Sometimes, the quarters that disappoint investors are the ones I like the most. Not because I love seeing stocks I own drop (although with Spotify after I recently sold a third of my position I’d love a large pullback, which you can read about in ‘Discussing Profit-Taking’)
Spotify’s Q2 results was exactly that kind of quarter. Let’s review.
The headline is simple: the business is compounding healthily, even if one segment—advertising—is still disappointing. Premium MAU growth came in at 12%, and ad supported MAU at 10%. At this scale, those numbers are exceptional, especially considering that management guided to far far lower numbers. It’s rare to see that kind of user growth without significant cost or dilution to unit economics.
What was disappointing? Sequential growth rates and guidance. Guidance for Q2 implies slowest sequential growth rate basically, ever. For Q1 Sequential growth was 1.9% for Premium and 0.4% for Total MAU. Q1 is usually the weakest for subscriber growth, but Q2 guidance of +1.6% and 1.8% for MAU and subscribers is the weakest growth sequentially in the past few years.
Q2 actual growth handily beat the 1.6% and 1.8% guidance with 3% and 2.7% actual growth. That’s a 100% beat - very impressive.
And it’s not just user growth that’s performing well. Gross margins expanded 227 bps year-over-year to 31.5%. Free cash flow over the past 12 months hit €2.8B. The business is scaling—and generating lots of cash. Spotify now has ~$8.3 billion of cash on their balance sheet and $1 billion in debt.
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So given the positive quarter, what caused headlines of a double miss?
The earnings and revenue miss is driven by 3 events: FX, social costs and a financial charge regarding Spotify’s debt.
Currency headwinds
Headline revenue growth of 10% missed slightly at the top line, but it’s heavily distorted by a 500 bps FX headwind. Strip that out, and revenue was up 15% - beating estimates.
Social costs drove higher operating costs
Operating costs were up ~$100m sequentially and 8% YoY, driven by higher social costs - an accounting procedure for the Swedish company that forces Spotify to account for the higher price stock as an expense when they give out stock RSUs. The higher the stock goes, the higher this expense item is, despite the company not actually giving out more shares, simply higher priced ones.
Finance costs
Last but not least, the most meaningful hit to EPS was a finance cost of 447m, which dropped the company to a reported loss. To quote my Q1 earnings review:
To keep it simple: In 2021 Spotify issued debt ‘Exchangeable notes’ that mature in March of 2026. They had a conversion price of $515.2 per share, meaning that the further the stock price moves above, the more cash the company has to pay to buy back the debt. Even though at the current stock price this doesn’t quite yet match the condition of 130% of the conversion price of $669, the accounting rules Spotify uses require them to mark to market their additional financing cost required that they might have to pay up. This isn’t an insignificant cost, and if the stock continues to rise, it will further increase (or the opposite if the stock price drops). In any event, paying back their debt is something Spotify is preparing for and has ample cash to deliver.
As I wrote, as the stock price increases, so does this cost, incurring a further loss.
However, none of these 'losses’ impact FCF which grew 40% YoY - highlighting the non cash nature of these losses.
So what actually was disappointing in the quarter? Two things: ad supported growth and the forecast.
Ad-Supported Remains a Drag
This is the only part of the business that isn’t working. Ad-supported revenue declined 1% on a reported basis and grew just 5% FX-neutral—both a step down from Q1. Management acknowledged this and pointed to specific causes: macro, lapping price increases, and some internal churn in inventory.
To their credit, they didn’t sugarcoat it. They also provided useful data points—monthly active advertisers grew 40%, that programatic drove the majority of growth and specifically from the call:
Yes. And just to specifically, as I mentioned in my my also remarks, we have a low double digit growth, if you exclude these more strategic short term impacts from from the inventory that we've taken away and the change in the SPP program.
If Spotify can turn this segment around that would be a major driver for future growth.
Weak Q3 guidance
Guidance came in light again: 2% sequential MAU growth, 1.8% sequential premium growth and revenue growth of 7% (13% net currency).
Historically, the only quarters where Spotify grows below 2% sequentially, is Q1, and so this guide is lower than expected and shows the slowing growth that management is building into their forecasts. Additionally, pricing hikes in main markets seem to be behind us for the near future and there’s no update as of yet on the new premium tier that Spotify is planning on launching. All of these contribute to a low 7% revenue growth forecast. While FX neutral, this is 13%, and not that disappointing, the 7% headline is low.
Despite the low forecast it’s important to keep a few things in mind.
The first and foremost is that Spotify has two things going for it: An expanding TAM and a management team that is laser focused on executing.
Spotify now bundles music, podcasts, audiobooks, and can soon add education across markets. It’s building a layered product that lifts LTV while reducing churn. Add to that the impact of the recent Apple ruling: and Spotify can now add a new business model of one-off purchases (like tickets or swag), and control its customer relationship more directly.
The optionality here is real, the TAM is increasing and the market position solidifying.
Secondly, management owns up to the misses and is focused on executing, both in the short and long term. CEO Daniel Ek addressed these issues on the conference call directly:
However, as I look at our progress, the one area that hasn’t yet met our expectations is our ads business – we've been moving too slowly and it’s taking longer than expected to see the improvements we initiated take hold. It’s really an execution challenge, not a problem with the strategy. While I am unhappy with where we are today, I remain confident in the ambitions we laid out for this business…we are working quickly to ensure we are on the right path. We are seeing some promising signs in our programmatic business, which will set us up nicely for 2026.
Spotify’s management focuses on the long term for their strategic initiatives, and so far they’ve captained their ship quite well. Ek continues:
But let me also take a step back to remind you how we run Spotify: our approach has always been—and will continue to be—focused on creating lifetime value rather than optimizing for quarter-to-quarter performance. Lifetime value is such a powerful metric because it inherently captures the balance and trade-offs between chasing short-term opportunities and driving long-term strategic initiatives. It acknowledges that not every decision will yield immediate returns and our progress is not always linear. Many of the initiatives driving today’s strong user and subscriber growth were started several quarters or even years ago. The exact timing of when these efforts flow into tangible results can vary—sometimes within our control, sometimes not. But the most important takeaway for you is that we don’t make decisions to achieve specific short-term quarterly outcomes. But zooming out, we are well positioned and I feel very good about our business.
Long term investors are in good hands
For long term investors, the company is in a stronger position today than it was at the beginning of the year. The moat is widening, FCF is growing and management is focused on executing. I remain a long term shareholder and despite Spotify being a very large part of my portfolio, I’d be happy to add back on a significant pullback.
I really like the management, and their product from personal experience is excellent!
But don't you think their stock price is too expensive today? Even after the declines..