre-market trading on Tuesday.

The company added 6mn quarterly subscribers, above the 4mn that Wall Street analysts had forecast, suggesting that higher prices did not dissuade sign-ups. Spotify raised prices in several countries in July, including the US — the first such increase since the app launched in the country more than a decade ago. The company counted 226mn paying subscribers at the end of September. 

Netflix, the video streaming service, last week also beat expectations by reporting 9mn subscribers in the third quarter, well above forecasts of about 6mn, as it cracked down on password sharing.

Spotify’s shares have nearly doubled this year, but they remain well below a peak reached during the pandemic in 2021. The group’s stock price is roughly flat from its initial offering on the New York Stock Exchange in 2018. 

The company this month announced that it would offer subscribers 15 hours a month of audiobook listening as it strives to become the home to all things audio. As part of the audiobooks push, Spotify will pay licensing fees to book publishers including Penguin Random House.

Chief financial officer Paul Vogel said: “Obviously, there’s some investment when it comes to audiobooks, but nothing that will impact our [financial] progress.”