← Back to SPOT filing summaryOriginal filing text · Part I
Item 5 — Management's Discussion and Analysis
Spotify Technology S.a. · 20-F · FY 2025 · Period ended Dec 31, 2025
View complete filing on SEC EDGAR ↗This is the extracted source text from the SEC filing. Formatting may differ from the original document.
For discussion related to our financial condition, changes in financial condition, and results of operations for 2024 compared to 2023, refer to Part I, Item 5. Operating and Financial Review and Prospects, in our Annual Report on Form 20-F for the fiscal year ended December 31, 2024, which was filed with the SEC on February 5, 2025.
Overview
We are the world’s most popular audio streaming subscription service. With a presence in 184 countries and territories, our platform includes 751 million MAUs and 290 million Premium Subscribers as of December 31, 2025.
We currently monetize our Service through both subscriptions and advertising. Our Premium Subscribers have grown 10% year-over-year as of December 31, 2025 to 290 million. Our 751 million MAUs have grown 11% year-over-year as of December 31, 2025.
We are focused on delivering best-in-class value to consumers relative to the price they pay for Spotify and we periodically update pricing to reflect the value of our evolving offering.
Audiobooks
The Company continued to expand the availability of audiobooks on our Premium Service. Currently, audiobooks are available for eligible Premium Subscribers in 22 markets.
Spotify Partner Program
On January 2, 2025, in the U.S., U.K., Canada and Australia, we launched the Spotify Partner Program, a new monetization program that offers podcast creators audience-driven payouts for eligible video streaming of their content on our platform. Users benefit from a bigger catalog of video podcasts, and Premium Subscribers in select markets are able to watch video podcasts without interruptions from dynamically inserted advertisements. The Spotify Partner Program is currently available in 19 markets.
Spotify Ad Exchange
On April 1, 2025, we announced the launch of Spotify Ad Exchange (“SAX”). SAX is a programmatic marketplace that enables advertisers to purchase advertising inventory campaigns through automated channels via real-time biddable auction buying. This product advancement modernizes our ad technology and helps us to strengthen our advertising partnerships in line with our focus on enhancing our automated buying channels to make it easier for advertisers to buy, create, and measure advertising inventory on Spotify.
Enhancing the listening and user experience
We are focused on building and delivering features designed to increase user engagement on our platform. On August 19, 2025, we launched playlist mixing features, giving subscribers the ability to add and customize transitions between tracks. We also introduced Messages on August 26, 2025, giving mobile users in select markets a fast and convenient way to share and discuss music, podcasts, and audiobooks with friends. On September 10, 2025, we introduced Lossless music to our Premium Service in more than 50 markets, allowing users to stream tracks in up to 24-bit/44.1 kHz FLAC. On September 15, 2025, we introduced enhancements to our mobile Ad-Supported Service experience globally, adding new features that improve playback control, music discovery, and sharing.
We continue to enhance the user experience by embedding AI to improve discovery and personalization across our platform. In April 2025, we expanded our AI Playlist feature to over 40 markets, enabling users to generate personalized playlists using written prompts. On October 6, 2025, we announced a new partnership with OpenAI, extending our ubiquity strategy into emerging agentic AI. Our partnership enables personalized music and podcast recommendations within ChatGPT. We also introduced Prompted Playlist on December 11, 2025, a beta AI-powered playlist discovery feature currently available as a limited release. Prompted Playlist leverages a user’s music listening history and listening patterns to curate and continuously refresh playlists that adapt over time to a user’s preferences.
Current macroeconomic environment
The global macroeconomic environment continues to be uncertain, reflecting the impacts of slower growth, inflation, changes in interest rates, changes in trade and tax policies, geopolitical conflicts, and related market uncertainty. We will continue to actively monitor and respond accordingly to the macroeconomic environment.
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For additional information, refer to the risk factors discussed under “Item 3.D. Risk Factors” included elsewhere in this report.
How We Generate Revenue
We operate and manage our business in two reportable segments—Premium and Ad-Supported. We identify our reportable segments based on the organizational units used by the chief operating decision maker to monitor performance and make operating decisions. See Note 23 to our consolidated financial statements included elsewhere in this report for additional information regarding our reportable segments.
Premium
Our Premium Service provides users with unlimited online and offline high-quality streaming access to our catalog of music and podcasts, including video in select markets. The Premium Service offers a music listening experience without commercial breaks. In select markets, the Premium Service provides Lossless music, allowing users to stream tracks in up to 24-bit/44.1 kHz FLAC. In select markets, the Premium Service provides eligible users with limited online and offline streaming access to a catalog of audiobooks, with an optional Audiobooks+ recurring add-on introduced in 2025 that allows Premium Subscribers to unlock additional hours of audiobook listening per month beyond the base plan. In select markets, Premium users can watch eligible video podcasts without interruptions from dynamically inserted advertisements. In addition to accessing our catalog on computers, tablets, and mobile devices, users can connect through speakers, receivers, televisions, cars, game consoles, and smart devices.
As part of our Subscription Offerings, we offer a Basic plan to eligible users in select markets that provides certain benefits of the Premium Service but does not include features such as the monthly audiobook listening time, as well as an Audiobook Access Tier in the U.S. that provides specified hours of audiobook access a month without all of the benefits of the Premium Service.
We offer a variety of subscription pricing plans for our Premium Service and Basic plan, including our Individual Plan, Family Plan, Duo Plan, and Student Plan, among others, to appeal to users with different lifestyles and across various demographics and age groups. Our pricing varies by plan and is adapted to each local market to align with consumer purchasing power, general cost levels, and willingness to pay for an audio service. Our Family Plan consists of one primary Premium Subscriber and up to five additional sub-accounts, allowing up to six Premium Subscribers per Family Plan subscription, depending on the market. Our Duo Plan consists of one primary subscriber and one additional sub-account, allowing up to two Premium Subscribers per Duo Plan subscription.
In addition, as we have entered into new markets where recurring subscription services are less common, we have expanded our subscription products to include prepaid options and durations other than monthly (both longer and shorter durations), as well as expanded payment options. We also bundle our services with other services.
