Spotify beats Q4 subscriber projections but prepares to further rein in spend

Investors had many questions about the future of Spotify’s advertising and podcasting strategy in light of its recent management changes during the company’s fourth-quarter earnings call.

Early last week, Spotify laid off nearly 6% of its global workforce, which is just under 600 people. At the same time, the company announced the voluntary departure of Dawn Ostroff, chief content and advertising business officer. 

Since Spotify derives 13% of revenue from advertising, according to its full-year 2022 results, the departure of its most senior advertising executive raised the alarm bells of investors. In particular, investors queried how content and advertising might change under Alex Norström, who has taken over Ostroff’s responsibilities in his role as co-president and chief business officer.

“I don't think from a strategy point of view that it will differ all that much from Dawn's,” CEO Daniel Ek said on the Tuesday earnings call. “The primary reason why we did this reorg was to drive speed and drive more efficiency…marketing was under Alex’s purview previously but not advertising and not content, and now we're holistically looking at it as one.”

Ostroff also led Spotify’s foray into podcasting and was responsible for increasing podcast content by “40x” during her tenure, the company said last week.

One investor expressed skepticism about the revenue prospects of Spotify’s podcasting business, especially in light of Ostroff’s departure.

Ek acknowledged that investments in new podcasts have been a drag on the company’s gross margin, despite the medium’s contributions to ad-supported revenue. Going forward, he said Spotify will be efficient in signing new podcast deals, and addressed that Ostroff’s departure won’t change its commitment to the medium.

“What you should expect [from] us is across the board now to be focused more on that efficiency and creating more leverage — and that's certainly true in podcasting too,” he said. “The management changes really had nothing to do with the change of strategy in podcasting. It's more around increasing the speed of decision-making and increasing the focus on efficiency across the board.”

Ek added that audiobooks, which Spotify added to its catalog in September, are still in their early stages on the platform, and that Spotify will continue investing in the medium as it did with podcasts four years ago.

Media buyers expressed confidence in Spotify’s podcast business in interviews with Campaign US last week.

Reining in investments

Ek admitted to overinvesting in Spotify’s business on the earnings call, which resulted in operating expenses rising 44% year-on-year in Q4 — driven primarily by headcount growth that it cut back in January this year.

Spotify posted an operating loss of €231 million ($251 million) in Q4.

But it performed slightly above its Q4 projections in regard to its premium subscriber base, total monthly active users, total revenue and gross margin, due to a record gain in paid subscribers and “lower podcast content spend,” said Paul Vogel, CFO.

The audio-streaming giant posted ad-supported revenue growth of 14% year-on-year to €449 million ($488 million), led by podcasting gains of around mid-30%. Total revenue clocked in at €3.17 billion ($3.44 billion). 

The audio-streaming giant tacked on 10 million premium subscribers between Q3 and Q4, reaching a total of 205 million paid subscribers — 3 million above guidance — and netting a 14% YoY growth, “aided by promotional intake and household plans,” Spotify said. 

It also saw 25% YoY growth in its ad-supported monthly active users, leading to 489 million total monthly active users — a 20% YoY increase.

Spotify also beat its projection for total monthly active users, which totaled 489 million in Q4 2022, ahead of the 479 million forecast. It projects a net gain of two million paid subscribers and 11 million total monthly active users in Q1 2023.