Spotify shares jumped 7.5% on Monday (Dec. 4) following news the company will lay off 17% of its global workforce. CEO Daniel Ek called the layoffs a “crucial step” in a wider effort to be “relentlessly resourceful.” The layoffs amount to roughly 1,500 staffers based on the company’s recent disclosure of having 9,241 full-time employees.
Spotify shares opened Monday at $193 per share, up 6.8% from Friday’s $180.69 closing price, and rose as high as $201.37, up 11.4%. By closing at $194.17, Spotify raised its market capitalization by approximately $2.6 billion to $37.9 billion and brought its year-to-date improvement to 146%.
Cutting such a large number of jobs will drastically reduce the amount spent on salaries and associated employee costs. Spotify expects to incur roughly 130 million to 145 million euros ($141 million to $157 million) in the current quarter for severance-related payments and the impairment of real estate assets associated with the smaller footprint, the company revealed in its SEC filing announcing the layoffs. Those amounts will be partially offset by forfeitures of equity awards by some departing employees. As a result, Spotify increased its guidance for fourth-quarter operating loss to a range of 93 million to 108 million euros ($101 million to $117 million).
After Spotify realizes those layoff-related expenses, it expects “meaningful operational efficiencies” in the future. In the financial world, efficiencies equals profitability and more cash left over for equity holders. On Monday, Analysts at Guggenheim raised their Spotify price target from $200 to $220 while J.P. Morgan analysts increased their price target from $205 to $220. In both cases, the analysts believe the layoffs will deliver on profitability goals laid out in the company’s 2022 Investor Day. At that June 8, 2022, presentation, Spotify’s leadership laid out plans to achieve 40% gross margin and 20% operating margin by reducing costs and expanding its podcast and audiobook businesses; the July subscription price increases will help, too. Both would be huge improvements from its 25% gross margin and -5% operating margin in the first nine months of 2023.
