• Disappointment greeted the audio streamer’s first-quarter financial reports.
  • Despite this, Spotify grows at double-digit rates and has significant operational trends in its favor.
  • Margins have struggled, but ad spending is increasing as competitors face revenue pressures.

Spotify’s (NYSE:SPOT) quarterly reports illustrate why investors should delve deeper into the truth about Spotify’s reports. Investors should pay attention to comprehensive releases rather than just focusing on the most recent news. Indeed, this business is one for which we avoid reading news about earnings days. Thus, we can evaluate the results better and form opinions before reading what the rest of the market thinks.

In the first quarter of 2022, we looked for Spotify’s music and subscription business to maintain its growth. Furthermore, we anticipated increased podcasting revenue, better profit margins in the advertising sector, and more. We considered these criteria to be indicators of the company’s long-term potential. Here’s a look at what Spotify reported.

Advertising is the key for Spotify

Spotify is still relatively new to the advertising business, and the firm must start increasing and expanding its margins. However, it’s also important to note that Apple (NASDAQ:AAPL) made significant changes in user tracking transparency, which will hurt Spotify’s monetization in the near term, just like every other ad-based streaming service.

According to the company, Spotify’s ad-supported monthly active users increased 21% year over year to 252 million, and ad revenue rose 31% to 282 million euros. However, revenue per customer was just 1.12 euros versus 13.07 euros per premium customer in the quarter.

Spending on advertising is generally declining, so it’s good news that Spotify’s advertising revenue per user is increasing while its user base is also growing.

On margins, things weren’t quite as good. After trending positive for much of last year, Spotify’s ad-supported service had a gross margin of -1.5%, down 584 basis points from a year earlier. Management attributed the decline to seasonality and additional costs associated with podcasting in the ad business, but it was still disappointing.

Premium and Russia

According to the report, the streaming service’s premium user base expanded by 15% to 182 million people, including 1.5 million losses in Russia. Even after considering another 600,000 users will disconnect in Russia throughout the second quarter, management predicts that the company will reach 187 million premium subs after the period.

Spotify’s revenue grew by 15% in the first quarter 2022 . Management expects even more clients to pick premium next quarter, which is fantastic. Spotify will continue to expand as long as it can increase revenue through the revenue channel.

The bottom line

There are several headwinds for Spotify. These include the negative influence of leaving Russia, a decline in advertising spending, an unfavorable economy, and fierce competition in music and podcasts. So naturally, consumers consider how much they’re willing to spend on streaming subscriptions.

But even with that environment, the company reported:

  • Subscribers to premium services increased by 15% year over year, with monthly active users rising by 19%.
  • Revenue growth was 24%, including a 31% increase in advertisement revenue.
  • Due to heavy investments in podcasts and infrastructure, the gross profit margin was down slightly to 25.2%.
  • Net income of 0.21 euros per share or 131 million euros.
  • The free cash flow in the quarter was 22 million euros.

Spotify is expanding at double-digit rates. It’s profitable, and it’s investing in a podcasting business that might be a key component of its future financial success. So even if the market disapproved of Spotify’s results this week and drove its stock down, we like where the company is and its earnings trends.

Occasionally, it’s helpful to step back and evaluate companies’ outcomes with new eyes rather than starting with analysts’ opinions as a baseline. The truth about Spotify’s Q1 results is that they appear decent in today’s market climate.

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