Pandora Media Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Pandora Media (P)

Pandora Media (NYSE:P)

Q4 2013 Earnings Call

March 07, 2013 5:00 pm ET

Executives

Dominic Paschel - Vice President of Corporate Finance and Investor Relations

Joseph J. Kennedy - Chairman, Chief Executive Officer and President

Michael S. Herring - Chief Financial Officer

Analysts

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Richard Tullo - Albert Fried & Company, LLC, Research Division

Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division

John R. Blackledge - Cowen and Company, LLC, Research Division

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Martin Pyykkonen - Wedge Partners Corporation

James C. Goss - Barrington Research Associates, Inc., Research Division

Michael Hickey - National Alliance Capital Markets, Research Division

Stephen Ju - Crédit Suisse AG, Research Division

Operator

Welcome to Pandora's Fourth Quarter and Fiscal 2013 Financial Results Conference Call. [Operator Instructions] Opening today's call is Dominic Paschel, Vice President, Pandora.

Dominic Paschel

Good afternoon, and welcome to Pandora's fourth quarter and fiscal 2013 financial results call for the quarter and year ended January 31, 2013. 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 these risks that could cause our results to differ from today's discussion, please refer to the documents we've 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.

For your convenience, supplemental information has been included in today's press release and detailed financials regarding RPM metrics that are available on the Investor Relations site.

Today's call is available via webcast and a replay will be available for 2 weeks, following the conclusion of the call. To access the press release, supplemental financial information or the webcast replay, please consult the IR section of pandora.com.

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

Joseph J. Kennedy

Thanks, Dom. Pandora continues to demonstrate and expand its mobile leadership with both listeners and advertisers. For the fourth quarter, total mobile revenue grew 111% to $80.3 million from $38 million in the same quarter last year, outpacing mobile listener hour growth, which grew 70% year-over-year.

For the fiscal year ending 2013, total mobile revenue more than doubled from fiscal 2012, growing 105% to $255.9 million, with full year mobile revenue growth also exceeding full year mobile listener hour growth, which grew 89% year-over-year. As a result of this success driving mobile monetization, total mobile RPM reached a record high rate for the year of $23.83.

Total listener hours for the quarter grew 53% year-over-year, exceeding 4 billion for the quarter, compared to 2.66 billion in the same quarter last year. For the fiscal year ended 2013, total listener hours grew 70% year-over-year, exceeding 14 billion compared to 8.2 billion in fiscal year 2012.

We continue to lead the market with aggressive listener hour growth, resulting in record market share. Pandora's market share of all U.S. radio as of January 31, 2013, also reached a high of 8.03%, up from 5.55% a year ago. As of this afternoon, we have also released February listener metrics and reached another new record of 8.48% share this past month, up from 5.74% a year ago.

Fourth quarter results exceeded the high end of our revised revenue and earnings expectations. Pandora's total revenue grew 54% to $125.1 million, and non-GAAP EPS was a loss of $0.04. Our mix of listener hours and advertising revenue continues to shift toward mobile. Listening on mobile and other connected devices represented 79% of total listener hours during the fourth quarter.

For the year, listening hours on mobile and other connected devices represented 77% of total listener hours. Web total RPM for the quarter was $52.82 compared to $56.22 in the same quarter last year. Mobile and connected devices total RPM was $25.05 compared to $20.15 last year. For the full year, web total RPM was $52.36 compared to $58.84 for fiscal year 2012. Mobile and connected devices total RPM was $23.83 compared to $21.93 at the end of fiscal year 2012. Mobile monetization continues to be a core focus, and we're pleased with the progress we've made throughout the year.

We remain focused on our mobile product as hours and ad revenue continue their shift toward mobile. Mobile provides national, regional and in particular local advertisers, the ability to reach listeners on their most personal and portable device, in their cars or on the go, wherever they may be. The $15 billion radio advertising market is approximately 70% to 80% spot radio ad dollars, and Pandora gives radio advertisers new and unique technological capabilities. Pandora's position as the #1 radio station in virtually all local markets offers local advertisers new options to reach their consumers such as targeting, interactivity and most important, measurability.

Our scale, coupled with Pandora's unique cross-platform advertising capabilities, has opened the door for Pandora to aggressively enter these lucrative national and local spot radio ad markets. Given our opportunity and unique product capabilities, our focus is not only on hiring salespeople but to hire the top performing people in those markets. We believe the best people, coupled with Pandora's unique advertising capabilities, will help deliver premium value and ultimately help us to unlock Pandora's disruptive power to transform radio advertising.