We generate revenue for our Premium segment through the sale of subscriptions to the Subscription Offerings. The Subscription Offerings are primarily sold directly to end users. The Premium Service is also sold through partners who are generally telecommunications companies that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Premium partner subscription revenue is based on a per-subscriber rate in a negotiated partner agreement.
Revenue from our Premium segment is a function of the price of our Subscription Offerings and the number of subscribers who subscribe to our Subscription Offerings. As of December 31, 2025 and 2024, we had 290 million and 263 million Premium Subscribers, respectively. New Premium Subscribers are primarily sourced from the conversion of our Ad-Supported Users. Through both our online platform and external marketing efforts, we engage our Ad-Supported Users by highlighting key features that encourage conversion to our subscription offerings. These efforts include product links, campaigns targeting existing users, and performance marketing across leading social media platforms. Additionally, new subscriber growth is also driven by the success of converting users from our trial programs to full-time Premium Subscribers. These trial campaigns typically offer certain features of our Premium Service for free or at a discounted price for a period of time.
The rate of net growth in Premium Subscribers is also affected by our ability to retain our existing Premium Subscribers and the mix of subscription pricing plans. New features and functionality have helped increase Premium Subscriber engagement over time. From a product perspective, while our Family Plan, Duo Plan, and Student Plan have lower price points per Premium Subscriber than our Individual plan, each of these Plans has aided retention across the Premium Service.
Our platform is built to work across multiple devices, including smartphones, desktops, cars, game consoles, and in-home devices. We have found that Premium Subscribers who access our Service through multiple devices have higher engagement and lower churn, which increases their expected lifetime value to Spotify.
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Ad-Supported
Our Ad-Supported Service has no subscription fees and provides Ad-Supported Users with limited on-demand online access to our catalog of music and unlimited online and offline access to our catalog of podcasts on their computers, tablets, mobile devices, and other smart devices. Our Ad-Supported Service serves as both a Premium Subscriber acquisition channel and a robust option for users who are unable or unwilling to pay a monthly subscription fee but still want to enjoy access to a wide variety of high-quality audio content.
We generate revenue for our Ad-Supported segment primarily from the sale of display, audio, and video advertising delivered through advertising impressions. We enter into arrangements with advertising agencies that purchase advertising on behalf of their clients and we also enter into arrangements directly with some large advertisers. These direct advertising arrangements are typically sold on a cost-per-thousand impressions (“CPM”) basis and are evidenced by an insertion order that specifies the terms of the arrangement such as the type of advertising product, pricing, insertion dates, and number of impressions in a stated period. Additionally, we generate revenue through automated sales channels, including both internal and external advertising automated exchanges, our self-serve platform, and advertising marketplace programs to distribute advertising inventory for purchase on a biddable auction or fixed CPM basis. These arrangements are evidenced through submission of order placements through the platform and online acceptance of terms and conditions. These order placements typically specify the type of advertising product, pricing, insertion dates, and number of impressions in a stated period.
Revenue from our Ad-Supported segment is dependent primarily on the number and hours of engagement of our Ad-Supported Users and podcast listeners and our ability to provide innovative advertising products that are relevant to those users and enhance returns for our advertising partners. Revenue is generally recognized based on the number of impressions delivered.
Our advertising strategy centers on the belief that advertising products that are based in music and podcasts and are relevant to Ad-Supported Users and podcast listeners can enhance user experiences and provide even greater returns for advertisers. We have historically introduced, and continue to introduce, new advertising products across both music and podcast content. Offering advertisers additional ways to purchase advertising on an automated basis is a key way that we continue to expand our portfolio of advertising products and the number of advertisers we can serve, enhancing our advertising revenue potential. Furthermore, we continue to focus on analytics and measurement tools to evaluate, demonstrate, and improve the effectiveness of advertising campaigns on our platform.
The Spotify Ad Exchange is a programmatic marketplace that enables advertisers to purchase advertising inventory campaigns through automated channels via real-time biddable auction buying.
The Spotify Audience Network (“SPAN”) is an audio advertising marketplace that connects advertisers to listeners across our owned and exclusive podcasts, podcasts from enterprise publishers via Megaphone, and podcasts from emerging creators via Spotify for Creators. Through SPAN, we provide ad-insertion capabilities for audio publishers that allow us to sell targeted advertising to brand partners that enables them to reach listeners both on and off our platform. Most of these agreements require us to share associated revenues and can include minimum guarantees.
In addition, certain offerings within our two-sided marketplace result in advertising revenues.
Revenue from our Ad-Supported segment will also be impacted by the demographic profile of our Ad-Supported Users and podcast listeners and our ability to enable advertisers to reach their target audience with relevant advertising in the geographic markets in which we operate. A large percentage of our Ad-Supported Users are between 18 and 34 years old. This is a highly sought-after demographic that has traditionally been difficult for advertisers to reach. By offering advertisers increased automated options, we continue to improve the efficiency and scalability of our advertising platforms. Additionally, we believe that our largest markets, including Europe and North America, are among the top advertising markets globally. However, our continuing expansion into new geographic markets will present monetization challenges. Monetizing our Ad-Supported User base has historically been, and is expected to remain, more challenging in our two fastest growing regions, Latin America and the rest of the world, compared to Europe and North America.
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Components of our Operating Results
Cost of Revenue. Cost of revenue consists predominantly of royalty and distribution costs related to content streaming. We incur royalty costs, which we pay to certain record labels, music publishers, audiobook publishers, and other rights holders, for the right to stream content to our users. Music royalties are typically calculated monthly based on the combination of a number of different variables. Generally, Subscription Offering music royalties are based on the greater of a percentage of relevant revenue and a per user amount. Music royalties for the Ad-Supported Service are typically a percentage of relevant revenue, although certain agreements are based on the greater of a percentage of relevant revenue and an amount for each time a track is streamed. We have negotiated lower per user amounts for our lower priced subscription plans such as our Family Plan, Duo Plan, and Student Plan. In our agreements with certain record labels, the percentage of revenue used in the calculation of royalties is generally dependent upon certain targets being met. The targets can include such measures as the number of applicable Premium Subscribers, the ratio of Ad-Supported Users to applicable Premium Subscribers, and/or the rates of applicable Premium Subscriber churn. In addition, royalty rates vary by country. Some of our royalty agreements require that royalty costs be paid in advance or are subject to minimum guaranteed amounts. For the majority of royalty agreements, incremental costs incurred due to unrecouped advances and minimum guarantees have not been significant to date. We also have certain so-called most favored nation royalty agreements, which require us to record additional costs if certain material contract terms are not as favorable as the terms we have agreed to with similar licensors. Cost of revenue also reflects discounts provided by certain rights holders in return for promotional activities in connection with marketplace programs. Additionally, it includes the costs of discounted trials. Royalties payable in relation to audiobook licenses are generally consumption-based. Royalties payable in relation to lyrics are generally based on a percentage of relevant revenue or lyric impressions.
