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Executives

Dominic Paschel - VP, Corporate Finance and IR

Joe Kennedy - Chairman & Chief Executive Officer

Steve Cakebread - Chief Financial Officer

Analysts

Doug Anmuth - JPMorgan

Laura Martin - Needham & Company

Rich Tullo - Albert Fried

Nat Schindler - Bank of America Merrill Lynch

Jordan Rohan - Stifel Nicolaus

Rohit Kulkarni - Citi

Martin Pyykkonen - Wedge Partners

Michael Graham - Canaccord

So Young Lee - SunTrust

Jeff Houston - Barrington Research

Peter Stabler - Wells Fargo Securities

John Blackledge - Cowen and Company

Pandora Media, Inc. (P) F3Q13 Earnings Call December 4, 2012 5:00 PM ET

Operator

Welcome to Pandora’s Third Quarter Fiscal 2013 Financial Results Conference Call. All lines have been placed on mute. There will be a question-and-answer session at the end of the conference. (Operator Instructions) Opening today’s call is Dominic Paschel, Vice President of Pandora.

Dominic Paschel

Good afternoon and welcome to Pandora’s third quarter fiscal 2013 financial results call for the quarter ended October 31, 2012.

Some of our discussions will contain forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a discussion of the risks that could cause our results to differ from today’s discussion, please refer to the documents we filed with the Securities and Exchange Commission.

Also, I would like to remind you that during the course of this conference call, we will discuss non-GAAP measures of our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release and Form 8-K filed earlier this afternoon with the SEC.

Today’s call is available via webcast and a replay will be available for two weeks following the conclusion of the call. To access the press release, supplemental financial information or the webcast replay, please consult the investor relations section of Pandora.com.

With that, let me turn the call over to Joe Kennedy, Pandora’s Chairman and CEO.

Joe Kennedy

Thanks, Dom. This quarter exceeded our expectations as Pandora continues to demonstrate and expand its mobile leadership with both listeners and advertisers. For the third quarter, total mobile revenue grew 112% to $73.9 million from $34.9 million in the same quarter last year, as mobile revenue growth outpaced mobile listener hour growth which grew 85% year-over-year. As a result, mobile monetization reached a record high rate of $26.96 of total RPM. Total listener hours for the quarter grew 67% year-over-year, reaching 3.56 billion for the quarter compared to 2.12 billion for the same quarter last year.

Pandora's market share of all U.S. radio as of the October quarter end also reached a record high of 6.55%, up from 4.27% a year ago. We have also now released November listener metrics and reached another new record of 7.09% share this past month, up from 4.32% a year ago. Third quarter results exceeded the high end of our revenue and earnings expectations. Pandora’s total revenue grew 60% to $120 million and non-GAAP EPS was $0.05.

As we mentioned on our last earnings call, we plan to share more detail on RPM on a quarterly basis in order to help investors better understand our monetization efforts on both the desktop as well as mobile and other connected devices. RPM is defined as advertising revenue earned per 1000 ad supported listener hours. Total RPM includes subscription revenue in the numerator and subscription hours in the denominator,

Our mix of listener hours and advertising revenue continues to shift towards mobile. Listening on mobile and other connected devices represented 77% of total listener hours during the third quarter. Web total RPM for the quarter was $56.40 compared to $62.06 in the same quarter last year. Mobile and connected devices total RPM was $26.96 compared to $23.60 last year.

Mobile monetization remains a core focus and we’re pleased with the progress we've made as reflected in our record high mobile RPM. We remain focused on our mobile product as hours and ad revenue continued this shift towards mobile. Our goal is to provide consumers with the best personalized radio experience in the world and center stage for that is the mobile environment.

During the quarter we launched Pandora 4.0, the biggest redesign the Pandora app has undergone on both iOS and Android smartphones since launching on the two major platforms. Pandora 4.0 marks the first time a uniform interface exists across both the iOS and Android platforms and offers listeners a better music experience with expanded functionality, a detailed personal music profile, diverse social sharing capabilities and other innovative features that are available on mobile for the first time.

With Pandora 4.0, we have combined years of innovation and learning into one cross platform app that provides listeners an ideal environment for music discovery, exploration and sharing and ultimately sets a new standard for mobile personalized radio.

For advertisers, Pandora 4.0 also offers new capabilities, including for example, unified sponsorships across all mobile devices. With the new enhanced social features on mobile, we have built sponsorships that offer brands the opportunity to align with consumers positive experience of sharing the music they love. We've also focused on improving how ads are integrated into the core listening experience by making ad transitions more seamless and enhancing ad delivery and performance.

Our already extraordinary mobile phone footprint will be expanding even more. Microsoft has announced that Pandora is coming to Windows phone in calendar year 2013. Pandora has become truly a must have for many smartphone consumers and hence a must have for all smartphone platforms. That said, our focus by no means ends with smartphones.

The goal of our Pandora Everywhere strategy has always been to give consumers access to their personalized Pandora stations everywhere they listen to radio. At home, in the office, on the move, or in the car. Pandora is now available across more than 700 consumer electronic devices and over 75 vehicle models. Recently, we reached a significant milestone as the number of users enjoying the sophisticated integrations we have implemented with automotive OEM and aftermarket products crossed the 1 million mark and we'll soon be expanding our presence in autos internationally.