As we mentioned over the past few quarters, we've been working to streamline the radio ad volume process, with the ultimate goal of making Pandora ads as easy to buy as traditional radio advertising. On Tuesday, we announced that Pandora's audience data will appear in the 3 most popular media-buying platforms, including STRATA and Mediaocean's Donovan and Mediabank stewardship systems. These systems enable radio buyers to compare Pandora's audience data side-by-side with that of the broadcast radio stations they've historically used. STRATA and Mediaocean important -- import Triton Digital's webcast metrics local data into their software platforms, allowing radio buyers to view Pandora national and local audience ratings.

Prior to these integrations, radio buyers using STRATA and Mediaocean systems were required to manually research Pandora audience ratings. Radio buyers now have an easy and efficient way to evaluate Pandora's audience size and rankings to make informed decisions about their media mix.

STRATA integration was released back in mid-January, and all STRATA agencies now have access to Pandora audience data. Mediaocean is currently in beta release in a small number of agencies, with rollout expected to all Mediabank system users in mid-March and all Donovan system users by the end of April. With our #1 position in most local markets, the best sales talent in those markets and ad products, products that offer superior targeting, interactivity and measurability, we are well positioned to increase our share of this $15 billion radio ad market, both nationally and locally.

As we expand our audience, our mission to deliver music that people love anytime, anywhere they want ultimately brings back our focus to the artists and musicians behind the music. While we are keenly focused on monetization, mobile and increasing the size of our sales team, Pandora continues our total commitment to supporting and encouraging artists to connect with their listeners.

This year at Austin South by Southwest Music Festival, Pandora will host the second annual Pandora Discovery Den, where more than 40 acts are scheduled to perform throughout the week, offering live music to fans both in person and online via a live audio stream on pandora.com. Pandora's artist data played a key role in selecting the Discovery Den talent, which spans across all genres from Hip Hop to Rock to Americana. This diversified artistic programming, along with a mix of established and more emerging talent, is a reflection of Pandora's commitment to creating and improving the best personalized music experience.

Our mission has always been to help every talented artist regardless of their sound, regardless of their popularity, reach the audience that will love their music. Our dream is that audiences around the world can find the music that they love and discover new music through Pandora's personalized radio. The Pandora Discovery Den brings that concept to life in yet another way.

In summary, Pandora is executing aggressively on a large and growing opportunity as we expand our mobile leadership among both listeners and advertisers, demonstrated by the growth in mobile ad revenue at a faster rate than our growth in mobile listening hours. We are establishing a broad sales footprint with a high quality sales team to capture our share of the $15 billion radio advertising market. And it's an important milestone that our systems are now integrated into the media-buying platforms preferred by local and national radio advertisers and their agencies. We enter fiscal 2014 with -- in a strong position to increase our share of the radio advertising market.

We continue to redefine radio for audiences, advertisers and artists. We see tremendous opportunity to grow all of the key dimensions of our business this year. We remain excited about our future and believe we have just scratched the surface of our potential.

With that, it's my great pleasure to hand it over to Mike Herring, our new Chief Financial Officer. We are very excited to have Mike join the team. In the final stage of the selection process, we had 4 candidates that we all thought were exceptionally strong. And Mike was the first choice of everyone on the management team and the board. Welcome to the team, Mike.

Michael S. Herring

Thank you very much, Joe. I'm very excited to be here. So let me get started by walking through our fourth quarter performance in more detail. Pandora delivered fourth quarter revenue of $125.1 million, representing 54% growth from the year-ago quarter, above the high end of our revised guidance range. Advertising revenue was $109 million, a 51% year-over-year increase. Subscription and other revenue was $16.1 million and grew 74% year-over-year. For the year ended January 31, Pandora delivered $427.1 million or -- in revenue or 56% growth over the prior year. Advertising revenue was $375.2 million, a 56% increase, while subscription and other revenue was $51.9 million or 51% growth year-over-year.

It's important to acknowledge that as Pandora entered into the fourth quarter with limited visibility on ad spend, the company cautiously decreased the outlook. Following strong execution by our sales team, we saw better-than-expected increases in mobile advertising, particularly in audio ad units when compared to last year.

