Spotify Q4’24 preview: Wrapping up 2024 on a high note

Spotify is set to release its Q4 earnings report on Tuesday, February 4, before the market opens. We believe key areas of focus in the report include gross margin, MAU/subscriber growth, monetization, and Q1’25 guidance. Given the sustained strong development in the stock since the Q3 report, we believe that there is little room for disappointment in the report. In addition, Netflix’s strong Q4 subscriber growth has likely raised expectations for a similar beat in Spotify’s MAU/subscriber metrics. However, we make no changes to our MAU/subs adds estimates before the report.

No major surprises expected in the top line

We expect revenue to align with guidance at 4.1 BNEUR (Q4’23: 3.7 BNEUR), reflecting a deceleration in y/y growth to 12% (Q3’24 19%) due to tougher comps. We expect revenue growth to be mainly driven by MAU growth (+10% y-y) but further supported by improved monetization (+3% y-y monthly premium ARPU). We estimate Spotify to add +24m new MAU q-q, reaching 664m in total, slightly below guidance and Street’s estimate (665m). This reflects a strong finish to an otherwise slower year for MAU additions (2024e: 64m; 2023: 113m; 2022: 83m). Our Q4 premium subscriber estimate is 260m (Q3’24: 252m), in line with guidance and Street consensus. We model premium ARPU (monthly) at EUR 4.75, showing incremental improvement in monetization (Q4’23: EUR 4.60; Q3’24: EUR 4.71).

On the look for comments regarding the outlook for the gross margin

Spotify has made significant strides in improving its gross margin YTD, supported by e.g. podcast profitability, less drag from audiobooks, marketplace expansion, and bundled subscription plans in 2024. For Q4, we estimate a gross margin of 31.8% (Q4’23: 26.7%), consistent with guidance and consensus. However, the recent multi-year deal with Universal Music Group (“UMG”) that was announced on January 26 may slow gross margin improvements going forward. The agreement, establishing Spotify's first direct publishing license with a major publisher in years, could lead to higher royalty rates for UMG after reductions in mechanical royalties tied to Spotify’s bundling deal last year. Financial terms remain undisclosed, so we’ll be on the lookout for additional details during the earnings release. A potential risk that we see in this agreement is that it could prompt other major labels like Warner Music Group, Sony Music Entertainment, and even Merlin to seek similar terms, potentially pressuring the gross margin further going forward. 

Additionally, the new Spotify Partner Program, a monetization system for video podcast creators offering revenue cuts, may limit gross margin improvements in 2025. For 2025e, we project gross margin at 31.7% (2024e: 30%), marking a more gradual improvement compared to the +4-percentage point gain in 2024. Any comments on this topic will be of interest in the report.

Strong share price development weighs on EBIT

Moving down the income statement, we are lowering our Q4 EBIT estimate to 433 MEUR (from 474 MEUR), which is 8-10% below guidance and consensus estimates, to account of incremental social charges, which we estimate will impact the quarter by about 60 MEUR. Recall that Spotify incorporated only 16 MEUR of social charges into its guidance. These charges, which are tied to share-based compensation and the intrinsic value of Spotify’s share price, lead to variability in payroll taxes, thereby impacting EBIT.

Monetization and cost-efficiency will remain on the priority list for 2025

As Spotify concludes its “year of monetization,” we expect 2025 to follow a similar trajectory, prioritizing monetization and cost efficiency while enhancing user engagement. For 2025, we estimate a 16% revenue growth to 18 BNEUR, supported by high-single-digit MAU/subscriber growth and improved monetization. EBIT margin is expected to rise to 11% (FY24e: 9%), primarily supported by continued improvements in gross margin. 

We anticipate Spotify’s Q1’25 guidance to project revenue of 4.1 BNEUR (12% y/y), with +14M MAU additions, including +3M premium subscribers. We expect a 31.4% gross margin and EBIT of 456 MEUR, representing an 11% margin.

With Spotify’s improved cash conversion and strong balance sheet (FY24e cash: 5.8 BNEUR), a capital allocation announcement may be imminent. Based on past actions, we believe Spotify favors buybacks over dividends, as they offer greater flexibility for a growth-focused company while signaling financial confidence. However, we note that its existing repurchase program, set to expire in 2026, had been utilized by less than 10% as of Q3’24.

After piloting the concept in the UK in 2024, there are signs that suggest Spotify is preparing to expand its educational courses to the US soon, though the company has not yet confirmed this. This would align well with Spotify’s broader strategy of evolving beyond music streaming into a diversified audio platform with growing video integration. Expanding non-music content not only enhances Spotify’s value proposition and user engagement but also opens access to higher ARPU segments. Additional monetization catalysts we see on the horizon include a “Super Fan Tier/Deluxe Version”, which has been rumored for some time, likely priced between USD 17-20, which could further elevate ARPU going forward.