During the quarter, Holden, GM's subsidiary down under, announced the upcoming launch of MyLink, the first in-car system in Australia to offer full compatibility with Pandora. In addition to the strong brand we've established among consumers, Pandora has established a strong brand among technology and automotive manufacturers. Recently Honda announced that 100% of its models will have Pandora integrations. The decision to integrate Pandora in 100% of Honda's vehicles is a testament to the strength of our brand and the breadth of our consumer appeal. At the risk of stating the obvious, this vast network of technology platforms and deep technical integrations would not be easy to replicate.

I'd now like to take a few minutes to talk about our efforts to achieve fair royalty rate structures to govern the compensation we pay to music creators and content owners. As I stated in my testimony at a Congressional hearing last week, the rates currently paid by internet radio to SoundExchange are extraordinarily unfair by any U.S. or global standard. The amount just Pandora will pay this year will be greater than that paid by any other radio company in the U.S. or around the world. In fact, there is no country internationally where the entire radio industry, all of the AM, FM, satellite, cable and internet radio companies, pays a total combined amount even close to what we as a single company will pay this year.

Over the next three years, we will pursue two related efforts as we seek to remedy this unfairness. The next royalty arbitration to set rates for internet radio will begin in calendar year 2014 and finish in 2015. It will set rates for all internet radio services for calendar years 2016 through 2020. We have already been preparing to prosecute that arbitration and very much look forward to that opportunity.

We believe that the likelihood of that arbitration process producing an outcome that all parties would consider to be fair would be enhanced if certain changes are made in the legislative guidance that Congress gives to the royalty judges who conduct the arbitration. Specifically, we believe that the guidance that Congress gives to the copyright royalty judges for setting internet radio rates, should be the same as that given for satellite and cable radio. And then important changes to the arbitration process should be made to ensure the comprehensiveness and thoroughness of the overall process.

Thus, we have already begun to see Congressional action and are pleased that a hearing in the matter took place last week by the subcommittee of the House judiciary committee that focuses on intellectual property matters. An important first step was taken with a comprehensive and well attended discussion on the issues led by Representative Bob Goodlatte, who will chair the full House judiciary committee next year. After the session, Representative Goodlatte publicly stated, “we will see if we can come to a consensus with all of the players. We are working towards finding a comprehensive solution.” This process will take time and there is far from any assurance that any legislation will ultimately pass, but this hearing was a good start.

As I emphasized in the hearing, this legislative process is not about whether Pandora or any other internet radio service is profitable or not. Even under the current extraordinarily unfair rates we are making strong progress financially. Rather all of these efforts are focused on establishing a fair royalty rate structure to govern the compensation that internet radio services pay to music creators and content owners which we believe will ultimately be a win for all parties. Artists, innovators and the American listening public.

While we are excited about the long-term opportunity in front of us and the progress we've been making, we're also sharply focused on our near term execution. While the third quarter beat our expectations, many of our advertisers have recently become more cautious about their near-term spending, including their plans for January as macroeconomic concerns, including the fiscal cliff, have increased. This caution has affected our near term visibility, so we are adjusting our guidance downward.

For the fourth quarter, we anticipate revenue in the range of $120 million to $123 million and non-GAAP EPS loss to be between $0.06 and $0.09. It is important to note that we still anticipate that Q4 will be yet another quarter in which total mobile RPM is up year-over-year. We continue to make progress in mobile monetization, something we expect to continue throughout fiscal year 2014.

Our monetization strategy is working and remains unchanged. First, enabling interactive buyers to easily extend their previously desktop centric spending to multiplatform spending on Pandora, giving them the unique advantage and being able to speak to the full range of their target audience as that audience spends more and more time on mobile. And second, disrupting the approximately $16 billion market for traditional radio advertising with ad products that offer superior targeting, interactivity and measurability.

With regard to this second part of the strategy, we have already begun a significant expansion of our radio advertising focused local sales organization. I am pleased to announce that we today already have sales management in place in 27 of the top 40 markets. Frontline sellers are already in place in 17 of those markets with significant additional hiring in place. Sales expense has already grown and will continue to grow as we continue this significant expansion. As we make these hires and bring them up to speed, we will also see the first versions of Pandora's integration with radio ad buying software released. We'll make specific announcements as those hit the market.

Looking ahead to the fiscal year 2014, we'd like to just remind you of our quarterly cadence. Fiscal Q1 revenues on average are down quarter-over-quarter from Q4 due to the natural spending patterns of the ad market. Also our seasonally strong hiring activity prior to and during fiscal Q1 adds incremental costs. This investment sets Pandora up for incremental local and mobile advertising revenue next year that will further enable mobile RPM growth.

In summary, Pandora continues to redefine radio, and that includes defining and expanding the frontier of mobile for both listeners and advertisers. While increased caution among advertisers leaves us more cautious about the current quarter than we had previously been, we still see a tremendous opportunity to grow all of the key dimensions of our business next year, including mobile monetization.

