In a recent announcement, Spotify (SPOT) revealed plans to lay off approximately 17% of its workforce, amounting to around 1,500 employees. This marks the third round of layoffs for the music streaming company within the current year.
Spotify’s CEO, Daniel Ek, communicated this decision in a letter to the staff on Monday. Ek acknowledged the positive earnings report and performance but highlighted the significant impact of economic slowdown and increased capital expenses due to higher interest rates.
“While we considered smaller reductions throughout 2024 and 2025, the disparity between our financial goals and operational costs led us to believe that a substantial action to rightsize our costs was the best option,” Ek explained.
Following the announcement, Spotify’s stock witnessed a 9% increase in early trading on Monday.
Ek emphasized the need for Spotify to be “relentlessly resourceful” in its operations, innovation, and problem-solving to prepare for the next phase where lean operations become a necessity rather than an option.
This round of layoffs follows previous workforce reductions of about 600 employees in January and an additional 200 workers in June. The company anticipates incurring charges between 130 million euros to 145 million euros in the current quarter, primarily attributed to severance-related pay and the impairment of real estate assets associated with the staff reduction, according to an SEC filing.
Notably, this move comes after Spotify achieved a profit in the third quarter, its first quarterly profit in over a year, driven by recent price hikes and lower-than-expected costs related to personnel and marketing spend.
Analysts have shown optimism regarding Spotify’s profitability plans, especially after the company pledged to improve its profitability starting in 2023 based on gross margin and operating income.
Despite challenges such as tough economic conditions and higher cost of capital, analysts like Steve Cahall from Wells Fargo believe that this round of layoffs signifies Spotify’s commitment to achieving its profitability targets and is not merely a response to incremental headwinds.
Spotify, known for its aggressive foray into the podcast market with substantial investments, has faced challenges in gross margins and profitability. The company has implemented strategies like price hikes, restructuring its podcast division, and offering free audiobooks to paying subscribers to address these issues.
While Spotify’s stock experienced a significant decline in 2022, it has shown a notable recovery in 2023, currently up about 130% year to date. Despite this recovery, shares remain below their record close in February 2021.
Citi analyst Jason Bazinet recently downgraded shares to Neutral, citing a growth shift to less profitable markets and a decline in the conversion of ad-supported monthly active users to premium users. However, Bazinet acknowledged that Spotify is on the right path to profitability and maintained a price target of $190 a share.