Our advertising revenue growth is directly impacted by our ability to monetize mobile listening hours. For the past 2 quarters, growth in mobile advertising revenue exceeded growth in mobile listening hours, reflecting our improving monetization of mobile content where 79% of our listening hours occurred in the fourth quarter.

Important metrics in understanding the dynamics of our financial model include RPM and LPM. RPM is revenue earned per 1,000 listening hours. LPM is licensing cost per 1,000 listening hours. LPMs are essentially fixed with annual increases, so the margin on the business improves as RPM grows. A cornerstone of our future success is mobile RPM growth, and that is why we are so pleased with our performance in this area. Fiscal 2013 total mobile RPM increased to $23.83 from $21.93 in fiscal 2012, and for the fourth quarter of fiscal 2013 reached $25.05.

As listening hours concentration in our ad sales focus shifted to mobile, web RPM decreased from $58.84 in fiscal year 2012 to $52.36 this year. Our total combined RPM for the year ended fiscal 2013 with $30.49.

For the fourth quarter of fiscal 2013, GAAP and basic diluted loss per share was $0.09. Non-GAAP basic and diluted loss per share was $0.04, excluding approximately $6.9 million in stock-based compensation, exceeding the high end of our revised non-GAAP EPS guidance by $0.02. Basic and diluted EPS were based on 170.9 million weighted average shares outstanding.

As we monetize mobile content and increase our top line revenue with a relatively fixed cost structure, we expect that an increasing percentage of mobile advertising revenue will contribute to the bottom line. We've experienced this in our web advertising business before, which is now performing at rates that are profitable to the company, and we expect a similar trajectory in mobile.

I joined Pandora because I'm bullish about the company's future and its mission to reinvent radio. Clearly, the company has made great progress attracting new listeners, growing listener hours and ultimately increasing its share of all U.S. radio to over 8%.

One of the questions that I asked before joining Pandora is what are the growth objectives and how is the company mapping against those objectives. I was pleased with what I found, and I thought investors would also like to know what convinced me to join.

Pandora focus on 5 primary growth objectives: first and foremost, to build the sales force. Pandora continues to build that sales force, expanding its footprint, including hiring the best local ad sales talent in the markets where we are at/or approaching #1 in market share.

Second, the company focuses on increasing utilization of its ad inventory. And the progress here was highlighted previously by the fact that total mobile RPM reached a record high in fiscal 2013 of $23.83.

Third, internally, we are maniacal about focusing on developing innovative and scalable products. In the third quarter last year, Pandora 4.0 was launched, offering listeners a better music experience with expanded functionality, a detailed personal music profile, diverse social sharing capabilities and other innovative features available on mobile for the first time. For advertisers, Pandora 4.0 offer -- also offered new capabilities, including, for example, unified sponsorships across all mobile devices.

The fourth objective is over the long-term, to expand internationally. In the second quarter of fiscal 2013, Pandora took an important step in expanding our service to Australia and New Zealand, and our user growth there has already outpaced user growth, population adjusted, in the U.S. at the same stage of its development.

And finally, our fifth objective is to expand distribution. Pandora is now available through more than 1,000 integrations, including on more than 760 consumer electronic devices and over 85 vehicle models.

So I'm excited to be here and especially excited about the progress we're making to achieve these growth objectives.

Moving back to results. Our single largest single expense category, content acquisition, was $76.7 million or 61% of revenue for the fourth quarter. For the year, content acquisition cost totaled $258.7 million, also 61% of total revenue. As revenue leverage increases, the percentage of our revenue paid for content acquisition will decrease, although the absolute dollar amount will increase with listener hours.

Starting this month, Pandora began to limit free mobile listening to 40 hours per month. This change will impact less than 4% of our mobile listeners and will increase the company's ability to manage usage growth and the associated cost of content. With Pandora's market share of more than 8% of all radio, U.S. radio, this is a proven targeted lever that will free up dollars for additional investments in our key initiatives. We believe we have the scale and financial model to execute effectively with the current content acquisition cost structure. As we drive this leverage, we will invest aggressively in growing our business, primarily through the initiatives that we've spoken about earlier.

As an organization, we increased headcount 40% year-over-year from 530 employees at the end of fiscal 2012 to 740 employees at the end of fiscal 2013. Our marketing and sales expense represented 27% of revenue in the fourth quarter, an increase of 63% from $20.9 million to $34.1 million compared to the year-ago quarter. We continue to focus on building our sales team as effectively as possible, managing our growth in markets by territory to make sure our new sales force additions are productive. For fiscal year 2013, total marketing and sales expenses grew 66% to $107.7 million from $65 million in the fiscal year 2012.