Our core mobile monetization strategies are working and we believe that our scale coupled with our product’s unique advertising capabilities, give Pandora an advantage in capturing an outsized share of media buying as advertisers shift their spending from traditional forms of media to mobile. We remain excited about our future and have just scratched the surface of our potential.

With that, let me turn it over to Steve.

Steve Cakebread

Thanks, Joe. Pandora delivered third quarter revenue of $120 million that represented 60% growth from a year ago quarter and above the high-end of our guidance range. Advertising revenue was $106.3 million, a 61% year-over-year increase, and subscription and other revenues were $13.7 million and grew 52% year-over-year. For the third quarter of fiscal 2013, GAAP basic and diluted earnings per share were $0.01. Non-GAAP basic and diluted EPS were $0.05 and that excluded approximately $7.1 million in stock-based compensation and again exceeding the high-end of our non-GAAP EPS guidance by $0.04. Basic EPS was based on 169.4 million weighted average shares outstanding and diluted EPS was based on 190.3 million weighted average shares outstanding.

Total listening hours grew 67% from 2.12 billion in the third quarter of fiscal 2012 to 3.56 billion this quarter. Total listening hours on mobile and other connected devices represent more than 77% of total listening hours, further expanding our position as a leading mobile service provider for both consumers and advertisers.

Joe spoke to the explicit third quarter RPMs. Let me reference the trailing 12-month third quarter RPMs. On mobile and other connected devices, total mobile RPMs increased from $21.65 in the trailing 12-month period ended October 31, 2011 to $22.68 in the same period this year. Mobile and other connected device ad RPMs increased from $20.71 in the trailing 12-month period ended October 31, 2011 to $21.56 in the same period this year. This represents a continued solid improvement and reflects our continued focus on monetizing mobile opportunities.

Moving to traditional computer, total RPMs decreased from $61.13 in the trailing 12-month period ended October 31, 2011 to $53.19 in the same period this year. Traditional computer ad RPMs decreased from $65.25 in the trailing 12-months period ended October 31, 2011 to $55.18 in the same period this year. This decline in traditional computer total and ad RPMs was driven in part by the elimination of the 40-hour per month fee listening cap on traditional computers we instituted in September of 2011. As a result, total RPMs decreased from $34.83 in the trailing 12-month period ended October 31, 2011 to $30.40 for the same period this year. This reflects the continuing mix shift from desktop to mobile listening and is consistent with what we expected in terms of RPM transfer this year.

Moving onto expenses. We increased headcount 38% year-over-year from 481 employees at the end of the third quarter of fiscal 2012 to 662 employees at the end of the third quarter of fiscal 2013. We grew sales headcount 75% from the third quarter of fiscal 2012 and we hired fewer sales and operations support people than we had forecast at the end of the second quarter.

Our marketing and sales expense grew 61% from $16.6 million to $26.7 million compared to the year ago quarter as we continue to focus on building our sales team as effectively as possible and managing our growth in markets by territory to make sure our new sales force additions are productive. Product development expenses grew 19% from $3.7 million in the third quarter of fiscal 2012 to $4.4 million in the current year period. This continues to be an area of focus to increase our investment given the opportunities that we see ahead of us.

Our largest single expense category, content acquisition, was $65.7 million or 55% of revenues. Pandora ended the third quarter with $80.5 million in cash, cash equivalents, short-term investments, compared to $82.3 million for the end of the prior quarter. Cash used in operating activities was $878,000 for the third quarter of fiscal 2013 compared to $111,000 generated in the year ago quarter.

So, let me now finish with some thoughts regarding our guidance. Starting with the full year fiscal 2013, we are estimating total revenues to be in the range of $422 million to $425 million, or our growth at the midpoint of roughly the 54%. From a profitability perspective, we expect fiscal 2013 non-GAAP net loss per share to be between $0.09 and $0.12 loss. Fiscal 2013 non-GAAP net loss per share excludes stock-based compensation expense, assumes a minimal tax expense given our net operating loss position and is based on 168 million weighted average basic shares outstanding for fiscal 2013.

For the fourth quarter of fiscal 2013, we currently expect total revenue to be in the range of $120 million to $123 million. Non-GAAP loss per share is expected to be between $0.06 and $0.09 loss for the fourth quarter. Non-GAAP loss per share excludes stock-based compensation expense and assumes a minimal tax expense given our net operating loss position and is based on 171 million weighted average basic shares outstanding for Q4 fiscal 2013. Our Q4 '13 forecast assumes a reacceleration of hiring driven partly by the addition of incremental recruiting opportunities.

Now let me turn the call back over to Joe for final comments.

Joe Kennedy

Thanks, Steve. As most of you know, Steve is leaving at the end of this year and this is his last conference call with us. I can't thank Steve enough for his extraordinary contributions over the past three years. The systems and processes he has put in place and most important the strong team he has built, will continue to benefit Pandora for many, many years to come. We are very excited about the quality of CFO candidates we've been speaking with and we expect to announce a successor before Steve leaves at the end of December.

I'm excited for the coming year. We have a solid track record around product and tech innovations, growing our listener base and establishing ourselves as a mobile pioneer and leader. And as radio has shifted from terrestrial to internet, our share of the internet radio market has grown even faster. This is a tremendous foundation for continued strong growth.

