Spotify is getting closer to podcast profitability, according to Q3 earnings

This improvement was buoyed by podcast advertising revenue growth, which “remained in the healthy double-digit range,” according to the shareholder presentation, which was “partially offset by softer pricing.” Spotify does not break out its podcast margins from the rest of its business.

Spotify’s positive signals echo what podcast networks reported in the second quarter of this year. At the time, executives told shareholders they were seeing improvements in the U.S. ad market and expected continued growth in Q3 and beyond, after disappointing ad revenue in the first quarter of 2023.

By the numbers:

• Spotify’s total revenue grew 11% year over year to €3.4 billion (about $3.6 billion), a 6% growth quarter over quarter.
• Operating income was €32 million (about $33.9 million), due to higher gross margin (which was at 26.4%) and cost-cutting measures.
• Advertising revenue grew 16% year over year to €447 million (about $473.4 million) and 11% quarter over quarter.
• Monthly active users (MAUs) were up 26% year over year to 574 million, with net additions of 23 million in the quarter, and up 4% quarter over quarter.
• Spotify subscribers grew 16% year over year to 226 million, with a net addition of 6 million in the quarter, and 3% growth quarter over quarter.

Cost cutting to achieve profitability

Spotify’s podcast profitability improvement was also a reflection of the company’s efforts to cut costs in the division earlier this year. 

Spotify laid off 200 people, including staffers from the podcast division, in June and merged its podcast units, Gimlet and Parcast, as part of its strategy to cut costs. Operating expenses at the company overall in Q3 declined 13% year over year.

Spotify CEO Daniel Ek said on Tuesday that the strategy to improve podcast profitability is “reining back on some of the spending” as well as “bring in more advertising dollars” to grow revenue.

Overall, Spotify returned to profitability in the third quarter, thanks to lower operating expenses and higher revenue in the quarter. It’s the first time the company has had a profitable quarter in a year and a half.

Advertising revenue continues to improve

The Spotify Audience Network – which is Spotify’s programmatic ad marketplace that inserts commercials into podcast episodes – saw double-digit quarter-over-quarter growth in the number of participating publishers and shows and high-single-digit quarter-over-quarter growth in the number of active advertisers, according to the company. The company did not disclose exact figures.

Selling ads across both music and podcasts has been “really, really helpful” to Spotify’s advertising business and is “a lot of the driving growth,” Vogel said.

An analyst asked Spotify’s execs about their goal to get its ad business to make up 20% of the company’s overall revenue. Currently, advertising revenue makes up 13% of Spotify’s business with the rest of the revenue primarily coming from subscriptions. But Vogel did not give a timeline as to when they expect to reach this goal post. Spotify vp and global head of advertising business and platform Lee Brown discussed “the 20% aspiration” in a Digiday Podcast interview earlier this year.

Subscription growth ahead of expectations

Spotify is ahead of its expectations for net-new subscribers this year, Ek said. At the beginning of 2023, the company expected to bring in over 20 million net-new subscribers for the year. As of the end of Q3, it is on track to bring in 30 million, he said.

“This will be the second biggest full-year gain in net [subscription] additions since going public,” Ek said. “This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3.”

In July, Spotify raised monthly prices on its subscription plans in more than 50 markets (specifically by $1 to $2 in the U.S.) — another contributing factor to the company’s revenue growth in the quarter, according to Spotify’s earnings report. While Vogel did not provide the rate of churn on the call with shareholders, he said it was “in line with expectations” and that subscriptions still grew in North America during the quarter (though he did not say by how much). A slide released as part of Spotify’s quarterly earnings documents (embedded below) shows the company’s premium subscriber count in North America appearing to have decreased from 61.6 million in Q2 2023 to 61.02 million in Q3 2023. However, Vogel addressed the matter during the earnings call.

“We actually did not lose subs in North America. So I think what’s going on here is the math – you’re coming up with a number that’s based on three rounded numbers. You’ve got a prior quarter number, a current quarter number that are both rounded, as well as a percentage number that’s rounded. So we actually grew subscribers in North America, in line with expectations,” Vogel said.

Q4 guidance

Vogel was optimistic about Q4 performance: “2023 should finish with the highest net addition for MAUs and the second largest for subscriptions in company history.”

He shared the following guidance for the next quarter:

• 601 million MAUs, an increase of 27 million from Q3 (an addition of about 112 million MAUs in 2023).
• 235 million subscribers, an increase of 9 million over Q3 and 30 million subscribers for the year.
• €3.7 billion (about $3.9 billion) in total revenue, a gross margin of 26.6% and an operating profit of approximately €37 million (about 39.2 million).
• Constant currency revenue (based on a fixed exchange rate) would be “closer to €3.8 billion,” Vogel said (about $4 billion), representing a 20% year over year growth.