Cost of revenue also includes the cost of podcast content assets (both produced and licensed). Amortization of podcast content assets is recorded over the shorter of the estimated useful economic life or the license period (if relevant) and begins at the release of each episode. Certain fixed fees to access content are recorded on a straight-line basis over the applicable license period. We make payments to podcast publishers, whose content we monetize through advertising sales in SPAN, which are also included in cost of revenue. Additionally, cost of revenue includes payments for certain video content. Amounts are recognized based on a number of factors including qualifying consumption time attributable to eligible video episodes and financial participations in excess of minimum guarantees.
Cost of revenue also includes credit card and payment processing fees for subscription revenue, advertising serving, advertising measurement, customer service, certain employee compensation and benefits, cloud computing, streaming, facility, and equipment costs.
Research and Development. We invest heavily in research and development in order to drive user engagement and customer satisfaction on our platform, which we believe helps drive organic growth in MAUs, which, in turn, drives additional growth in, and better retention of, Premium Subscribers, as well as increased advertising opportunities to our users. We aim to design products and features that create and enhance user experiences, and new technologies are at the core of many of these opportunities. Research and development expenses were 8%, 9%, and 13% of our total revenue in each of 2025, 2024, and 2023, respectively. Expenses primarily comprise costs incurred for the development of products related to our platform and Service, as well as new and existing advertising products and improvements to our mobile application and desktop application and streaming services. The costs incurred include cloud and IT related costs, facility costs, consulting costs, and employee compensation and benefits costs. We expect engineers to represent a significant portion of our employees over the foreseeable future.
Many of our new products and improvements to our platform require large investments and involve substantial time and risks to develop and launch. Some of these products may not be well received or may take a long time for users to adopt. As a result, the benefits of our research and development investments are difficult to forecast.
Sales and Marketing. Sales and marketing expenses primarily comprise employee compensation and benefits, public relations, branding, consulting expenses, customer acquisition costs, advertising, marketing events and trade shows, the cost of working with content creators and rights holders to promote the availability of new releases on our platform, and the costs of providing free trials. The cost of providing free trials are typically per user royalty fees, determined in accordance with the rights holder agreements.
General and Administrative. General and administrative expenses primarily comprise employee compensation and benefits for functions such as finance, accounting, analytics, legal, human resources, and other costs including consulting fees, facility and equipment costs, directors’ and officers’ liability insurance, and director fees.
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Key Performance Indicators
We use certain key performance indicators to monitor and manage our business. We use these indicators to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe these indicators provide useful information to investors in understanding and evaluating our operating results in the same manner we do.
MAUs
We track MAUs as an indicator of the size of the audience engaged with our Service. We define MAUs as the total count of Ad-Supported Users and Premium Subscribers that have consumed content for greater than zero milliseconds in the last thirty days from the period-end indicated. Reported MAUs may overstate the number of unique individuals who actively use our Service within a thirty-day period as one individual may register for, and use, multiple accounts. Additionally, although we strive to detect and minimize non-bona fide accounts that may typically be created in an attempt to artificially stream content, they may contribute, from time to time, to an overstatement in our reported MAUs. Our MAUs in the tables below are inclusive of Ad-Supported Users who may have employed methods to limit or otherwise avoid being served advertisements. For additional information, refer to the risk factors discussed under “Item 3.D. Risk Factors” included elsewhere in this report.
The table below sets forth our MAUs as of December 31, 2025, 2024, and 2023.
As of December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in millions, except percentages)
MAUs 751 675 602 76 11 % 73 12 %
MAUs were 751 million as of December 31, 2025. This represented an increase of 11% from the preceding fiscal year. MAUs increased due to our continued investment in driving the growth of our Service through successful consumer marketing campaigns, enhanced content offerings, and product enhancements, resulting in continued user engagement and customer satisfaction.
Premium Subscribers
We define Premium Subscribers as users that have completed registration with Spotify and have activated a payment method for the Subscription Offerings. Our Premium Subscribers include all registered accounts in our Family Plan and Duo Plan. Our Family Plan consists of one primary subscriber and up to five additional sub-accounts, allowing up to six Premium Subscribers per Family Plan Subscription, depending on the market. Our Duo Plan consists of one primary subscriber and up to one additional sub-account, allowing up to two Premium Subscribers per Duo Plan Subscription. Premium Subscribers include subscribers in a grace period of up to 30 days after failing to pay their subscription fee.
The table below sets forth our Premium Subscribers as of December 31, 2025, 2024, and 2023.
As of December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in millions, except percentages)
Premium Subscribers 290 263 236 27 10 % 27 11 %
Premium Subscribers were 290 million as of December 31, 2025. This represented an increase of 10% from the preceding fiscal year. Our free trial offers and global campaigns were meaningful contributors of total gross additions in Premium Subscribers, while our Family Plan and Duo Plan also accounted for a significant portion of gross additions in Premium Subscribers.
Ad-Supported MAUs
We define Ad-Supported MAUs as the total count of Ad-Supported Users that have consumed content for greater than zero milliseconds in the last thirty days from the period-end indicated.
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The table below sets forth our Ad-Supported MAUs as of December 31, 2025, 2024, and 2023.
As of December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in millions, except percentages)
Ad-Supported MAUs 476 425 379 51 12 % 46 12 %
Ad-Supported MAUs were 476 million as of December 31, 2025. This represented an increase of 12% from the preceding fiscal year. Ad-Supported MAUs increased due to our continued investment in driving the growth of our Ad-Supported Service through successful consumer marketing campaigns, enhanced content offerings, and product enhancements, resulting in continued Ad-Supported User engagement and customer satisfaction.
