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 surged more than 10% in early trading.

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 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, or a loss of 1.55 euros a share.

Gross margins came in stronger than expected at 29.2%, beating company guidance of 28.1%. The streamer said it expects margins to tick up to 30.2% in the third quarter, 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 compared with 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.

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