Spotify: Solid Results, Big Tax Bill

Here's our initial take on Spotify's (SPOT -6.42%) fiscal 2025 first-quarter financial report. Key Metrics Metric Q1 2024 Q1 2025 Change vs. Expectations Revenue 3.6 billion euros 4.2 billion euros 16% Met Earnings per share 0.97 euros 1.07 euros 10% Missed Premium subscribers 239 million 268 million 12% Beat Free cash flow 207 million euros 534 million euros 158% n/a Spotify Sees Growth Everywhere, Including Taxes Spotify's 2024 momentum continued in the first three months of 2025, with the company reporting active monthly users up 10% to 678 million and premium subscribers up 12% to 268 million. It translated into solid 16% year-over-year revenue growth and 10% earnings growth for the quarter. Alas, some of Spotify's success is taking a toll on results. Spotify's EPS result came in significantly below Wall Street expectations due to higher-than-expected costs. The culprit? About 76 million euros in employment taxes tied to the 106% increase in the company's share price over the past year. Spotify said those so-called social charges were about 58 million euros above forecast. Operating metrics for the company continue to look strong. Spotify's average revenue per user for its subscription businesses was up 4% to 4.73 euros, fueled by price increases. And ad-supported revenue was up 8%. Overall gross margin came in at 31.6%, up 400 basis points from a year ago. The strong profitability helped Spotify more than double free cash flow in the quarter to 534 million euros. Immediate Market Reaction The earnings miss appears to be weighing on investors in early morning trading. Share prices of Spotify were down 6% following the release of earnings but ahead of the open of regular trading on the New York Stock Exchange. What to Watch Spotify turned a lot of heads in 2024 when it was able to use the benefits of its massive scale and pricing power to generate its first full year of profitability. The company said it was watching "headwinds," including a potential slowdown in consumer spending and volatile foreign currency exchange rates, but still sees continued growth in 2025. The company expects total users to grow to 689 million in the current quarter, which is slightly below Wall Street expectations, but for premium subscribers to grow to 273 million, which would be slightly better than what analysts expected. The bull case from here is that Spotify has a sticky product and is a relatively affordable "splurge" when times are tough. Spotify's quarter, despite the tax-related turbulence, provided no reason to worry that the bull case is in doubt. Helpful Resources Full earnings report Investor relations page