Premium ARPU
Premium ARPU is a monthly measure defined as Premium subscription revenue recognized in the quarter indicated divided by the average daily Premium Subscribers in such quarter, which is then divided by three months. Annual figures are calculated by averaging Premium ARPU for the four quarters in such fiscal year.
The table below sets forth our average Premium ARPU for the years ended December 31, 2025, 2024, and 2023.
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
Premium ARPU € 4.63 € 4.69 € 4.39 € (0.06) (1) % € 0.30 7 %
For the year ended December 31, 2025, Premium ARPU was €4.63. This represented a decrease of 1% from the preceding fiscal year. This decrease of €0.06 was primarily attributable to unfavorable movements in foreign exchange rates, decreasing Premium ARPU by €0.17, and changes in product and market mix, decreasing Premium ARPU by €0.14. These decreases were largely offset by an increase in Premium ARPU of €0.25 as a result of price increases.
The table below sets forth our average Premium ARPU for the quarters ended December 31, 2025, 2024, and 2023.
Three months ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
Premium ARPU € 4.70 € 4.85 € 4.60 € (0.15) (3) % € 0.25 5 %
For the quarter ended December 31, 2025, Premium ARPU was €4.70. This represented a decrease of 3% year-over-year. This decrease of €0.15 was primarily attributable to unfavorable movements in foreign exchange rates, decreasing Premium ARPU by €0.29, and changes in product and market mix, decreasing Premium ARPU by €0.16. These decreases were partially offset by an increase in Premium ARPU of €0.30 as a result of price increases.
A. Operating Results
Revenue
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Premium 15,350 13,819 11,566 1,531 11 % 2,253 19 %
Ad-Supported 1,836 1,854 1,681 (18) (1) % 173 10 %
Total 17,186 15,673 13,247 1,513 10 % 2,426 18 %
Premium revenue
For the years ended December 31, 2025 and 2024, Premium revenue comprised 89% and 88%, respectively, of our total revenue. For the year ended December 31, 2025, as compared to 2024, Premium revenue increased by €1,531 million or 11%. The increase was due primarily to an increase in the number of Premium Subscribers, partially offset by a decrease in Premium ARPU, as described above.
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Ad-Supported revenue
For the years ended December 31, 2025 and 2024, Ad-Supported revenue comprised 11% and 12%, respectively, of our total revenue. For the year ended December 31, 2025, as compared to 2024, Ad-Supported revenue decreased by €18 million or 1%. This decrease was due primarily to a decrease in our direct music channels and ad sales from podcasts of €116 million due to a decrease in fixed-CPM rates as well as a decrease in music impressions sold. This decrease was partially offset by an increase in our automated sales channels of €103 million driven by an increase in music impressions sold primarily on our biddable offerings.
Foreign exchange impact on revenue
The changes in revenue described above include the impact of foreign exchange rate movements during the respective periods. For Premium revenue, the general movement of the Euro relative to certain foreign currencies, as well as movements primarily in the U.S. dollar, Mexican peso, Brazilian real, and Argentine Peso, for the year ended December 31, 2025, as compared to 2024, had a net unfavorable impact. We estimate that Premium revenue for the year ended December 31, 2025 would have been approximately €502 million higher if foreign exchange rates had remained consistent with foreign exchange rates for the year ended December 31, 2024. For Ad-Supported revenue, the general movement of the Euro relative to certain foreign currencies, as well as movement primarily in the U.S. dollar, for the year ended December 31, 2025, as compared to 2024, had a net unfavorable impact. We estimate that Ad-Supported revenue for the year ended December 31, 2025 would have been approximately €83 million higher if foreign exchange rates had remained consistent with foreign exchange rates for the year ended December 31, 2024.
Cost of revenue
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Premium 10,184 9,324 8,231 860 9 % 1,093 13 %
Ad-Supported 1,506 1,625 1,619 (119) (7) % 6 — %
Total 11,690 10,949 9,850 741 7 % 1,099 11 %
Premium cost of revenue
For the year ended December 31, 2025, as compared to 2024, Premium cost of revenue increased by €860 million, or 9%, and Premium cost of revenue as a percentage of Premium revenue decreased from 67% to 66%. The increase in Premium cost of revenue was driven primarily by increases in Premium revenue and increased rates for certain licensors driving increases in music royalties, as well as increases in audiobook licensing costs and costs associated with the launch of the Spotify Partner Program, partially offset by benefits from certain marketplace programs. These collectively resulted in higher royalty costs of €765 million. Additionally, there was a €34 million increase in payment processing fees and a €23 million increase in streaming delivery costs during the year ended December 31, 2025.
Ad-Supported cost of revenue
For the year ended December 31, 2025, as compared to 2024, Ad-Supported cost of revenue decreased by €119 million, and Ad-Supported cost of revenue as a percentage of Ad-Supported revenue decreased from 88% to 82%. The decrease in Ad-Supported cost of revenue was driven primarily by a reduction in podcast costs of €83 million due primarily to our optimization of podcast inventory as well as costs attributable to the new video podcast experience available to subscribers to our Premium Service now recorded to the Premium segment. Additionally, music royalty costs decreased by €21 million during the year ended December 31, 2025 due primarily to benefits from certain marketplace programs. Additionally, there was €14 million of real estate impairment charges during the year ended December 31, 2024, with no comparable charges during the year ended December 31, 2025.
Foreign exchange impact on total cost of revenue
The changes in cost of revenue described above include the impact of foreign exchange rate movements during the respective periods. The general movement of the Euro relative to certain foreign currencies, primarily the U.S. dollar, Mexican peso, Brazilian real, and Argentine Peso, for the year ended December 31, 2025, as compared to 2024, had a net favorable impact on our cost of revenue. We estimate that total cost for the year ended December 31, 2025 would have been approximately €419 million higher if foreign exchange rates had remained consistent with foreign exchange rates for the year ended December 31, 2024.