Our product development expense represented 4% of revenue in the fourth quarter, an increase of 44% from $3.6 million to $5.2 million compared to the year-ago quarter. For the year, our product development expenses grew 35% to $18.1 million from $13.4 million in fiscal year 2012. This will continue to be an area of focus and investment as we develop innovative and scalable products.

Our G&A expense represented 11% of revenue in the fourth quarter, an increase from -- of 43% from $10.1 million to $14.3 million compared to the year-ago quarter. For the year, G&A expenses grew 36% to $48.2 million from $35.4 million in fiscal year 2012. We continue to see leverage in G&A as we grow the business. As a percentage of revenue, G&A declined from 13% to 11% of revenue year-over-year.

Pandora entered the fourth quarter with -- ended the fourth quarter with $89 million in cash, cash equivalents and short-term investments compared to $80.5 million at the end of the prior quarter. Cash generated from operating activities was $8.4 million for the fourth quarter of fiscal 2013 compared to $1.9 million generated in the year-ago quarter.

I'll wrap up with thoughts regarding our guidance. Starting with the full fiscal 2014, we are estimating total revenues to be in the range of $600 million to $620 million or growth at the midpoint of 43%. From a profitability perspective, we expect fiscal 2014 non-GAAP net loss or earnings per share to be between a loss of $0.05 and a gain of $0.05. Fiscal 2014 non-GAAP net loss per share excludes stock-based compensation expense, assumes minimal tax expense given our net operating loss position and is based on 176 million weighted average basic shares and 199 million diluted shares outstanding for fiscal 2014.

For the first quarter of fiscal 2014, we currently expect total revenue to be in the range of $120 million to $125 million. Non-GAAP loss per share is expected to be between $0.13 and $0.10 for the first quarter. Non-GAAP loss per share excludes stock-based compensation expense, assumes a minimal tax expense given our net operating loss position and is based on 174 million weighted average basic shares outstanding for the first quarter of fiscal year 2014.

When it comes to guidance philosophy, we are a growth company, and our guidance reflects our growth expectations and the investments we are making to achieve that growth. Our guidance assumes that we will continue to execute well on existing programs. We are optimistic that recently announced initiatives like the limit on mobile listening hours and the integrations with Mediaocean and STRATA will have a positive impact on our ability to drive additional leverage in our business. Although we are optimistic about these initiatives, there remain new initiatives, and as such, we have limited visibility into the exact magnitude and timing of their ultimate impact.

Once again, I'm excited to be here and working with this inspiring management team and a very talented group of Pandora employees. I look forward to meeting our investors and analysts and discussing our business as we progress through the year. Before we go to questions, I'd like to pass this time back to Joe for some final comments.

Joseph J. Kennedy

Thanks, Mike. As you've likely seen by now, we're also announcing today that we've started the process of identifying a successor for me. I love this business which I helped create. My heart is still 100% in Pandora, and there's no opportunity I could be more excited about. But as I approach the start of my 10th year, my head is telling me it's time to get to a recharging station sooner rather than later.

I'm excited to continue to lead the company as Chairman, CEO and President, all the way through a great transition no matter how much time that process takes. We have strong momentum, especially with mobile monetization and a plan for the fiscal year that we're all excited about. We've got a terrific team all the stronger with the addition of Mike, and I look forward to continuing to lead them. With that, we'll open it up to your questions.

Question-and-Answer Session

Operator

Your first question comes from Doug Anmuth with JPMorgan.

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Two things. First, I just wanted to ask if you could comment a little bit more about the early feedback from the STRATA integration. And it's, in particular, just talk a little bit more about the education process that's involved for radio buyers now that Pandora will be included in platforms. And then secondly, if you could give us an update on the sales force build-out and perhaps add some numbers to it, overall head, whether you talked about 100 most recently, and the new 17 of the top 40 markets, if you could provide an update there, that would be helpful and perhaps your past [indiscernible], can you talk about through '13?