With that, we'll be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Douglas Anmuth at JPMorgan. Your line is now open.

Doug Anmuth - JPMorgan

Just a couple of things I wanted to ask. First on the 4Q guidance, can you help us understand, I mean you talked about the fiscal cliffs -- I am sorry, advertiser caution actually, going to the fiscal cliff. Can you help us understand how much of the guidance in January is driven by that factor versus what you saw a year ago in January in terms of the weaker seasonality and sort of the lower premium sell-through rates and lower ad network rates from year ago? And then also should November and December be seasonally stronger months in the quarter, so that's part one.

And my second question, if you could just give us an update on the buy side platform timing. Do you still expect this to be integrated by the end of your fiscal year and should we think about the step up in terms of advertising as something that's more immediate or more gradual as ad buyers get more accustomed to the platform? Thanks.

Steve Cakebread

Sure. Thanks, Doug. What we're really seeing from advertisers, I think, has to be first understood in the context of again our fiscal year quarter is November, December, and January. And so what we've really experienced over the past couple of months is increasing caution from advertisers about macroeconomic concern, the fiscal cliff particularly in January. And that really is the difference between what we know now and what we knew three months ago when we last gave guidance. The visibility of January is never particularly good and the cautiousness surrounding January at this point further deteriorates the visibility and drives us to a more cautious position. As you suggest, November and December are seasonally strong months and we certainly expect a good November and December, but are very cautious about January at this point.

In terms of the second part of your question, we're excited about the progress that's being made in terms of the integration of Pandora into the buy-side platforms. As I think you know we've been very focused on integration into the two major platforms. One of them is going along great on a terrific schedule. The other one is going to be closed in terms of the end of the fiscal year. We're project managing it pretty carefully, trying to keep it within that time zone. I think there is some risk that it might fall a couple of weeks beyond the end of the fiscal year at this point, but again we're bringing a lot of resources to pull that in. And from an overall strategic standpoint, we really see the convergence coming together that we've been talking about for over a year.

Our market share is now over 7%. As I talked about in my remarks, we're putting the resources in place in at least 27 of the top 40 markets, and these by side integrations will begin to hit the market as we close this fiscal year and start next year. And that leaves us -- we're very well positioned. We believe to disrupt the radio advertising market in fiscal year '14.

To the last part of your question, in terms of is it a step function versus a gradual increase, I think virtually everything in business is gradual the nature of rollouts and adoption will be gradual. So we don't see some overnight huge step function. But definitely the foundation laid for significant growth in terms of our penetration of the radio advertising market as we move into fiscal year '14.

Operator

Your next question comes from the line of Scott Devitt from Morgan Stanley. Your line is now open.

Unidentified Analyst

This is [Jon] for Scott. I just wanted to ask about the $74 million in mobile revenue. Are you going to breakout -- are you willing to breakout advertising versus subscription again? And also we are wondering how much of a factor political spending was in the third quarter? Thanks.

Joe Kennedy

Yeah. Hopefully someone will run for me the breakdown of the Q3 ad revenue between, or the Q3 mobile revenue between subscription and advertising. In terms of political, political for the quarter in total across all platforms was about $6 million and about 5% of total revenue, pretty much in line with the relatively modest expectations that we had for political. In terms of the second part of that, let me just answer, the advertising revenue component of mobile was $66 million and the subscription component was about $7 million or $8 million.

Operator

Your next question comes from the line of Laura Martin from Needham and Company. Your line is now open.

Laura Martin - Needham & Company

I’d actually like to focus on this issue of desktop pricing falling. Could you guys just walk though again, Steve, maybe expand on a little bit why the desktop pricing came down so much? I’m actually very curious about that as a place to start.

Joe Kennedy

Maybe I’ll dive in more. I think fundamentally our focus is on mobile. Mobile is 77% of our hours at this point. And I think the drop in the desktop RPM really reflects the fact that we have the organization very focused on mobile, I think very successfully focused on mobile. We don't see anything fundamental in terms of deterioration of the desktop opportunity. We still believe that the $60 plus RPM that we’ve demonstrated on the desktop is potential that’s still there. But at this point from the standpoint of organizational focus we are tremendously focused on mobile. It’s probably leaving us a bit under-optimized in terms of desktop execution, but I think the results that we’re seeing in terms of continued mobile monetization progress merit the focus that we are bringing to in.

Operator

Your next question comes from the line of Rich Tullo from Albert Fried. Your line is now open.

Rich Tullo - Albert Fried

Since I'm only allowed one question, it shall be a run-on sentence. When you came across the guidance, it seems like your deferrals in the quarter are very strong. Deferred revenue is up, accounts receivable is up, which may point to some pretty strong confidence in the next quarter. Would you say that if it wasn't for the fiscal cliff, that you would be more confident in the quarter? And how much of the lack of confidence in advertisers is coming from, would you say, like the retail sector or the auto sector, if you have any color on that?