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Gross profit and gross margin
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Gross profit
Premium 5,166 4,495 3,335 671 15 % 1,160 35 %
Ad-Supported 330 229 62 101 44 % 167 269 %
Consolidated 5,496 4,724 3,397 772 16 % 1,327 39 %
Gross margin
Premium 34 % 33 % 29 %
Ad-Supported 18 % 12 % 4 %
Consolidated 32 % 30 % 26 %
Premium gross profit and gross margin
For the year ended December 31, 2025, as compared to 2024, Premium gross profit increased by €671 million and Premium gross margin increased from 33% to 34%. Premium gross margin increased due primarily to revenue growth outpacing music royalty costs net of certain marketplace programs and audiobook licensing costs. This increase was partially offset by costs associated with the launch of the Spotify Partner Program, inclusive of certain costs previously attributable to the Ad-Supported segment, during the year ended December 31, 2025.
Ad-Supported gross profit and gross margin
For the year ended December 31, 2025, as compared to 2024, Ad-Supported gross profit increased by €101 million to a gross profit of €330 million, and Ad-Supported gross margin increased from 12% to 18%. The increase in Ad-Supported gross margin was due primarily to a reduction in podcast costs. Additionally, the increase in gross margin was due to growth in benefits from certain marketplace programs and the lack of comparable real estate impairment charges during the year ended December 31, 2025.
Consolidated Operating Expenses
Research and development
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Research and development 1,393 1,486 1,725 (93) (6) % (239) (14) %
As a percentage of revenue 8 % 9 % 13 %
For the year ended December 31, 2025, as compared to 2024, research and development costs decreased by €93 million, or 6%. The decrease was due primarily to a decrease of €108 million in social costs due primarily to changes in share price movements. There was also a decrease in share-based compensation of €12 million, due to a change in the timing of annual grants in 2025 moving from March 1 to May 1. These decreases were partially offset by an increase of €30 million in information technology costs due primarily to an increase in our usage of cloud computing services.
Sales and marketing
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Sales and marketing 1,426 1,392 1,533 34 2 % (141) (9) %
As a percentage of revenue 8 % 9 % 12 %
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For the year ended December 31, 2025, as compared to 2024, sales and marketing expense increased by €34 million, or 2%. The increase was due primarily to an increase in costs of €50 million for marketing campaigns. This increase was partially offset by a decrease of €29 million in social costs due primarily to changes in share price movements.
General and administrative
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
General and administrative 479 481 585 (2) — % (104) (18) %
As a percentage of revenue 3 % 3 % 4 %
For the year ended December 31, 2025, as compared to 2024, general and administrative expense decreased by €2 million, or less than 1%. The decrease was due primarily to a decrease of €28 million in social costs due primarily to changes in share price movements. This decrease was partially offset by an increase in other general and administrative expenses of €20 million, primarily driven by higher legal and compliance-related costs for the year ended December 31, 2025.
Foreign exchange impact on total operating expenses
The changes in operating expenses described above include the impact of foreign exchange rate movements during the respective periods. A significant portion of our operating expenses are denominated in the U.S. dollar. The general movement of the Euro relative to certain foreign currencies, primarily the U.S. dollar, for the year ended December 31, 2025, as compared to 2024, had a favorable net impact on our operating expenses. We estimate that total operating expenses for the year ended December 31, 2025 would have been approximately €121 million higher if foreign exchange rates had remained consistent with foreign exchange rates for the year ended December 31, 2024.
Finance income
Finance income consists of fair value adjustment gains on certain financial instruments, interest income earned on our cash and cash equivalents and short term investments, interest income on our finance lease receivables, dividends received on our long term investments, and foreign currency gains.
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Finance income 292 328 161 (36) (11) % 167 104 %
As a percentage of revenue 2 % 2 % 1 %
For the year ended December 31, 2025, as compared to 2024, finance income decreased by €36 million. The decrease was due primarily to a decrease of €67 million in foreign exchange gains on the remeasurement of monetary assets and liabilities in a transaction currency other than the functional currency. This decrease was partially offset by an increase of €20 million in interest income earned on cash and cash equivalents and short term investments.
Finance costs
Finance costs consist of fair value adjustment losses on certain financial instruments, interest expense, and foreign currency losses.
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Finance costs (266) (352) (220) 86 (24) % (132) 60 %
As a percentage of revenue (2) % (2) % (2) %
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For the year ended December 31, 2025, as compared to 2024, finance costs decreased by €86 million. The decrease was due primarily to a decrease of €116 million in net fair value movements on the Exchangeable Notes and €33 million in fair value movements on the warrants during the year ended December 31, 2024, with no such activity on the warrants recognized within finance costs during the year ended December 31, 2025. These decreases were partially offset by an increase of €63 million in foreign exchange losses on the remeasurement of monetary assets and liabilities in a transaction currency other than the functional currency.
Income tax expense
Year ended December 31, Change
2025 2024 2023 2025 vs. 2024 2024 vs. 2023
(in € millions, except percentages)
Income tax expense 12 203 27 (191) (94) % 176 652 %
As a percentage of revenue — % 1 % — %
For the year ended December 31, 2025, income tax expense was €12 million, as compared to income tax expense of €203 million for the year ended December 31, 2024. The decrease of €191 million was primarily related to the incremental recognition of deferred tax assets within the Group year over year, which resulted in an additional deferred tax benefit of approximately €159 million. The decrease was further driven by lower taxable profits of subsidiaries within the Group resulting in a decrease of current expense of €53 million year over year, primarily due to the acceleration of the deduction of the previously capitalized and unamortized domestic research and development costs in the United States.
B. Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, short term investments, and cash generated from operating activities. In addition, we generate cash inflows from the exercise of stock options, which can be significant depending on activity in the period. Cash and cash equivalents and short term investments consist mostly of cash on deposit with banks, time deposits, investments in money market funds, and investments in government securities, agency securities, corporate notes, fixed income funds, and collateralized reverse purchase agreements. Cash and cash equivalents and short term investments increased by €2,019 million from €7,448 million as of December 31, 2024 to €9,467 million as of December 31, 2025.
