Spotify says price hikes will have 'minimal impact' on subscriber growth

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Spotify (SPOT) said recently announced price hikes will not hurt subscriber growth — a stark concern for investors after the audio giant saw shares close at their lowest level since mid-December on Monday following news of the increases.

On Monday, the music streamer confirmed price increases will hit subscription plans in the US and a number of other territories, including the UK, Spain, France, New Zealand, Hong Kong, and Peru.

"Our data would suggest that historical price increases have had minimal impact on [subscriber] growth," Spotify CFO Paul Vogel said on the company's second quarter earnings call on Tuesday. "But given the breadth of this change and the significant outperformance in the first half of the year, there is some conservatism baked into our outlook for Q3."

The company estimates that monthly active users will grow to 572 million in the third quarter, significantly above consensus calls for 548 million, with premium subscribers anticipated to reach 224 million.

"We do expect our net adds through Q3 of this year to be higher than the same point last year, roughly 30% better," Vogel added. He said price increases will have a minimal impact on the third quarter, but that investors will see "the full benefit" of the price increase in Q4, including a bigger acceleration in average revenue per user, as well as revenue growth.

In the US, Spotify increased the price of its ad-free premium subscription plan by $1 to $10.99 a month — a long-awaited change as the company continues its profitability push. The company's Duo plan will rise by $2 to $14.99, while the family plan will increase by $1 to $16.99. The student plan will also go up by $1 to $5.99 a month.

Existing subscribers will get a one-month grace period before the new pricing goes into effect, Spotify said on its website. The news comes as competitors Apple Music (AAPL), Amazon Music (AMZN), and most recently YouTube Music (GOOGL) have all announced higher prices.

On the call, Spotify CEO Daniel Ek called the company's ability to increase prices a "new tool in our toolbox," noting that Spotify "feels good" about raising prices at this point.

Wells Fargo analyst Steve Cahall, who reiterated his Overweight rating and price target of $250 a share, shrugged off investor concerns regarding pricing.

"Price increases will lead to higher margins over time," he wrote in a new note on Tuesday. "So while some see it as a 'sell the news event' we remain bullish on the long term."

Spotify's earnings miss despite subscriber surge

Daniel Ek, CEO of Swedish music streaming service Spotify, poses for photographers at a press conference in Tokyo on September 29, 2016. Spotify kicked off its services in Japan on September 29.
Daniel Ek, CEO of Swedish music streaming service Spotify, poses for photographers at a press conference in Tokyo on September 29, 2016. (TORU YAMANAKA/AFP via Getty Images) (TORU YAMANAKA via Getty Images)

Spotify reported a wider-than-expected loss for the second quarter even though subscribers surged.

Monthly active users (MAUs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.

Still, the streaming service posted a net loss of 302 million euros, or 1.55 per share, wider than the year-earlier period's loss of 125 million euros, or 0.85 a share. Analysts had expected a loss of 0.66 euros per share.

The company also missed gross margin estimates of 25.5% to hit 24.1% in the second quarter amid greater losses from cuts in its podcast division, coupled with higher music royalty costs. Spotify guided to a Q3 boost in gross margins to 26% "primarily driven to year-over-year improvement in podcasting and other costs of revenue."

In the earnings release, Spotify said gross margins and the company's operating loss, which came in at 247 million euros in Q2 compared to a loss of 194 million euros in the year-ago period, "were both primarily impacted by charges related to our actions to streamline operations and reduce costs."

"Excluding these items, adjusted gross margin of 25.5% was in-line and up 22 bps Y/Y (consistent with how we guided the quarter)," the company added.

Spotify has previously said it expects the metric to come in between 30% and 35% over the long term amid plans to further scale its podcasting and ads business.

Shares sank on the heels of the results, closing down more than 14% on Tuesday.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].

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