Spotify (SPOT) plans to lay off 17%, or about 1,500, of its employees — its third round of layoffs this year.
Spotify CEO Daniel Ek announced the news in a letter to staff on Monday. The executive said that despite the streamer's recent efforts to boost margins, economic growth has "slowed dramatically" as higher interest rates squeeze profits amid increased capital expenses.
"I realize that for many, a reduction of this size will feel surprisingly large given the recent positive earnings report and our performance," Ek said. "We debated making smaller reductions throughout 2024 and 2025."
But he said that given the gap between the company's financial goals and operational costs, he decided "that a substantial action to rightsize our costs was the best option to accomplish our objectives."
Spotify stock climbed about 9% higher in early trading on Monday following the news.
"The Spotify of tomorrow must be defined by being relentlessly resourceful in the ways we operate, innovate, and tackle problems," Ek continued. "This kind of resourcefulness transcends the basic definition — it’s about preparing for our next phase, where being lean is not just an option but a necessity."
The company laid off about 600 employees in January and another 200 workers in June.
According to an SEC filing, the company estimates that it will incur approximately 130 million euros to 145 million euros in charges in the current quarter, primarily consisting of severance-related pay and the impairment of real estate assets as a part of the staff reduction.
The latest round of job cuts comes after the streaming service turned a profit in the third quarter — its first quarterly profit in over a year following recent price hikes coupled with lower-than-expected costs related to personnel and marketing spend.
Analysts, overall, have been bullish on Spotify after the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis.
The company has previously said it expects gross margins to come in between 30% and 35% over the long term, as it plans to scale its podcasting and ads business further. The metric came in at 26.4% last quarter, and the streamer said it expects margins to tick up to 26.6% in the current quarter.
"While management cited tough economic conditions and higher cost of capital in its letter, we believe this further cements SPOT's focus on achieving its profitability targets and are by no means in response to incremental headwinds," Wells Fargo analyst Steve Cahall wrote in reaction to the news on Monday. "We expect this to be SPOT's final round of layoffs."
Spotify's profitability push
Spotify spent $1 billion pushing into the podcast market over the past four years with splashy A-list deals and $400 million-plus studio acquisitions.
That spending took a significant bite out of gross margins and weighed heavily on profitability. Investors punished the company as a result, and the stock was down a whopping 70% in 2022.
In addition to price hikes and layoffs, Spotify has realigned its podcast division and recently made audiobooks free to paying subscribers, offering 15 hours of free listening per month.
The stock, which lost more than two-thirds of its value in 2022, is up about 130% year to date. Still, shares remain 50% below their record close of $364.59 in February 2021.
On Friday, Citi analyst Jason Bazinet downgraded shares to Neutral from Buy, citing a growth shift to less profitable developing markets in addition to a declining conversion of ad-supported monthly active users to premium users.
Nevertheless, the analyst did say the streamer is on the right path to profitability. He maintained his price target of $190 a share.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].
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