Spotify profit takes hit from higher payroll taxes, shares drop

Spotify forecast second-quarter profit below market estimates on Tuesday due to employee salary-related taxes, taking the shine off its strong subscriber growth and sending shares of the Swedish music-streaming giant down 7% before the bell.

The company’s profitability is closely watched by investors looking for signs that it can bolster margins after years of prioritizing user growth.

While cost-cutting initiatives and price increases have aided profits in recent quarters, its latest earnings took a hit from taxes tied to higher salaries and benefits that jumped sharply due to an increase in the company’s stock price.

Spotify recorded 76 million euros ($86.47 million) in such charges in the first quarter, offsetting lower marketing costs and weighing on its operating profit of 509 million euros, which was below the average analyst estimate of 518.2 million euros, according to data compiled by LSEG.

Its second-quarter profit forecast of 539 million euros includes 18 million euros in payroll taxes, and was above estimates of 557.5 million euros.

Still, strong subscriber growth showed that efforts to draw users with more video content and AI-powered services, including playlists generated with a simple written prompt, were working.

Premium subscribers rose 12% to 268 million in the first quarter, beating Visible Alpha estimates of 265.3 million. The company had 678 million monthly active users, above estimates of 671.9 million.

“The underlying data at the moment is very healthy. The short term may bring some noise, but we remain confident in the long-term story,” CEO Daniel Ek said.

Spotify’s shares have risen about 34% so far this year.

It expects monthly active users to rise to 689 million in the second quarter, compared with LSEG-compiled estimates of 684.9 million. Premium subscribers are expected to increase to 273 million, above Visible Alpha estimates of 271.5 million.

First-quarter revenue rose 15% to 4.19 billion euros, slightly below LSEG-compiled estimates of 4.20 billion euros. Spotify forecast second-quarter revenue of 4.3 billion euros, in line with estimates.