We believe our existing cash and cash equivalents, short term investments, and the cash flow we generate from our operations will be sufficient to meet our working capital and capital expenditure needs and other liquidity requirements, including maturity of the Exchangeable Notes on March 15, 2026, for at least the next 12 months. However, our future capital requirements may be materially different than those currently planned in our budgeting and forecasting activities and depend on many factors, including our rate of revenue growth, the timing of new product introductions, market acceptance of our products, the acquisition of other companies, competitive factors, and global economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders, while the incurrence of debt financing would result in debt service obligations. Such debt instruments also could introduce covenants that might restrict our operations. We cannot assure you that we could obtain additional financing on favorable terms, or at all. See “Item 3.D. Risk Factors—Risks Related to Our Operations—We may require additional capital to support our strategic objectives, and this capital might not be available on acceptable terms, if at all.”
We continue to evaluate our real estate footprint to optimize our global office space while making necessary investments in offices and information technology infrastructure to grow our business. We fund these investments using current cash and cash equivalents and the cash flow we generate from operations. Given the impact of our Work From Anywhere program and in conjunction with a strategic review of our real estate footprint and space utilization trends, our focus has shifted more towards optimizing our current portfolio and reviewing our real estate needs around the world as opposed to significant expansion of our presence in current markets. This has resulted in a reduction of our real estate footprint as we have decided to sublease certain leased office space. See Note 3 and Note 10 to our consolidated financial statements included elsewhere in this report for additional information.
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Share repurchase program
On August 20, 2021, the Company announced that the board of directors had approved a program to repurchase up to US$1.0 billion of the Company’s ordinary shares. On July 29, 2025, the Company announced that the board of directors had approved an increase in the Company’s share repurchase program by an additional US$1.0 billion. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The authorization to repurchase will expire on April 21, 2026 unless renewed by decision of a general meeting of shareholders of the Company. As of December 31, 2025, the Company repurchased 1,237,497 shares for €530 million under this program. The Company repurchased 768,223 shares for €439 million (US$510 million) during the year ended December 31, 2025. As of December 31, 2025, the maximum value of shares that may yet be purchased under the share repurchase program is approximately US$1,385 million.
The timing and actual number of shares repurchased depends on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is executed consistent with the Company’s approach to capital allocation of prioritizing profitable growth while maintaining a balance sheet that can support our long term strategy. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Company uses current cash and cash equivalents and the cash flow it generates from operations to fund the share repurchase program.
Exchangeable Notes
On March 2, 2021, Spotify USA Inc. issued US$1,500 million in aggregate principal amount of the Exchangeable Notes. Net proceeds from the issuance of the Exchangeable Notes were €1,223 million after deducting transaction costs. The noteholders may exchange their Exchangeable Notes at their option into consideration that consists, at the Issuer’s election, of cash, ordinary shares of the Company, or a combination of cash and ordinary shares, but only under certain circumstances as set forth in the Indenture. The circumstances required to allow the noteholders to exchange their Exchangeable Notes have been met since June 30, 2025. The Exchangeable Notes are exchangeable through close of business on March 12, 2026. The Group has elected to settle all exchanges on or after December 15, 2025 in cash. Since March 20, 2024, the Exchangeable Notes are redeemable, in whole or in part, at the Issuer’s option at any time, and from time to time, and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Exchangeable Notes to be redeemed, plus accrued and unpaid special and additional interest, if any, but only under certain circumstances as set forth in the Indenture. The circumstances required to allow the Issuer to redeem the Exchangeable Notes were not met as of December 31, 2025. See Note 18 to our consolidated financial statements included elsewhere in this report for further information regarding our Exchangeable Notes.
Cash flow
Year ended December 31,
2025 2024 2023
(in € millions)
Net cash flows from operating activities 2,933 2,301 680
Net cash flows used in investing activities (1,785) (1,486) (217)
Net cash flows (used in)/from financing activities (381) 729 234
For the year ended December 31, 2025, as compared to 2024, net cash flows from operating activities increased by €632 million. The increase was due primarily to an increase of €767 million in operating income adjusted for non-cash items including depreciation, amortization, impairment, and share-based compensation expense. This increase was partially offset by unfavorable changes in working capital movements of €128 million, principally in trade receivables and other assets, partially offset by favorable changes in trade and other liabilities, provisions and deferred revenue.
For the year ended December 31, 2025, as compared to 2024, net cash flows used in investing activities increased by €299 million. The increase was due primarily to an increase in net cash outflows from purchases and sales and maturities of short term investments of €255 million, as well as an increase in capital expenditures of €44 million.
For the year ended December 31, 2025, as compared to 2024, net cash flows (used in)/from financing activities changed by €1,110 million. The change from €729 million of net cash flows from financing activities in 2024 to €381 million of net cash flows used in financing activities in 2025 was due primarily to a decrease in proceeds from the exercise of stock options of €561 million and an increase in repurchases of ordinary shares of €439 million. Additionally, there was an increase in payments for employee taxes withheld from restricted stock units of €106 million.
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Free Cash Flow:
We define “Free Cash Flow” as net cash flows from operating activities less capital expenditures and change in restricted cash. Based on our definition, our Free Cash Flow is summarized as follows:
Year ended December 31,
2025 2024 2023
(in € millions)
Net cash flows from operating activities 2,933 2,301 680
Capital expenditures (61) (17) (6)
Change in restricted cash 2 1 4
Free Cash Flow 2,874 2,285 678
We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under IFRS and should not be considered as an alternative to net cash flows from operating activities.
Free Cash Flow is a non-IFRS measure and is not a substitute for IFRS measures in assessing our overall financial performance. Because Free Cash Flow is not a measurement determined in accordance with IFRS, and is susceptible to varying calculations, it may not be comparable to other similarly titled measures presented by other companies. You should not consider Free Cash Flow in isolation, or as a substitute for an analysis of our results as reported on our consolidated financial statements appearing elsewhere in this report.
For the year ended December 31, 2025, as compared to 2024, Free Cash Flow increased by €589 million. The increase in Free Cash Flow was due primarily to an increase in net cash flows from operating activities of €632 million, as described above.
Restrictions on subsidiaries to transfer funds
The payment of dividends and the making, or repayment, of loans and advances to the Company by the Company’s direct subsidiaries and by its indirect subsidiaries to their respective parent entities are subject to various restrictions. Future indebtedness of these subsidiaries may prohibit the payment of dividends or the making, or repayment, of loans or advances to the Company. In addition, the ability of any of the Company’s direct or indirect subsidiaries to make certain distributions may be limited by the laws of the relevant jurisdiction in which the subsidiaries are organized or located. Since the Company is expected to rely primarily on dividends from its direct and indirect subsidiaries to fund its financial and other obligations, restrictions on its ability to receive such funds may adversely impact the Company’s ability to fund its financial and other obligations.