As well as one last question here is, when you get on to the new ad platforms, could you please walk us through and provide us a little color on how users at the ad agencies who don't really have access to Pandora now in a timely trading basis will be able to execute on that platform, as well as perhaps drive the desktop rates higher again as they have access to your inventory? And would you provide additional inventory to those advertisers as the systems come onboard?

Joe Kennedy

Sure, let me try and take those. I think there's three main buckets. One, I think you alluded to the deferred revenue and the accounts receivable. I think those really reflect two different things. The deferred revenue is really a function of our subscription revenue business. Again, the nature of subscription is that we'll frequently take cash before we recognize the revenue. And that's really the story on the deferred revenue line. And our subscription business is continuing to grow. We are excited about that and you can see that in the growth of the deferred revenue line.

In terms of the accounts receivable, that just reflects the growth in as we grow ad revenue, we grow accounts receivable, that's pretty straightforward. I think the second part of your question was about fiscal cliff by sector. I know the caution that we are seeing is not centered on any particular part of the advertising world. I wouldn't say that its uniform everywhere but it's significant across many of the advertisers that we work with. It's hard to speculate in terms of if the fiscal cliff were eliminated, exactly how much of that caution would go away, but certainly the combination of general macroeconomic concerns and certainly exacerbated by the fiscal cliff, particularly when it comes to January media planning. It's certainly in effect that we are seeing that has to leave us more cautious as a consequence.

I think the last part of your question on the ad platforms. I think the best thing to visualize, and we are now seeing screenshots of these systems as some of them are moving into to test mode, is really enabling ad buyers in the radio world to see data about Pandora, in many cases side by side and in identical format to how they have traditionally seen AM and FM radio stations as they go about researching and planning ad buys. And that's really just a tremendous win for us to have ad buyers in the radio world have that side-by-side comparable visibility with Pandora. And we do see that as a catalyst for our increased penetration of the radio ad market, of course enhanced by the additional sales voice resources that we are bringing and supported of course by the tremendously strong share position than we continue to develop in the radio world.

Operator

Your next question comes from the line of Nathaniel Schindler from Bank of America Merrill Lynch. Your line is now open.

Nat Schindler - Bank of America Merrill Lynch

I just wanted to get a little bit more detail on two things. I know it's one question but I will just use a run-on sentence to. One, the fiscal cliff, how much you usually know about January spend in November and December, or early December? And is this something that you would normally have more visibility to and it's really just falling off or is this usually just, is this just caution that you will have a problem potentially and you just don’t know yet.

Secondly, on a totally, in the same sentence but unrelated note, if you could go on talk a little bit if you can about how you have been trending on your interruptive or kind of audio ads versus display ads? And is that something -- have you turned on and sold through more of your sell-through on the audio ads on mobile, is that the real drive here or has it been better display? Thank you.

Joe Kennedy

Sure. Relative to the first part of the question. In general, visibility into January is difficult under any circumstance, just the fact that many marketers are still -- their heads are in finishing up the Christmas season and the calendar year Q4. So the typical position would be less than great visibility and the concerns about macroeconomics and fiscal cliff take that less than great visibility and deteriorate it significantly. So that really is the caution that we feel at this point.

In terms of the second part of your question, we've seen progress on both the display and the audio side. I think of the two we've probably seen more progress on the audio side but I think that the most important message is that our sell-through on mobile is up. Sell-through in terms of what we're able to sell ourselves directly at premium rates, and as a consequence we're now seeing mobile ad revenue grow faster than mobile listening growth. We anticipate that continuing in the current quarter and continuing next year and we think that's foundational to the kind of improvements that we've been talking about for some time in terms of the overall financial performance of the business.

Operator

Your next question comes from the line of Nat Brogadir from Stifel Nicolaus. Your line is now open.

Jordan Rohan - Stifel Nicolaus

Hey, guys. It's Jordan Rohan here. So, if the fiscal cliff doesn't play out as a dire confrontation actually, how much should we add back to what our expectation should be for the fiscal fourth quarter? And then a second question, can you comment on the competitive landscape. I know when we talked to investors on this issue they always bring up Spotify and the enormous valuation that Spotify tends to raise money at and other things like that. Clearly there is a lot of fundamental traction for Spotify. Do you see any evidence of that in your listener hours, I think people switching to Spotify and other things like that?

Joe Kennedy

Hey, Jordan. The first part of your question about if fiscal cliff is resolved how much we add back, that's really unknowable at this point. And I think it's obviously a function, just of not whether it's resolved but when it's resolved. The nature of media planning is such that we'd like to see media planning with respect to January going on now and the natural tendency of advertisers is to wait. So, I think if it's resolved then it's resolved soon then some money could flow back in to January. I think there is some risk that most marketers work off of calendar year quarter spending budgets and there is a natural tendency in the current environment to take the money budgeted for Q1 and to say, hey, I'm going to think mostly about spending that in February and March as opposed to spending it in January. And even in this scenario of a resolution of fiscal cliff, it could be that Q1 spending is more weighted on February and March than it is even typically the case. So, difficult for us to know at this point and hence the caution that you're seeing from us.