Joseph J. Kennedy

Doug, in terms of the rollout of STRATA and Mediaocean, it's early to have specific data in terms of the impact of those systems. I think as you said, one of the important things that we're going through is just the rollout. The rollout encompasses certain system elements, but also, we've worked very closely with both STRATA and Mediaocean to put together training because really, the key thing is not just to get the software into all of the agencies that are clients of STRATA and Mediaocean but to get the media planners and the media buyers trained in them. And I think we've had a good plan. We've been executing away. We've got great support and cooperation from STRATA and Mediaocean. We have agencies that are interested in that, and that's a core part of this rollout that we are well underway with but certainly not complete. In terms of the sales force build-out, at a high level, we are nearing completion of having local teams in the 27 or 28 markets that we really want to focus on this year. And we've done a great deal of hiring over the last few months. There's a bit more of that to go, but we feel good about the people that we have and the market opportunity that those 27 or 28 markets represent, and look forward to the impact of those people as they get fully up to speed in market.

Operator

The next question comes from Scott Devitt with Morgan Stanley.

Scott W. Devitt - Morgan Stanley, Research Division

Your February listening metrics looked quite strong and at 8.5% of radio, it was particularly strong relative to even the recent past, given that you were closer to 7% only 2 months ago. I was wondering, Joe, if you could just talk about some of the trends that are causing this meaningful change in share and whether the automobile segment is becoming a more meaningful contributor? And then secondly, if you could break out mobile revenue between subscription and advertising, that would be helpful.

Joseph J. Kennedy

Great. I'll let Mike and his team work on the second piece. I think the trend that you see -- and we were really excited about the [indiscernible] our trends in February. I mean, it's a short month, 28 days, even a comparable months last year was 29. I think you run any kind of metrics on that and it's a good story. And we're getting more listening per active user per day than we've ever seen before. I continue to believe that it's really the cumulative effect of 2 things. It's just continued improvement in the product, everything from continued investment we make in the core playlist intellectual property, the investments we've made in UI with Pandora 4.0 combined with, as you allude to, the distribution footprint of over 1,000 different ways for people to listen to Pandora on the go, in a car, in the living room. I wouldn't attribute the increase to the car, in particular. I still think that fundamentally, the continued penetration of smartphones across the U.S. population is the single most important catalyst, but we're also seeing tremendous growth in the living room, with TV devices as well and obviously, the news continues to be good on the automotive side. But yes, certainly the playlist, the product, the distribution footprint, they're enabling people to listen more different ways, and we're seeing that in terms of how often they listen during a month and how much they listen during a month. To the second question on sub revenue, I don't know whether we've broken that out or not.

Michael S. Herring

So in terms of -- I think you were asking specifically about mobile. And from an RPM perspective --

Unknown Executive

From the revenue perspective.

Michael S. Herring

Total mobile ad revenue, I believe it was around $80 million for the quarter.

Unknown Executive

Total total.

Michael S. Herring

Total total.

Joseph J. Kennedy

I think we've got -- so the total mobile revenue is $80.3 million, and that breaks down $70.8 million advertising and $9.5 million subscription.

Operator

Your next question comes from Laura Martin with Needham.

Laura A. Martin - Needham & Company, LLC, Research Division

So Joe, I'm really interested in 2 things. One is I really love this idea of capping the heaviest users on mobile. This has been a good idea for the last 2 years. What changed? Why now? How are you thinking about that, trying to limit -- did you just do a P&L per customer and realized those customers are costing you a fortune and you just wanted it to stop or? This has always been a good idea, so why now? And then I'm really interested, you really were right on top of our advertising estimate, but the subscription and other line was like 30% above where we came in. Could you talk about what you -- was it this extra sales force you were talking about in the quarter that had you come in stronger in that subscription line than you would thought? Why was that subscription line so strong in the quarter as it turned out?

