Spotify’s Outlook Dampened by Payroll Taxes Despite Subscriber Growth

Spotify Technology SA anticipates second-quarter profit to fall short of market expectations, primarily due to taxes related to employee compensation. This forecast overshadowed robust subscriber growth, causing a 7% drop in the Swedish music-streaming company’s shares in pre-market trading.

Investors are keenly observing the company’s profitability, seeking confirmation of its ability to enhance margins after years focused on expanding its user base.

While recent cost-reduction measures and increased pricing have boosted profits, the most recent financial results were adversely affected by taxes linked to rising salaries and benefits, which significantly increased in tandem with the company’s stock value.

Spotify reported expenses of 76 million euros ($86.47 million) related to these charges during the first quarter. This offset reductions in marketing expenditures and impacted the operating profit, which reached 509 million euros, below the analyst consensus of 518.2 million euros, based on LSEG data.

The projected second-quarter profit of 539 million euros factors in 18 million euros in payroll taxes, slightly surpassing prior estimates of 518.2 million euros.

Nevertheless, substantial subscriber growth indicates that initiatives aimed at attracting users through enhanced video content and AI-driven functionalities—such as playlists developed from user-written prompts—are proving successful.

Premium subscribers increased by 12% to 268 million during the first quarter, exceeding Visible Alpha’s projection of 265.3 million. The company reported 678 million monthly active users, surpassing the estimated 671.9 million.

CEO Daniel Ek stated, “The fundamental data currently looks promising. While there may be short-term fluctuations, we maintain confidence in the long-term trajectory.”

Spotify’s stock has increased by approximately 34% since the beginning of the year.

The company anticipates that monthly active users will reach 689 million in the second quarter, compared to LSEG’s compiled estimate of 684.9 million. Premium subscribers are projected to increase to 273 million, exceeding Visible Alpha’s estimate of 271.5 million.

First-quarter revenue increased by 15% to 4.19 billion euros, slightly below the forecast of 4.20 billion euros. Spotify expects second-quarter revenue to reach 4.3 billion euros, aligning with current estimates.