Digital Music service, Spotify, has reported a strong second-quarter 2023 earnings, recording a revenue growth of 11% year-on-year to €3.2 billion, and a gross profit of 9%.
Spotify outperformed in all regions and saw higher monthly active users (MAU) net additions relative to the prior year period, aided by improved retention and marketing efficiencies.
The company users surged 27% to 551 million, and net additions of 36 million were 21 million ahead of guidance, representing an all-time high for the company.
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Premium subscribers grew 17% year-on-year to 220 million up from 210 million last quarter. Net additions of 10 million were 3 million ahead of guidance, representing the highest second quarter (Q2) in the company’s history.
Ad-Supported revenue grew 12% Y/Y, reflecting double-digit Y/Y growth across nearly all regions. Music advertising revenue grew mid-single-digits Y/Y, reflecting double-digit Y/Y growth in impressions sold, partially offset by softer pricing due to the macroeconomic environment.
Spotify’s podcast advertising revenue growth re-accelerated to more than 30% Y/Y with sold impressions across original and licensed podcasts, and the Spotify Audience Network hit an all-time high, partially offset by softer pricing.
The Spotify Audience Network saw double-digit growth in participating advertisers and publishers, and high single-digit Q/Q growth in participating shows.
Gross Margin finished at 24.1% in Q2, while adjusted Gross Margin was 25.5%, which excludes €44 million in net charges. Adjusted Gross Margin was up 22 bps Y/Y, reflecting podcasting improvement, Marketplace growth, and Other Cost of Revenue favorability.
Premium Gross Margin was 28.5% in Q2. Adjusted Premium Gross Margin was 28.4%, down 37 bps Y/Y, reflecting Marketplace growth and other costs of Revenue favorability, partially offset by increased music royalty costs. Ad-Supported Gross Margin was (5.7%) in Q2.
Adjusted Ad-Supported Gross Margin was 5.7%, up 458 bps Y/Y, reflecting improving podcast profitability and other costs of Revenue is favorable, partially offset by increased music royalty costs.
Operating expenses grew 13% Y/Y (or 16% constant currency), driven predominantly by charges related to efficiency efforts of €91 million (contributing -1,000 bps to Y/Y Operating Expense growth), of which roughly €83 million were related to real-estate impairments and the remaining €8 million were severance-related and other charges.
Additionally, Y/Y changes in Social Charge movements of €35 million impacted Y/Y expense growth by 400 bps. All remaining Operating Expense growth reflected higher personnel costs related to Y/Y headcount growth and acquisitions, partially offset by lower marketing and legal costs in the quarter.
Free Cash Flow was €9 million in Q2, a decrease Y/Y as a result of reduced favorability in net working capital specifically related to the timing of certain payments in Q2. Additionally, capital expenditures declined €3 million Y/Y to €2 million as a result of the completion of office build-outs.
While the magnitude of Free Cash Flow can fluctuate from quarter to quarter based on seasonality and timing, Spotify averaged approximately €200 million of positive Free Cash Flow on a trailing 12-month basis for the past three years.
On a cumulative basis, the company has generated €1.4 billion of Free Cash Flow since the beginning of 2016, supporting its strong balance sheet and €3.5 billion in cash and cash equivalents, restricted cash, and short-term investments balance.
Notably, Spotify’s CEO Daniel Ek during the second quarter earnings call, highlighted a few ways the streaming service could introduce additional AI-powered functionality. He talked about how AI could be used to create more personalized experiences, summarize podcasts and generate ads.
The CEO disclosed that consumers can expect to see similar AI-powered features that aim to contextualize and personalize content across the streaming service in the future, as it will be looking to integrate AI technology into the platform to enhance users’ experience.