Joseph J. Kennedy

Sure. The 40-hour limit is something that we did on the desktop back in 2009. And we did it for about 27, 28 months. We've always known that was a lever we could use to move between usage growth and the associated content cost on the one hand and monetization on the other hand. Why now on mobile? And I'd really highlight 2 things: one is the achievement of our share. We now have north of 8% share, in fact, just under 8.5% share with the February data that we've released. We now have the audience scale that's meaningful to national advertisers, meaningful to local advertisers, radio, interactive. We have that. We didn't have that kind of share and scale even a year ago, certainly 2 years ago. So we have the share that we need to penetrate all of the ad markets that we've been talking about without question. So that's the first thing that's why now. The second is really about the user experience. And the key, based on what we learned back in 2009, with the 40-hour limit is to give the consumer a great set of choices. These are people who love Pandora, they are our heaviest users. They love Pandora and we love them. In a world in which they would have to enter a credit card into a mobile browser, a 40-hour limit isn't a 40-hour limit, it's a 40-hour brick wall. What we've seen over the last 15, 16 months in terms of in-app purchasing capability is that it really is much more seamless and frictionless to pay things -- pay for things on mobile devices when you can charge them to your iTunes account, you can use Google Play to charge things on an Android phone. And so the development of that capability and our confidence in it enables us to offer this full set of choices to consumers, and we really care about that. Give them a great experience, they can listen on the desktop, they can pay $0.99 and continue to listen on mobile with ads but we get the $0.99. They can upgrade to Pandora One, do either of those things in-app, certainly some consumers are just going to manage their listener hours. So I think we can accomplish this business objective of working this lever on monetization on the one hand, usage growth and content, on the other hand, and put it in a very prudent way, manage appropriately the monetization of our heaviest listeners and still provide consumers a great experience and a great set of choices, and we're able to do that now and we couldn't say that a year ago or 2 years ago. That actually relates to the second part of your question on our subscription performance. We have been very pleased with our continued growth in subscription. And most of that subscription growth is coming on mobile. And it's a combination of our marketing efforts in product, our marketing efforts using house advertising and this seamless frictionless ability of people to charge that upgrade to their iTunes account. And we actually now also have integration into Google Play. So good numbers on subscription, and we're excited about the progress we're seeing there.

Operator

Your next question comes from Rich Tullo with Albert Fried.

Richard Tullo - Albert Fried & Company, LLC, Research Division

My first question is there seems to be a virtuous cycle between the mobile -- growth in the mobile, ad inventory and the uptake in that from advertisers and then on the other side, growth in subscriptions. I mean, am I thinking about this the right way that as you monetize more mobile ad inventory, just certain people will just opt to no advertising and pay you. It mean -- is it as simple as that?

Joseph J. Kennedy

I think the simple answer to that is yes. I think there is exactly that synergy between the ad-supported part of our business, and as we effectively monetize the advertising, which means a little bit more advertising load, obviously still dramatically, dramatically less than the 13 minutes of advertising on traditional radio. But it does motivate those people who are particularly sensitive to advertising to say, "Hey, Pandora One is a great value proposition for $3.99 a month or $36 a year." And I think it's synergistic. I mean, we even view it as an element of personalization of experience. You can personalize your experience and have it free and supported by advertising or you can personalize your experience and have no ads and be a Pandora One user.

Operator

Your next question comes for Jordan Rohan of Stifel.

Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division

My question is a little bit more on the listening caps. In particular, I'm interested on P&L impact. And I know this may just be a scenario analysis at this point because it's so early. But when you think about this on the mobile listening caps, do you expect more of an increase in revenues due to that extra $1 a month or $3.99 a month if you go to Pandora One, more of a decrease in costs due to a change in user behavior for the heaviest users or some combination of both? Which is going to be the dominant factor, and is that already in your guidance to some degree for revenues and profitability for fiscal '14?

Michael S. Herring

Right. So that's a very new initiative that we just launched, and you're exactly right, it -- we don't know exactly how it will play out in terms of curtailing listener hours the long end of the tail and thus, reducing cost or driving additional revenue options like subscriptions or the $0.99 extended listening feature that's also available. Since this March, it was launched on March 1, it's really -- we're in the first month of impact. Because it's new from that perspective, we don't have a major impact from that in our projections. And as that plays out, we will adjust our guidance accordingly.

Operator

Your next question comes from John Blackledge with Cowen and Company.

John R. Blackledge - Cowen and Company, LLC, Research Division

Great. A couple of questions. Of the 4% of users listening over 40 hours per month, just wondering how many hours that cohort group is listening to on average? And then secondly, the salespeople that you're hiring in the local markets, are they being picked off from terrestrial radio companies in those markets or from other local-oriented advertisers like TV or even outdoor?

Michael S. Herring

Well, just to address the first question, our users that exceed that 40-hour per month listener obviously are listening much higher than our average users per month, which is about 20 hours. So there's a disproportionate percentage that is applicable to that 4% related to the number of listener hours.

Joseph J. Kennedy

In terms of the sales force overwhelmingly the hires we're making on a local basis are coming from broadcast radio companies. Our focus is on hiring the best people with experience in that market. We found a lot of people who are just tremendously excited about bringing to the market a product that has target-ability, measurability and interactivity, something that they've never been able to offer to those buyers before, and combined with the scale of being effectively larger than any broadcast radio station in the market. So you see lots of people here with backgrounds from Clear Channel and Cumulus and CBS, et cetera.