Indebtedness
As of December 31, 2025, our outstanding indebtedness, other than lease liabilities, consisted primarily of the Exchangeable Notes that mature on March 15, 2026 and bear no interest. See Note 18 to our consolidated financial statements included elsewhere in this report for further information regarding our Exchangeable Notes. We may from time to time seek to incur additional indebtedness. Such indebtedness, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors.
Off-balance sheet arrangements
As of December 31, 2025, we do not have transactions with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.
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Contractual obligations
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2025:
Payments due by period
Contractual obligations: Total Less than 1 year 1-3 years 3-5 years More than 5 years
(in € millions)
Minimum guarantees (1) 2,613 1,123 1,490 — —
Exchangeable Notes (2) 1,277 1,277 — — —
Lease obligations (3) 685 98 175 146 266
Purchase obligations (4) 1,575 626 668 228 53
Total 6,150 3,124 2,333 374 319
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(1)We are subject to minimum royalty payments associated with our license agreements for the use of licensed content. See Part I, “Item 3.D. Risk Factors.”
(2)Consists of principal on our 0.00% Exchangeable Notes due March 15, 2026.
(3)Included in the lease obligations are short term leases and certain lease agreements that we have entered into, but had not yet commenced as of December 31, 2025. Lease obligations primarily relate to our office space and our subleased properties. The expected lease terms are up to 11 years. See Note 10 to the consolidated financial statements included elsewhere in this report for further details regarding leases.
(4)We are subject to various non-cancelable purchase obligations and service agreements with minimum spend commitments, including a service agreement with Google for the use of Google Cloud Platform and certain content and marketing commitments.
Subsequent to the end of the reporting period, the Group signed several license agreements with certain content providers which include minimum guarantee and spend commitments of approximately €202 million over the next three years.
C. Research and Development, Patents and Licenses, etc.
For a detailed analysis of research and development policies and costs, see “Item 4.B. Business Overview” and discussions elsewhere in “Item 5. Operating and Financial Review and Prospects.”
D. Trend Information
Our results reflect the effects of our trial programs, both discounted and free trials, in addition to seasonal trends in user behavior and, with respect to our Ad-Supported segment, advertising behavior. Historically, Premium Subscriber growth accelerates when we run such trial programs. Since 2022, we have run three programs per year during the second, third, and fourth quarters.
For our Ad-Supported segment, typically we experience higher advertising revenue in the fourth quarter of each calendar year due to greater advertising demand during the holiday season. However, in the first quarter of each calendar year, we typically experience a seasonal decline in advertising revenue due to reduced advertiser demand.
Other than as disclosed here and elsewhere in this report, we are not aware of any trends, uncertainties, demands, commitments, or events since December 31, 2025 that are reasonably likely to have a material effect on our revenues, income, profitability, liquidity, or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates.
The critical accounting policies, estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below.
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Revenue Recognition
Premium Revenue
In arrangements where we have multiple performance obligations to the customer, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price. We generally determine stand-alone selling prices based on the prices charged to customers; but where stand-alone selling prices are not directly observable, estimation techniques are used which may include competitor pricing and other observable inputs. In the markets where we offer audiobook listening time as part of the Premium subscription, we satisfy our performance obligation to provide a monthly entitlement to specified hours of audiobook content as these hours are consumed and recognize revenue over time using an output method based on the proportion of hours consumed. Additionally, we estimate how many hours of audiobook content will not be used by eligible Premium Subscribers and recognize the revenue attributable to the unexercised rights in proportion to the pattern of audiobook consumption.
Share-based Compensation
Our employees and members of our board of directors receive remuneration in the form of share-based compensation transactions, whereby employees render services in consideration for equity instruments.
The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of an RSU or restricted stock award is measured using the fair value of our ordinary shares on the date of the grant. Stock-based compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards, which is up to four years from the grant date.
Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including expected term of the option, expected volatility of the price of our ordinary shares, risk-free interest rates, and the expected dividend yield of our ordinary shares. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
We also must estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. A higher revised forfeiture rate than previously estimated will result in an adjustment that will decrease the stock-based compensation expense recognized in the consolidated statement of operations. A lower revised forfeiture rate than previously estimated will result in an adjustment that will increase the stock-based compensation expense recognized in the consolidated statement of operations.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we accumulate additional data related to our ordinary shares, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.
Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation. Social costs in connection with granted options and RSUs are accrued over the vesting period based on the intrinsic value of the award that has been earned at the end of each reporting period. The amount of the liability reflects the systematic recognition of the award over the vesting period and the impact of expected forfeitures. The social cost rate at which the accrual is made generally follows the tax domicile within which other compensation charges for a grantee are recognized.
Content
We incur royalty costs for the right to stream content to our users, paid to record labels, music publishers, and other rights holders. Royalties are calculated using negotiated rates in accordance with license agreements, estimates of those rates in instances where rights holders are not identified, or rates as determined by government bodies. Calculations are based on either Premium and Ad-Supported revenue earned or user/usage measures or a combination of these. The rights holder agreements are complex and our determination of royalties payable involves certain significant judgments, assumptions, and estimates in addition to complex systems and a significant volume of data to be processed and analyzed. The estimate of royalty costs requires us to make assumptions about the rates to be recorded for streams where the rights holder is not identified and the potential incidence of duplicate claims. These estimates are subject to revision until settlement. Considering the number of variables impacting the amounts owed, the actual outcome could be different than our estimates, resulting in an additional accrual or release of previously recorded liabilities.
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Some rights holders have allowed the use of their content on our platform while negotiations of the terms and conditions of individual agreements or determination of statutory rates are ongoing. In these instances, royalties are calculated based on our best estimate of the eventual payout.
