Here is a fun thing about earnings season: a company can miss on the numbers Wall Street actually publishes estimates for and still get rewarded, as long as the numbers Wall Street quietly cares about keep going in the right direction. Spotify Technology S.A. (SPOT) demonstrated this Thursday.
The music streaming company reported third-quarter earnings of $2.85 per share, missing the consensus estimate of $3.11. Revenue rose 16% year over year to 4.97 billion euros ($5.72 billion), just shy of the $5.73 billion consensus. A miss on both lines, technically.
And the stock climbed 8.34% to $569.15 at the time of publication Thursday, according to market data. Because the thing investors were really watching, the subscriber machine, kept humming.
Subscribers Keep Showing Up
Spotify's monthly active users increased 11% year over year to 788 million, with 11 million net additions matching company guidance. Premium subscribers rose 9% to 306 million, including 6 million net additions.
Average revenue per premium user increased 9.3% to 4.95 euros, while ad-supported revenue grew 10%. That combination, more subscribers plus more money per subscriber, is the engine that makes the whole thing go.
Margins Widen Even as AI Bills Pile Up
Gross margin expanded 136 basis points to 33%, exceeding company guidance, driven by improvements in both the premium and advertising businesses. Premium gross margin rose 130 basis points to 34.5%, while ad-supported gross margin increased 105 basis points to 18.7%.
Operating income climbed 15% to 672 million euros, a 13.5% operating margin. Operating expenses, meanwhile, increased 26% year over year to 967 million euros. Excluding currency movements and social charges, expenses rose 19%, primarily reflecting increased marketing, cloud and AI spending.
So yes, Spotify is spending more. It is also earning more on every euro of revenue, which is the trade investors seem happy to make right now. The company generated 735 million euros in free cash flow and ended the quarter with 9.9 billion euros in cash, cash equivalents, restricted cash and short-term investments.
Premium, Ads and Audiobooks Do the Heavy Lifting
Premium revenue increased 17% year over year, or 15% on a constant-currency basis, supported by subscriber growth and higher average revenue per user. Premium ARPU rose 9.3%, or 7.5% at constant currency. Ad-supported revenue grew 10%, or 9% at constant currency, supported by automated advertising channels and podcast sponsorships.
Then there are audiobooks, which Spotify plans to expand to more than 180 markets by year-end. Co-CEO Alex Norström said audiobooks are increasing user engagement, retention and lifetime value, while Audiobooks+ add-ons provide additional revenue opportunities.
The AI Bet: Discovery, Distribution and Joe Rogan
Co-CEO Gustav Söderström said Spotify is evolving into an AI-powered media platform that allows users to interact with content through natural language. Management said AI investments are already driving double-digit improvements in content discovery and could generate billions of additional listening hours annually.
Spotify has integrated with ChatGPT, Meta's Ray-Ban smart glasses, OpenAI's Dots and Meta's Muse as part of its strategy to expand distribution through third-party AI platforms. The company also signed a new multiyear agreement with Joe Rogan and expanded partnerships with Believe and TuneCore to support remixes and covers. It is expanding its Partner Program and introducing Creator Memberships, allowing fans to pay for additional creator experiences.
What's Next: 316 Million Subscribers in Sight
For the fourth quarter, Spotify expects revenue of 5.2 billion euros, or approximately $5.985 billion, below analysts' consensus estimate of $6.010 billion. The company projects premium subscribers will reach 316 million, representing approximately 10 million net additions, and monthly active users are expected to increase to 818 million.
Spotify forecasts a gross margin of about 33.8% and operating income of approximately 820 million euros, including roughly 6 million euros in share-based social charges. Management expects operating expense growth to moderate in 2027 while continuing to invest in AI, advertising and new products, emphasizing the need to balance investments in emerging growth opportunities with sustainable margin expansion and stronger long-term monetization.
In other words: keep growing the subscriber base, keep widening the margins, and keep spending on the AI stuff that is supposed to make all of it stickier. The market, at least on Thursday, was willing to buy that story even with an earnings miss attached.