Operator

Your next question comes from Nathaniel Schindler with Bank of America MD.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Just looking at your desktop ad monetization, it's been declining all year, and the declines on a year-over-year basis, seem to be moderating. But is that a trend we should expect to level off somewhere near these levels or is -- and what is causing that trend other than the lack of focus on the desktop?

Michael S. Herring

If I -- I think we are identifying -- really, what we're seeing is we emphasize the selling of mobile advertising within our sales force, both from an audio and a display perspective. That's just taking the emphasis away from the website. And that is driven mostly because that's where the opportunity is for salespeople was it's a much, much higher level of inventory available for sale, and therefore they -- and we'd like to monetize that aggressively and that is in often case our first priority. And so it's causing that kind of fluctuation in the web RPM. We don't expect it to continue in any specific trajectory, but rather probably flatten out about where it is today.

Operator

Your next question comes from Peter Stabler with Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Joe, could you talk a little bit about the demo splits that are garnering the most interest among your radio sales force? And any information you could give us on how your audience splits? You told us that Pandora is the largest station in any particular market, but buyers are really looking at demo splits, average quarter hour ratings and weekly cums when they pull their rankers. So if could you give us a sense of whether it's 18-24, 25-34, where the greatest demand is coming in, that would be very helpful.

Joseph J. Kennedy

Sure, Peter. Yes, the radio advertisers historically really focus the vast majority of their spending on the 25 to 54 age group. And so in terms of those traditional radio budgets, that's where we're seeing the spend. The good news is that's where the bulk of our listenership is so there's no fundamental issue there, and we can bring in terms of -- if you break us down to those demos, our position in the marketplace again in terms of the ratings, the scale, the share that we bring, is very compelling to radio advertisers.

Operator

Your next question comes from James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Two quick questions here. One, I was hoping you could give us an update on the progress on IRFA. I guess during the hearing in the fourth quarter, it sounds like it was moving towards kind of comprehensive reform, and then recently, there is some introduction of a legislation that Local Radio Freedom Act. Is there anything to glean from that? I mean, it seems like IRFA is tied to comprehensive reform and then Local Radio Freedom Act seems to be kind of a sign of solidarity to kind of protect terrestrial. Does this make it more difficult to get IRFA through in your mind?

Joseph J. Kennedy

I don't think so. I mean, I think the IRFA is a resolution that's been introduced to the best of my knowledge, I think, in every session of Congress for the last -- at least for the last couple. I think as you said, I think Congress persons and their staff who are in leading positions in the House Judiciary Committee continue to believe that royalties is an area in need of comprehensive reform. Reform, the goal of which would be a win for listeners, a win for artists and a win for innovative services. And we look forward to continuing to support their efforts to address those issues and achieve that end.

Operator

Your next question comes from Martin Pyykkonen with Wedge Partners.

Martin Pyykkonen - Wedge Partners Corporation

Two questions, if I could. Number one, on the kind of the national versus local, as you go forward, Joe. You mentioned the lion's share of where you're looking for hire wise come from broadcast, it's obviously more local, I think. But mobile, specific in terms of where you're at today, in terms of a campaign basis, can you give us a sense skew, one way or other, between national versus local and how that might, if at all, change as you go forward? I know you're not going to probably split out the exact numbers but is it a 2/3, 1/3, one or the other or greater, again, in terms of where the campaigns are focused? And then secondly, back to the systems and the integration, more in the marketing, the media buyers, is there a time frame you could kind of scope out in terms of where, again the lion's share of those media buyers would be completely fluent both technically, as well as the process of working with you on those systems in terms of your current fiscal year, if you can map that out a little bit.

Joseph J. Kennedy

To your first question, on the mix of our revenue national versus local, I would say still, our -- the revenue that we're reporting to you is still very strongly national. That said, the local component is significant and is growing as a percentage of the mix, and obviously, we see tremendous opportunity there. And we actually continue to be very excited about the national opportunity, but obviously, local is an initiative that really started last year and that we are accelerating in terms of our market presence, and as you allude to, facilitated by the system integrations with STRATA and Mediaocean. I think as Mike alluded to before, in terms of trying to peg exactly how big is the impact of those system integrations and exactly when it's going to hit, it's hard for us to discern that. We're doing all the right things in terms of the technology rolling out, the media planners and media buyers getting trained. We have salespeople who are calling on them. We have a terrific story in terms of our share and relevance, and we know that's all good news but tough to put specific magnitude and timing on that impact.

