Premium subscribers rose to 306 million, beating the company's own target, and fourth-quarter operating income guidance came in above forecasts. Investors chose the subscriber and profit trajectory over the bottom-line miss.
Spotify's third-quarter report contained a clear miss and a clear beat, and investors decided the beat mattered more.
The miss: diluted earnings per share were 2.48 euros, below a consensus estimate of about 2.81 euros and down from 3.28 euros a year earlier. Net income was 518 million euros, and free cash flow fell 9% to 735 million euros.
The beat: Spotify added 6 million premium subscribers, ahead of its own forecast of 5 million, to reach 306 million, up 9% from a year earlier. Monthly active users rose 11% to 788 million. Operating income was 672 million euros, in line with the 671.8 million euros expected, according to Visible Alpha, and gross margin widened by 136 basis points to 33.0%.
Revenue was 4.97 billion euros, up 16%, or 14% at constant currency, roughly matching the 4.98 billion euro consensus from LSEG.
Shares traded at $579.11 at 1:46 p.m. Eastern, up 10.2%, at their highest level since January.
The guidance did the work
The forecast for the fourth quarter is what lifted the stock. Spotify expects operating income of 820 million euros, above the 813.4 million euros analysts expected, according to LSEG, and 316 million premium subscribers, against forecasts of 314.7 million. It expects gross margin of 33.8%, revenue of 5.2 billion euros and 818 million monthly users.
That revenue guidance is slightly below some estimates. Investors were willing to accept it because profit and subscriber growth point the right way.
Why EPS and operating income diverged
Operating income met expectations while earnings per share missed. Part of the shortfall was attributed to social charges, payroll taxes linked to employee equity awards that tend to rise with the share price. If that is the main driver, the miss says more about Spotify's stock than about its business.
The AI story
Co-Chief Executive Alex Norström and co-CEO Gustav Söderström emphasized artificial-intelligence features, such as the AI DJ and playlists built from text prompts, along with licensing agreements with Universal Music Group, Merlin and Kobalt. Investors have worried that AI-generated music could erode the value of a streaming catalog. Spotify is pitching AI as a reason to stay subscribed instead.
What to watch
Fourth-quarter net additions against the 316 million target, any further price increases, and the size of social charges, which will remain sensitive to the share price after Thursday's jump.