In terms of the second question about competitive landscape, again, we released the November audience metrics today. I think it continues an unbroken trend of continued growth in audience, continued growth in hours, continued growth in share, the consumers’ embrace of Pandora personalized radio continues at an extraordinary rate. We haven't seen evidence of Spotify or any other player affecting the growth that we’re seeing. There is some natural moderation in the percentage growth rate, that’s law of large numbers. But in absolute terms the amount of growth that we continue to see is extraordinary and I think continues to support the hypothesis that services such as Spotify are fundamentally complementary to Pandora just as Rhapsody, iTunes, etcetera have been for the 7.5 years since we first launched Pandora.

Operator

Your next question come from Rohit Kulkarni from Citi. Your line is now open

Rohit Kulkarni - Citi

Thank you for taking my questions. A couple of them. Can you talk about your content acquisition cost? They were down sequentially Q2 to Q3. Last couple of years they have been flat. Anything new or extraordinary you would point out there? And then on ad RPMs, on a TTM basis you said, I think if I’m calculating this right, for Q2 desktop ad RPMs were down 12% to 13%, mobile ad RPMs were up 12% to 13%, and now in Q3 desktop are again down 12% to 13% but mobile are up about I think low-single digits. Anything new or unusual you would point out there? Thank you.

Joe Kennedy

Sure. In terms of the content acquisition cost line, I think as you think about that line, I think you have to think about three different pieces that potentially drive change in it. One is, what the mix is of mobile versus desktops since we monetize those two at different levels. Mix shift to mobile implicitly ends up raising the content acquisition cost as a percentage of revenue metric. The second driver of the content acquisition cost line is obviously the rates themselves. The rates are subject to single-digit annual increases and so modeling those properly is important.

And then, of course, the most fundamental and long-term driver of content acquisition cost as a percentage of revenue is really what the fundamental monetization rate is on mobile and on desktop and really over the long-term it's the monetization rate on mobile that will be the ultimate driver of content acquisition cost. So, because of those various factors you see the numbers move around to the extent the overall total on a year-on-year basis content acquisition cost as a percentage of revenue is up year-on-year, that entirely reflects the shift from desktop to mobile. However, if you look at mobile specifically, because our monetization on mobile continues to improve and again I think very notably in this past quarter mobile revenue grew faster than mobile hours, that is really ultimately the foundation for improving the content acquisition cost as a percentage of revenue metric, and clearly that's our focus going forward.

In terms of the TTM, RPMs that you mentioned, I don't think there’s anything particularly micro going on in the details there. I think it's really a macro story of we are very, very focused on mobile monetization. We continue to see improvements there. We anticipate those improvements will continue in Q4 even with the reduced guidance and we anticipate that they will continue into next year. And that really reflects the success of the two strategies that we've been articulating for some time. One with respect to the interactive ad market and the other with respect to the radio ad market. And by and large, we see that as part of a continued trend. As I mentioned in response to a previous question, the deterioration in terms of desktop RPM is largely a function of the focus we will bring into mobile and certainly not a function at all of any deterioration in the fundamental monetization potential of the desktop.

Operator

Your next question comes from the line of Martin Pyykkonen from Wedge Partners. Your line is now open.

Martin Pyykkonen - Wedge Partners

Couple of things. If there’s any metrics you can split out on the mobile RPM back to the audio versus display. I was curious if there's anything that you can separate there in terms of the growth in mobile RPM or just even the total number? And then on the third-party metrics, the Triton in particular, I'm assuming that most of those metrics that advertisers are using in practice would be a little bit more to the audio side. Is that a fair assumption or is there a fair amount of the display parts that are relevant since it’s Triton Digital? Then I have one quick follow-up. Thanks.

Joe Kennedy

Martin, in terms of metrics, we haven't broken down -- we haven't released metrics that break down RPM further, not just mobile and desktop but then into subcomponents of audio versus display. I think that might get a little bit too micro quarter-in quarter-out. As I mentioned in response to a previous question, we've seen improvements in both. I think the larger improvement is as a function of the audio side. And I think from a strategic standpoint that's really the core takeaway at this point.

In terms of third-party metrics, I'm glad that you raised that. Certainly, we've talked a lot about the radio advertising market. Triton is the audience measurement currency, if you will, in the internet radio advertising world. It's their data that's getting integrated into the ad buying of platforms that radio advertisers use. Obviously, we remain a very substantial player in the world of digital advertising. I think many of you may have seen the comScore released data just in the past week as they move to systematic measurement of internet usage across desktop and mobile with integrated metrics. I think those metrics demonstrate the kind of position that we have developed in mobile. I think we were the fifth most highly trafficked application in the world of mobile and obviously with our hours data it's probably a pretty good guess that we rank even higher in terms of total engagement.

So as we go forward, I think it's proper when it comes to third-party audience measurement to think about Triton as really being the source that serves the radio advertising community and comScore, and to some extent Nielsen, continuing to be the providers who serve the interactive ad buying community. And the progress that comScore in particular announced and is rolling out, is exciting from our standpoint in terms of getting more and more data particularly about mobile into the hands of advertisers. And our position there is so strong that is only helpful to us in terms of that first part of the mobile monetization strategy that I talked about in terms of just getting more and more ad dollars from interactive ad buyers as they switch from desktop centric buying to buying that's more by platform and encompasses mobile.