Operator

Your next question comes from Jim Goss with Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I've got a couple. One, I'm thinking as you're trying to target specific demographics, even the 8% share, which is really tremendous, still is less than some are probably developing and with regard to specific demographics. But are you able to offset that somewhat by the fact that you are -- your targeting does reach specific people in that demographic where the broader markets might be -- maybe a little less specific?

Joseph J. Kennedy

Yes, I think where I'll go with that, Jim, is that, well, radio advertisers do target demographics, as I said, very focused on 25 to 54. First of all, we've got a lot of listenership in those demos that people are looking for. But maybe the second part, I'm not sure whether you're alluding to or not, is the key insight that when you buy an ad on a broadcast radio station, it's not as if all of the people in the demo, all the people who listen to that radio station, hear that ad. The only people who hear that ad are the people who were listening at that precise moment in time. The flip side, the power of Internet radio in its unicast structure is that when you buy a demo in Pandora in say, the New York market, we can bring all of the listenership in that target demo to that advertising. And so the -- what I'll call, the effective reach of Pandora is dramatically higher than the reach of a single spot or even some combination of spots typically on a broadcast radio station.

Operator

Your next question comes from Mike Hickey with National Alliance Securities.

Michael Hickey - National Alliance Capital Markets, Research Division

Joe, I was just curious if you could give us a little more data on your departure. I'm definitely surprised and I know -- I understand the recharge part, but it seems like you've kind of hit an inflection point. You've worked through some issues and have really started to grow mobile, so is this something you've been thinking about for a while? Or is it just -- any more thoughts would be helpful. And also kind of what you're thinking about in terms of your successor, what attributes you would think would be key to that role.

Joseph J. Kennedy

Yes. I mean, I wouldn't say that I spent much of the last couple of years and the much -- the past 9 years thinking about when I would eventually move on, so this is pretty recent. I do think -- I feel -- there's no perfect time to do this. I do feel good about the business. I think we've turned a corner in mobile monetization. We have positive trends in all of the parts of the business. We have a great plan for this year. We have a terrific team only further enhanced with the addition of Mike. So you can't say that there's a perfect time for someone in my position to transition, but I think this year is a good time to do it. And again, I'd emphasize I'm going to be around for a while. I care passionately about this company, and it will be a plan this year that I'm excited to implement and then hand the baton to someone who can take the company to the next level after that and levels beyond that. My ambition has always been for this company, my ambition is actually not defined by myself. And I was telling that the company, when I announced this, that the true story that when I started almost 9 years ago, I made everybody who is in the company at the time, that's probably like 15 people, buy the book Built To Last by Jim Collins because I said, "Hey, what I'm about is building enduring great companies." And that's my ambition for this company, and I really just see my succession as part of that path to an enduring great company, where I hand the baton to someone who's fantastic and continues the path forward to the tremendous opportunity that we have ahead.

Operator

Your next question comes from Stephen Ju with Credit Suisse.

Stephen Ju - Crédit Suisse AG, Research Division

So Joe, anything you can share in terms of an average budget range that the incremental sales person hired can theoretically handle? And further, if there's a meaningful delta between national and local salespeople focus? And further, when you hire a salesperson from terrestrial radio, does the book of business that, that person brings on board to Pandora generally end up matching what it was on terrestrial?

Joseph J. Kennedy

Stephen, very tough question to answer because we hire lots of different salespeople, we're addressing different markets and different segments of the market. The book of business for someone who calls on local advertisers is different from someone who is a national network radio seller, which is different from an interactive seller. So it's tough to develop an average for those. I think the key is in every one of those cases, we believe that the economics of the hire are good for the company in a relatively short period of time, in all cases, most definitely paying back well within a year. In terms of the book of business compared to their predecessor company, again, I'm not particularly conversant in what they're bringing in. I think the opportunity we have as a company is to get our fair share of the overall $15 billion radio ad market, and that's what we're going after and we like the team that we have. The system's pieces are all coming together. We've got the scale and that's exciting.

Dominic Paschel

Thank you, Joe. With that, operator, that will conclude today's call. Can you please take us back to Pandora?

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