Spotify Subscription Revenue Soars in Q3

Spotify isn’t showing signs of slowing down. In the third quarter, revenue hit 3.99 billion euros ($4.32 billion) and subscribers grew by 6 million, the company announced Tuesday.

According to Billboard, the Swedish music streaming company has helped revolutionize how people listen to music but until recently, it didn’t have financial results to match its market power. Reacting to investors’ demands for both growth and profitability, last year Spotify tightened its belt and laid off about a quarter of its workforce, and this year’s quarterly financial results have shown marked improvements in margin and profitability without sacrificing all-important subscriber growth.

Although revenue was slightly below Spotify’s previous guidance of $4.4 billion, operating profit was a record high of $500 million, exceeding guidance by 12%. After routinely posting operating losses in previous years, Spotify’s operating profit increased 70% from the second quarter and was up more than 14-fold from the prior-year quarter.

Likewise, gross margin — revenue less cost of sales — reached $1.37 billionand improved to 31.1% of revenue, up from 29.2%, 27.6% and 26.7% in the preceding three quarters. The margin improvement was attributed to gains from premium subscriptions as well as audiobooks and ad-supported gains.

Recent price increases in the U.S. and many other markets didn’t slow subscriber growth. Spotify finished the third quarter with 252 million subscribers, an increase of 6 million from the prior quarter and 11.5% higher than the prior-year period. Subscription revenue reached $3.86 billion, up 20.8% year-over-year. Premium average revenue per user increased 9% (at constant currency) to $5.18.

Advertising, a key ingredient to both Spotify’s freemium music model and podcasting business, continued to lag behind subscriptions.