Spotify Q2'25 flash comment: Just not good enough to defend the valuation

Spotify’s Q2 print missed our top- and bottom-line estimates. Still, subscriber growth outperformed once again, driven by broad-based strength across all markets. Q3 guidance followed a similar pattern, with weaker financials but stronger user growth. Wall Street appears more focused on the former rather than the latter, with shares down some 6-7% in pre-market trading. Following the report, we see modest downward revisions to our short-term estimates, mainly on revenue and margins.

Source: Inderes & Bloomberg (consensus, 34 estimates)

Strong user intake, but weaker pricing development and FX headwinds weighed on revenue growth

MAUs reached 696m (Q2’24: 626m), which was 7m above our estimate of 689m (guidance: 689m, Street: 689m), led by strong development in Rest of the World, Latin America, and Europe. Premium subs came in at 276m (Q2’24: 246m), beating our and Street’s estimates by 3m and ahead of guidance. Ad-supported users increased by 10m q/q, compared to our forecast of +6m (Street: +6m). Premium ARPU was EUR 4.57 (Inderes: EUR 4.71, Street: EUR 4.67), down 3% q/q and 1% y/y, but up 3% y/y on a FX neutral basis (Q2’24: EUR 4.62). While the FX effect had a clear negative impact of some 400 bps y/y, the FX-neutral growth was supported by 2024’s price hikes, partially offset by product/market mix. We had anticipated FX headwinds to weigh on ARPU by 400 bps, but had expected that 2024 price increases, coupled with e.g. small price adjustments in a few selected markets during the year, to have a bigger impact. However, we acknowledge that the strong MAU development in emerging markets has a diluative effect on ARPU due to lower price points. 

Q2 revenue grew 10% y/y (FX-neutral: 15%) to 4.2 BNEUR, which was below our forecast of 4.3 BNEUR, driven by lower pricing effects than expected. Premium revenue grew 12% (16% FX neutral) to 3.7 BNEUR (Inderes est: 3.8 BNEUR), while ad-supported revenue came in at 453 MEUR and below our estimate of 460 MEUR, mainly due to softness in pricing and podcast inventory optimization. For Q3, the company anticipates a 490 bps FX headwind to revenue growth at current currency rates.

FX headwinds, social charges, and increased OpEx behind EBIT miss

Gross margin was in line with guidance, reaching 31.5% (Q2’24: 29.2%), and aligned with our and Street’s estimate. Spotify reiterated that GM will show variability throughout the year but remain above FY24’s level. The company guided for 31.1% in Q3’25, below our estimates of 31.7% (Street’s: 31.5%) heading into the Q2 report. The guidance did incorporate regulatory charges in the Premium segment equivalent to ~40 bps.

Operating income (EBIT) was 406 MEUR (Q2’24: 266 MEUR), corresponding to a 10% margin. This was well below the company’s guidance of 539 MEUR, as well as our (477 MEUR) and Street’s (490 MEUR) estimate. Social charges* pressured EBIT with 115 MEUR (guidance: 18 MEUR), which was higher than our estimate of 105 MEUR. Operating expenses increased 8% y/y (5% FX neutral and excl. social charges) and in relation to revenue, these were about 140 bps higher than our forecast, primarily driven by higher-than-expected R&D and S&M expenses.

Spotify’s reported free cash flow reached 700 MEUR (Q2’24: 490 MEUR), equivalent to a 17% margin, and was more or less in line with our estimated ~690 MEUR**. The liquidity and balance sheet continued to improve, with the net cash position amounting to 6 BNEUR (incl. leases).

Q3 Guidance below estimates on revenue and EBIT, but above on user growth

Spotify guided to Q3 MAUs of 710m, above both Street’s estimate (707m) as well as ours (705m). Premium subs guidance of 281m came in ahead of our 277m and Street’s 279m, implying +5m q/q growth. However, revenue guidance of 4.2 BNEUR (5% y/y) was well below our and Street’s 4.6 BNEUR and 4.5 BNEUR, largely due to FX effects (~490 bps headwind). Q3 EBIT guidance of 485 MEUR implies an 11.5% margin, did also fell short of our 12.3% and Street’s 12.7%.

On the earnings call, Spotify emphasized its focus on optimizing user lifetime value (LTV) over short-term gains, citing its strong market positioning and continued growth in user engagement. In terms of capital allocation, the company announced an increase to its existing share repurchase program, from 1 BNUSD to 2 BNUSD. With only about 100 MUSD used to date, approximately 1.9 BNUSD remains authorized. The buyback program is set to expire on April 21, 2026, but may be renewed with shareholder approval.

Before the Q2 print, our revenue estimate for 2025 stood at 18 BNEUR (+14% y-y) with a 12.2 % EBIT margin. Following the Q2 report, we see some downward pressure on our overall short-term financial estimates, while we think the stronger-than-expected development in the user base provides relatively good support for our long-term estimates. 

* Social Charges are payroll taxes that vary with Spotify’s stock price due to their link to share-based compensation in certain countries.

**Adding back SCB and excluding lease payments to make it easier to compare to reported figures.