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Spotify CFO on surprise quarterly profit: 'We hit an inflection point'

Spotify (SPOT) turned a surprise profit in the quarter for the first time in over a year.

The streaming service reported net income of 65 million euros ($69.1 million), or 0.33 euros per share. It's a significant beat, given analysts had expected a loss of 0.20 euros per share. It also compares with the year-earlier period loss of 166 million euros, or 0.86 euros a share.

"Our expectations are now that we will consistently be in the black moving forward," Spotify CFO Paul Vogel said on the company's third quarter earnings call on Tuesday.

"Obviously, you never know what can happen in any one quarter, but we feel good that we're on a different trajectory and we've hit an inflection point with respect to profitability of the business."

The stock surged following the earnings call, up as much as 11% in early trading — the most since Jan. 31.

The company delivered gross margins of 26.4% for the quarter, slightly topping its forecast for 26% with the help of recent price hikes and lower-than-expected costs related to personnel and marketing spend.

Late last quarter, Spotify hiked 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 rose by $2 to $14.99 while the family plan increased by $1 to $16.99. The student plan also went up by $1 to $5.99 a month.

Along with price hikes, Spotify has committed to various cost-cutting initiatives over the past year, which have included layoffs and a realignment of its podcast division. It also recently made audiobooks free to paying subscribers, offering 15 hours of free listening per month.

"As you look into 2024, we expect to see a continued improvement in our gross margin trends and a continued improvement in our operating income trends as well," Vogel said.

Some analysts have raised concerns that Spotify's audiobooks push could drag down margin growth, although management attempted to ease those fears during the earnings call.

"Obviously, there's some investment when it comes to the audio books business but there's nothing about the launch that will derail our progress on the gross margin side or our progress on the operating income side [and] free cash flow side," Vogel said.

Spotify logo displayed on a smart phone with Spotify seen on screen, in this photo illustration, on 15 August 2023 Brussels, Belgium. (Photo Illustration by Jonathan Raa/NurPhoto via Getty Images)
Spotify app displayed on a smart phone in front of a screen with the Spotify logo. (Jonathan Raa/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Free cash flow jumped on both a yearly and quarterly basis, coming in at 216 million euros compared to 9 million euros in the prior quarter and 35 million euros in the year-ago period.

"We feel good about the free cash flow trajectory as well in the business," the executive added. "We're very encouraged with how 2023 is forecast to end, and we're very optimistic with respect to the early indications of where we think 2024 will be."

Wall Street analysts praised the report.

Wells Fargo analyst Steve Cahall, who reiterated his Overweight rating and $250 price target, called out the strong monthly active user (MAUs) additions in the quarter — the second largest Q3 net addition in the company's history.

"The Premium price increases, which affect the vast majority of rev-weighted subs starting in Sept., do not appear to be causing enough churn to derail MAU growth," Cahall wrote.

Bank of America also reiterated its Buy rating and $185 price target, citing bullishness over the streamer's long-term potential as the ad market improves, along with deeper penetration in existing markets and further cost controls.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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