On May 16, 2024, the Mechanical Licensing Collective (“MLC”), an entity designated to administer a blanket compulsory license available under U.S. law, filed a lawsuit against Spotify USA Inc. in the U.S. District Court for the Southern District of New York (Mechanical Licensing Collective v. Spotify USA Inc., No. 1:24-cv-03809), alleging that beginning with its March 2024 reporting, Spotify USA Inc. improperly reported and underpaid royalties for its Premium Service as a bundle that includes a monthly allocation of audiobook access. On January 29, 2025, the MLC’s lawsuit was dismissed with prejudice, with the court holding that the Premium Service is a bundle. On October 1, 2025, the MLC filed an amended complaint alleging that Spotify USA Inc. improperly valued the components of the Premium Service bundle and improperly reported royalties for the Audiobook Access Tier product. The MLC has also sought permission from the district court to seek interlocutory appeal of the court’s prior ruling that the Premium Service is a bundle under the applicable regulations. If the MLC were to ultimately be entirely successful in its claim alleging that Spotify’s Premium Service is not a bundle, then the liability in relation to the period March 1, 2024 to December 31, 2025 would be approximately €358 million, plus potential penalties and interest, which we cannot reasonably estimate. Any liability would be partially offset by direct deals with publishers.
Many of the rights holders agreements include the right to audit our royalty payments, and any such audit could result in disputes over whether we have paid the proper royalties. Given the complexity of the arrangements, if such a dispute were to occur, we could be required to pay additional royalties, and the amounts involved could be material.
The majority of our rights holder liabilities are settled on commercial payment terms shortly after they are incurred. However, certain of these liabilities are not settled for more significant periods of time due to uncertainties related to the reasons discussed above. Of the total accruals and provisions to rights holders at December 31, 2025 and December 31, 2024, approximately €406 million and €351 million, respectively, relate to liabilities that were incurred more than 12 months prior to the date of the statement of financial position. An additional €5 million of expense was included in the consolidated statement of operations for the year ended December 31, 2025 due to an increase of estimates included in the financial statements at December 31, 2024.
We have certain arrangements whereby royalty costs are paid in advance or are subject to minimum guaranteed amounts. These minimum guarantee amounts have been disclosed in Note 24 of the consolidated financial statements included elsewhere in this report. An accrual is established when actual royalty costs to be incurred during a contractual period are expected to fall short of the minimum guaranteed amounts. For minimum guarantee arrangements for which we cannot reliably predict the underlying expense, we will expense the minimum guarantee on a straight-line basis over the term of the arrangement. We also have certain royalty arrangements where we would have to make additional payments if the royalty rates for specified periods were below those paid to certain other licensors (most favored nation clauses). For rights holders with this clause, we compare royalties incurred to date plus estimated royalties payable for the remainder of the period to estimates of the royalties payable to other appropriate rights holders, and the shortfall, if any, is recognized on a straight-line basis over the period of the applicable most favored nation clause. An accrual and expense is recognized when it is probable that we will make additional royalty payments under these terms. The expense related to these accruals is recognized in cost of revenue.
Provisions
From time to time, we are involved in legal actions or other third-party assertions related to content on our platform and our operations. There can be no assurance these actions or other third-party assertions will be resolved without costly litigation in a manner that does not adversely impact our financial position, results of operations, or cash flows, or without requiring higher royalty payments in the future, which may adversely impact gross margins. We record a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. In determining the probability of a loss and consequently determining a reasonable estimate, management is required to use significant judgment. Given the uncertainties associated with any litigation, the actual outcome can be different from our estimates and could adversely affect our results of operations, financial position, and cash flows. See “Item 3.D. Risk Factors—Risks Related to Securing the Rights to the Content We Stream—Our royalty payment system is complex, and it is difficult to estimate the amount payable under our license agreements or relevant statutes.”
We also have provisions that relate primarily to potential tax obligations other than income tax in various jurisdictions. We recognize provisions for claims or on taxes other than income tax when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated.
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Exchangeable Notes
Our Exchangeable Notes are re-measured at each reporting date using valuation models using input data. They are accounted for in their entirety at fair value, with any change in fair value after initial measurement being recorded in finance income or cost in the consolidated statement of operations, except that changes in fair value that are due to changes in own credit risk will be presented separately in other comprehensive income and will not be reclassified to the consolidated statement of operations. The fair value of the Exchangeable Notes is estimated using a combination of a binomial option pricing model and prices observed for the Exchangeable Notes in an over-the-counter market on the last trading day of the reporting period. Our ordinary share price is a primary driver of the fair value of the Exchangeable Notes. If factors change and different assumptions are used, our finance income/(costs) could be materially different in the future. Please refer to “Item 11. Quantitative and Qualitative Disclosures About Market Risk” included elsewhere in this report for additional information on the share price risk related to our Exchangeable Notes.
See Note 22 to our consolidated financial statements included elsewhere in this report for additional information on the valuation models used for our Exchangeable Notes.
Income Taxes
We are subject to income taxes in Luxembourg, Sweden, the United States, and numerous foreign jurisdictions. Significant judgment is required in determining our uncertain tax positions. The Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty.
Deferred tax assets in excess of deferred tax liabilities are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets are reviewed at each reporting date and are not recorded when, in management’s assessment, it is not probable that the related tax benefit will be realized.
In determining the amount of current and deferred income tax, we take into account the impact of uncertain tax positions and whether additional taxes, interest, or penalties may be due. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, new information presented by a tax authority, or changes in tax legislation. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
We are subject to the continuous examination of our income tax returns by various tax authorities which could result in assessments against us. There are currently ongoing tax audits in several jurisdictions, some of which involve tax matters related to transfer pricing, direct taxes, or withholding taxes. Tax authorities in certain jurisdictions have challenged our tax positions. We regularly assess the likely outcomes of these audits, taking into account any new information available, in order to determine the appropriateness of our tax reserves. If we conclude that it is not probable that our tax position will be accepted, the effect of that uncertainty is reflected at either the most likely amount or the expected value, taking into account a range of possible outcomes. The resolution of tax examinations may be significant to the consolidated financial statements.
Goodwill Impairment
In accordance with the accounting policy described in Note 2 to our consolidated financial statements included elsewhere in this report, we annually perform an impairment test regarding goodwill. The assumptions used for estimating fair value and assessing available headroom based on conditions that existed at the testing date are disclosed in Note 12 to our consolidated financial statements included elsewhere in this report.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this report.
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