Spotify reports strong user growth as it is raising subscription price

Spotify just reported its second-quarter earnings and the two most impressive metrics are the number of subscribers and the total number of Spotify users. There are currently 220 million people who pay for a Spotify subscription around the world — that number is up 17% year over year.

Overall, Spotify now has 551 million monthly active users. That means that 331 million users are currently using the service every month with a free, ad-supported account. Spotify has never added as many users in a single quarter — 36 million new active users.

In other words, Spotify is growing nicely, but the company is attracting more free users than paid users. Of course, there is some porosity between these two buckets as some users start with a free account and then become paid subscriber while others stop paying for a premium subscription for one reason or another.

Spotify’s premium subscribers now represent 39.9% of its overall user base. That ratio has been going down over time (but remember that the total user base is growing). This is an important metric as it is much easier to monetize paid users than ad-supported users.

When it comes to gross margin, Spotify currently generates 28.4% in gross margins for premium users. The gross margin on free users is currently negative at -5.7%. But the company has made some write-off charges on content assets and contract termination this quarter. Its adjusted ad-supported margin is at +5.7%.

But let’s be honest, Spotify’s overall gross margin is not as good as expected. With a gross margin of 24.1%, it’s less than estimates of 25.5% according to Yahoo Finance.

The company reported nearly €3.2 billion in revenue for the most recent quarter ($3.5 billion at today’s exchange rate). Revenue is up 11% year over year. However, Spotify also reported €247 million in operating loss ($274 million).

If you take into account the company’s recent layoffs and related charges, Spotify claims that it registered €112 million in adjusted operating losses ($124 million). Unless the company conducts another wave of layoffs, operating losses shouldn’t be as bad next quarter.

However, as losses are much higher than expected, Spotify shares are currently trading down 9.30% in pre-market trading at $148.50 per share.

After resisting raising its prices for months, Spotify finally announced a price hike for its premium plans yesterday. In the U.S., an individual premium plan will now cost $10.99 per month instead of $9.99. Similarly, the duo plan will cost $14.99 instead of $12.99 and the family plan will be priced at $16.99 instead of $15.99.

The company is also reflecting these price hikes in other markets, including much the of the European Union, the U.K., and several other countries in South and Central America, Asia and Oceania. These changes should have a great impact on Spotify’s bottom line going forward.