Spotify Technology (SPOT) reported fiscal second quarter earnings on Tuesday that beat expectations as the audio giant posted record profit, gross margin, and free cash flow in the quarter on the heels of its recent "efficiency" strategy.

Revenue came in line with estimates while monthly active user metrics disappointed, both of which investors shrugged off as the stock closed about 12% higher.

In June, Spotify announced it would hike the prices of its premium US subscription plans, with increases set to take effect this month. Spotify previously raised prices last summer.

On top of price adjustments, the company has committed to multiple rounds of layoffs and initiatives to boost top-line growth and improve margins, like a music-only streaming tier and audiobooks-only plan. It also introduced a higher-priced audio bundle that includes music, podcasts, and audiobooks.

The audio giant reported operating income of 266 million euros ($289 million), compared with a loss of 247 million euros in the prior-year period. This was above company guidance of 250 million euros, driven by "lower personnel and related costs and lower marketing spend."

It also guided to a strong Q3 operating income of 405 million euros ($440 million), well ahead of Wall Street consensus expectations of 298.1 million euros.

The streaming service reported net income of 274 million euros ($298 million), or earnings of 1.33 euros ($1.44) per share. That was well ahead of analyst expectations of earnings of 1.04 euros per share. It also compares with the year-earlier period loss of 302 million euros ($327.77 million), or a loss of 1.55 euros ($1.68) a share.

Gross margins came in stronger than expected at a record 29.2%, beating company guidance of 28.1%. The streamer said it expects margins to tick up to 30.2% in the third quarter, well ahead of forecasts, primarily driven by year-over-year improvements in music and podcasting.

Spotify has previously said it expects the metric to come in between 30% and 35% over the long term amid plans to further scale its podcasting and ads business.

Revenue, meanwhile, met expectations of 3.81 billion euros ($4.14 billion) — 20% higher than the second quarter of 2023. The company expects revenue to hit 4 billion euros in Q3 versus the 3.4 billion euros in the year-ago period.

Wall Street analysts credited Spotify's gross margin beat and better-than-expected guidance for Q3 operating income and gross margins as key catalysts for the positive stock reaction.

User figures

Total monthly active users (MAUs) came in below company estimates of 631 million to hit 626 million in the quarter — but it was still a 14% improvement compared with the total in the year-ago period. The streaming service anticipates Q3 MAUs to come in at 639 million.

Premium subscribers came in above company expectations of 245 million to hit 246 million — a 12% year-over-year jump. Spotify expects the subscriber count to increase to 251 million in the third quarter.

Free cash flow, another key metric for investors, came in at a record 490 million euros in the quarter compared to 9 million euros in the year-ago period.

The average revenue per user, or ARPU, for Premium subscriptions increased 8% year over year to 4.62 euros (or 10% year over year, excluding foreign exchange headwinds). ARPU was driven by price increase benefits that were partially offset by discounted plans and lower prices in emerging markets, the company said.

Profit pledge

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.

After its stock plunged, the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis.

The company also said earlier this year it plans to be more intentional about future investments. It has since adjusted its podcast strategy to focus more on distribution rather than exclusivity.

Spotify also changed up its royalty structure, made audiobooks free to paying subscribers, and locked in new deals with popular podcasters like Joe Rogan and Alexandra Cooper of "Call Her Daddy."

The stock has surged as a result, with shares gaining more than 50% since the start of the year and up about 70% on a yearly basis.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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