Operator

The next question is from Michael Graham of Canaccord. Your line is now open.

Michael Graham - Canaccord

I just wanted to ask two clarifications and I have a question just on RPMs. The first clarification is, you gave in your 10-Q ad RPMs for both mobile and desktop for Q2 and today you just gave us total I thought for the quarter. Are you going to be giving us the add RPMs just for the quarter at some point is one question. And then, I may have got this wrong so I apologize, but I thought on the trailing 12-month desktop RPMs that you gave us, I just wondered if you could give us those numbers again because the way I wrote it down it seemed like the advertising trailing 12-month RPM was greater than the total trailing 12-month RPM. So, sorry for that, but I just wanted to get those straight.

And then, Joe, if I could just ask, as we move into next year, how are you thinking about the philosophy around profitability and specifically as it relates to how fast or slowly you think you can grow a sales force? Like are you willing or interested in adding a lot of salespeople aggressively early in the year, putting the business into a big loss making position but to sort of lock in future growth and maybe bring it in a little faster. I'm just -- how you're thinking about that framework for next year?

Joe Kennedy

Maybe I'll take the second one and Steve will line up the data on the first one. I think we've always articulated that we do the bulk of our hiring as the calendar year ends and the new calendar year starts. There’s many reasons to do that. It's when many of the best salespeople become available just because of the structure of their compensation. It also puts us in a position to train people and get them up to speed during the relatively slower part of the ad cycle and have them in place to be highly productive as we get into the media's part of the spending in the advertising world. And we continue to follow that basic strategy. We are expanding as I indicated into a number of markets and that will be a significant investment.

Obviously, historically Q1 or fiscal Q1 has been a loss that, as I talked about, reflects the fact that fiscal Q1 is typically late in terms of revenue on a seasonal basis but incorporates all of this investment cost that we make in expanding the employee force. I would certainly anticipate that this coming year will be no different in terms of that basic structure.

I think with the culmination of the market share that we've now achieved the integrations into the radio ad volume platforms that will begin to roll out and the sales force expansion, we will make our most significant investment yet in disrupting the radio advertising market and that will flow through the expense side as we start the year. But I think it really sets us up for considerable opportunity as the year goes on, and in particular sets us up for another strong year in terms of improving mobile monetization year-over-year.

Steve Cakebread

Yeah. So we will have all the RPMs in the Q and that will get filed in a couple of days, but for the quarter Q3 web ad, just web ad RPM was 58.03 and total web RPM was 56.40. Now this is just for the quarter. On the trailing 12-months, total trailing was 53.19 and ad was 55.18. We'll get those to you as well and they'll get posted.

Joe Kennedy

And that shouldn't surprise me, I think Michael you expressed a little surprise that the total was less than the as reported, and that really circles back to the story we told a little bit more than a year ago, that desktop subscribers tend to include really our heaviest users. And so when you think about subscription revenue on a revenue per hour basis when you look at that desktop centric subscribers, pretty heavy users. And we actually monetized with advertising a bit better than we advertised with subscription among that desktop heavy listening crowd. And that's really why we lifted the cap on desktop ad supported listening in September of last year. And, again, it's really fundamentally a success story of how far we've come in terms of monetizing the desktop experience with advertising.

Operator

Your next question comes from the line of So Young Lee from SunTrust. Your line is now open.

So Young Lee - SunTrust

Just curious, given the reduced guidance for Q4, are you still expecting the blended RPM rate to be about the same as last year as you said earlier in this year? And also, can you give us your perspective on how the Internet Fairness Act is being received in Congress?

Joe Kennedy

Sure. I think with respect to the first question, Steve can look at kind of the details. I think at the start of fiscal year '13 we said we expected mobile RPMs relatively flat and desktop’s RPMs relatively flat and some deterioration in terms of total RPM as a consequence of mix. I think as the year has gone on we have revised that and as is now apparent, we've actually made some pretty remarkable progress in terms of mobile monetization, again reaching the point where the mobile revenue growth is growing faster than the growth in mobile hours. There has been some sacrifice as a consequence in terms of the desktop RPM. And so I think really the story of this year overall is of some significant progress on the mobile RPM side and some deterioration in terms of the desktop. But I think that's really been the right tradeoff in terms of where our future really lies. Do you have anything to add on that Steve?

Steve Cakebread

Yeah, I think on the blended for Q4 last year to Q4 that we're looking at this year, it's roughly the same for Q4 to Q4.

Joe Kennedy

To the second part of your question, So Young, Internet Radio Fairness Act, I don't really have anything to add beyond what I said in the script. Again, we are pleased that in the midst of a lame duck session of Congress, we had a hearing of the appropriate subcommittee of the House Judiciary Committee. It was well-attended. The incoming chairman of the full Judiciary Committee led that hearing and indicated that he plans to further devote time and energy to the issue next year as the next session of Congress gets started. And we think that that's all good. It's a recognition that there is a very real issue here. We are certainly well aware that there's no assurance that there'll be any bill passed, but to get the active consideration of the key people in Congress is clearly a good first step in our view.

Operator

Your next question comes from the line of Jeff Houston from Barrington Research. Your line is now open.

