Spotify’s stock fell over 8% in premarket trading on Tuesday after the company released its first-quarter earnings report. While the report showed strong subscriber growth and profitability, Spotify’s guidance for the second quarter was weaker than expected.
The streaming service reported a 15% year-over-year increase in revenue, totaling €4.19 billion. This growth came from both premium subscriptions and advertising revenue.
Premium subscribers rose by 12% to 268 million, surpassing expectations and marking the second-highest net addition for a first quarter in the company’s history. Monthly Active Users (MAUs) grew by 10% to 678 million, meeting guidance but slightly missing analyst estimates.
Despite these positives, investors were disappointed with Spotify’s second-quarter outlook. The company expects 689 million MAUs, below the analyst consensus of 694 million. Spotify also projected revenue of €4.3 billion and a gross margin of 31.5% for Q2, which led to further concerns.
In the first quarter, Spotify reported a gross margin of 31.6%, above Wall Street estimates, but lower than the record 32.2% from the previous quarter. New deals with major music labels may put pressure on future margins. Advertising revenue, which accounts for about 12% of total revenue, will also be closely monitored due to a potentially weak economy.
Despite these challenges, CEO Daniel Ek expressed confidence in the company’s future. He noted that engagement is strong and that many users stick with Spotify during uncertain times because of its freemium model.
Analysts believe Spotify’s subscription model may be more resilient during economic uncertainty, but some warned that margin growth may slow after a significant increase this past year. Shares of Spotify surged to all-time highs in February but have since declined. Still, the stock is up 110% over the past year.
Spotify is also undergoing significant changes, including layoffs and a shift away from podcast exclusivity. The company has cut back on podcast investments after spending $1 billion in the market. Nevertheless, Spotify continues to invest in its creator economy, paying over $100 million to podcast publishers and creators worldwide in the first quarter.