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Spotify (SPOT) is out of tune today after badly missing 1Q25 EPS expectations and issuing downside Q2 revenue guidance of €4.3 bln, halting the stock's long-standing bullish momentum. Staying true to recent form, the premium subscription business performed quite well as strong subscriber gains and price hikes drove a 16% yr/yr increase in premium revenue to €3.77 bln. Those price hikes pushed ARPU higher, which, alongside favorable music content costs, drove gross margin higher by 400-bps yr/yr to 31.6%. 

However, social charges of €76.0 mln came in significantly higher than anticipated and offset a decline in personnel and marketing costs, leading to the EPS miss. Social charges, which refer to payroll taxes associated with employee salaries and benefits, were above forecast due to share appreciation during the quarter. More worrisome, though, is SPOT's soft Q2 revenue guidance that suggests a slowdown in advertising spending is underway, and the downside MAU forecast of 689 mln, representing a yr/yr increase of 10%.

• Although SPOT has made major strides in profitability over the past few years, the company has now missed EPS expectations in each of the past three quarters. This underperformance relative to expectations puts SPOT's execution under the spotlight. Unfavorable FX impacts are also complicating matters as a strengthening Euro against other currencies is creating a top-line headwind that's funneling down the income statement.
• The good news is that premium subscriber growth remains robust at +12% yr/yr to 268 mln, marking SPOT's second highest Q1 net addition in its history. Even as the company hikes prices in various markets, churn has been minimal, indicating strong pricing power. Whether SPOT begins to experience a slowdown in premium subscriber growth, and/or an increase in churn in the coming quarters, will be closely monitored as consumers continue to tighten their budgets.
• Total MAU's grew by 10% yr/yr to 678 mln, matching SPOT's expectations, highlighting the stickiness of the platform and the company's ability to attract new users. The freemium model also continues to be an effective funnel for acquiring premium subscribers. 

SPOT's Q1 report revealed strong execution in key areas like premium subscriber growth and gross margin expansion, suggesting the company's focus on profitability continues to yield positive results. However, the downside Q2 revenue guidance shows that SPOT is not immune to macroeconomic headwinds and currency fluctuations.