Jeff Houston - Barrington Research

Could you talk a bit about your ability to monetize data within Pandora in new ways, such as providing different analytics and insights to the various players in the music industry? I think I read an article about some bands were able to look at Pandora to get suggestions about where they should hold their concerts?

Joe Kennedy

Yeah, we have begun to share some data with artists. There's a great story of I think with the lead singer of All-American Rejects came through sometime roughly a year ago and we shared the data in terms of the geography where that band has fans based on the Pandora data that we have. And it highlighted for them that they had an awful lot of fans in Salt Lake City but they had actually never performed in Utah, which they went ahead and did this past year. They were back here about a month ago and talked about how they had sold out performances of tremendously enthusiastic fans in the Salt Lake concert. So that was a pretty gratifying example of the power of our data.

We don't really see that data, you expressed the question in terms of monetization, I think relative to the revenue opportunities that we see, we have the opportunity to sell into $15 billion, $16 billion radio ad market on mobile advertising market that's projected to be comparable in size in four or five years. We don't see the data opportunity within the music industry as even close to that. I mean it’s many order of magnitudes less than that. So I think it’s fundamentally about us participating in and contributing to the development of the artists on our platform but I don't really see it as material from an economic standpoint.

Operator

Your next question comes from the line of Peter Stabler from Wells Fargo Securities. Your line is now open.

Peter Stabler - Wells Fargo Securities

I'm wondering if you could give us some color around the issue of data caps being implemented by the mobile carriers or at least them changing the structure of their context or of their contracts. I'm wondering, whether increased usage of users of streaming video from other sources could be at some point lending some pressure on them to cut back other streaming activities? Thank you.

Joe Kennedy

Peter, we haven't seen any indication of that. In fact if you look at the data just as we released it and look at the hours of usage per active listener, we continue to see a long-term trend of growth there. Obviously the percentage of usage on mobile continues to grow as well. I'm not aware of any feedback from our listeners that they are coming across issues there. As we have talked about at various times through the years, the Codecs that are used to deliver audio on mobile are extremely efficient. Most of our usage on Pandora is delivered at 32 kilobits a second, meaning that we are quite a small portion of any user's data cap. A user who is using Pandora 10, 20 hours a month even if it's all on 3G or 4G, is consuming just a minority of their overall data plan. So, we just don't see anything there that appears to be a threat to our continued development and usage.

Operator

The last question comes from the line of John Blackledge from Cowen and Company. Your line is open.

John Blackledge - Cowen and Company

Just wondered if you can give us a sense of your current salespeople per market, maybe what the optimal amount of salespeople for market would be? And also how the current sales staff compares to the large terrestrial players at this point? And then just a question on the ad revenue, just wondering what percent of ad revenue is generally booked as you head into any given quarter? Thank you.

Joe Kennedy

Sure. I'll take first part, maybe Steve can take the second part. Again, we sell into multiple markets. We sell into national advertisers. We sell into interactive advertisers. We sell into the radio market. I infer from the question that it's most focused on the local component, and again our local component is a part of our strategy to address the overall radio advertising opportunity which also has a national component. But if one looks at the local teams which are focused on local radio advertising, if you look at most of the big radio companies the Clear Channel, CBSs, typically it depends on the market, but to see a sales team that's order of magnitude half dozen sellers, is pretty typical. Somewhat more obviously in the very largest of markets and that number obviously is going down as you get into smaller markets.

In general, in some markets we're at that level, in most of the markets we're not at that level. We're in the process of continuing to grow in virtually all of the markets in which we exist. And as I noted on the call there is ten markets where we actually have the sales management in place but haven't made the first sales hire yet. So, obviously there is a significant amount of hiring to go on there. My understanding of the benchmark data is that the big radio players, I think the data point that I'm aware of is CBS has order of magnitude 1,200-1,300 sellers. We're obviously much less than that today. I think probably beginning to approach order of magnitude 100 in terms of local radio ad sellers.

I think our belief is over the long-term with the use of technology we can be somewhat more efficient than the traditional players in this business, but I think time will tell and we'll sort that out. I think what we do know based on the local radio teams that we have had in place for roughly a year now is that we know how to hire the right people, they know how to bring on the advertising clients that we're looking for, and that the economics of both local radio ad sales teams work just fine in terms of the model that we articulated to the Street when we went public in terms of total ad sales cost on the order of 20% of total revenue. So, as I said with our share continuing to grow, with the systems side coming into implementation, we're moving aggressively to position ourselves to take more and more revenue from the radio ad market and are excited about taking that step as we move into next year.

Steve Cakebread

So, with regards to visibility, as you guys are all aware the advertising business is pretty dynamic. People can cancel campaigns on a moment’s notice. We do try and feel good that we're looking four to six weeks out. It's that future in a quarter that gets a little bit tough. We work on an opportunity basis so we can’t see the stuff come and go, but it's tough to see out 90 days with the volatility and the dynamics of the advertising spend.

Dominic Paschel

Great. With that we are running over time. We realize we have left a number of you guys in queue. We'll attempt to rotate through analysts on future calls, but we look forward to continuing the discussion throughout the quarter. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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