Spotify third-quarter results: Subscription and gross margin improvements; profit growth depends on slower expense growth in 2027

Where did the third quarter improve, and where did it fall short?

Paid subscribers reached 306 million in the third quarter of 2026, 1 million above both company guidance and market consensus, in line with Bernstein’s forecast; promotions contributed to some of the additions. Gross margin rose 1.35 percentage points year on year to 33%, a record for a third quarter and 0.1 percentage points above guidance and consensus.
The improvement was concentrated in subscriptions and gross margin; revenue and operating profit did not materially exceed expectations. Revenue was 4.969 billion euros, up 16% year on year and slightly below Bernstein’s forecast and consensus; operating profit was 672 million euros, broadly in line with both.

Expenses absorbed part of the gross margin improvement: third-quarter operating expenses rose approximately 26% year on year, faster than revenue growth of 16%; excluding foreign exchange effects and share-price-related social charges, they still rose 19%. The company said marketing, cloud and AI spending was temporarily high.
Fourth-quarter guidance implies operating expense growth of approximately 17.5%, still above revenue growth of approximately 15%. On that basis, Bernstein believes operating leverage has merely been delayed—that is, as revenue grows, expenses fall as a share of revenue and profit grows faster. If expenses do not return to normal in 2027, its thesis that Spotify will enter a period of profit harvesting would face a direct challenge.

The company’s fourth-quarter gross margin guidance of 33.8% matched consensus and exceeded Bernstein’s 33.7%; operating profit guidance of 820 million euros was slightly above both forecasts. However, the guidance included only 6 million euros in share-price-related social charges, and Bernstein believes recent share-price movements account for part of the profit advantage.
Paid subscriber guidance of 316 million was above consensus of 315 million but below Bernstein’s forecast of 317 million. Monthly active user guidance of 818 million was below consensus of 819 million and the firm’s forecast of 821 million; the third-quarter actual figure of 788 million also only met guidance and consensus. The data do not yet support accelerating user growth, but the high comparison base of 38 million net additions in last year’s fourth quarter underpins Bernstein’s view that guidance is conservative.

Third-quarter average revenue per paid user was 4.95 euros, up 9.3% year on year and 7.5% at constant currency; the entire upside relative to Bernstein’s forecast came from foreign exchange. The firm is watching fourth-quarter price increases, the comparison base following the 2025 price increases, and the effect of family-plan verification on churn; pricing power remains an important variable.
Advertising revenue was 482 million euros, below Bernstein’s forecast and consensus; nominal growth was 10%, or 9% at constant currency, driven mainly by higher advertising volume, while music advertising prices were weak. As a result, sustained double-digit growth in advertising still lacks support from pricing.

Third-quarter earnings per share were 2.48 euros, 10% below consensus, mainly because of lower financial income and higher taxes. Free cash flow was 735 million euros, below Bernstein’s forecast of 788 million; the shortfall came from working capital, including an increase of 194 million euros in accounts receivable. Improved operating performance did not produce the expected cash collection at the same time.
Bernstein maintained its Outperform rating and 625-dollar price target. The target uses a discounted free cash flow model, assuming a cost of capital of 11% and perpetual cash flow growth of 3%; slower expense growth and cash conversion directly affect this valuation thesis.