Pandora's Earnings Show Improved Mobile Monetization, Though Cost Concerns Remain

| About: Pandora Media (P)

Pandora Media's (NYSE:P) stock jumped substantially in after-hours trading as the company beat Wall Street's earnings estimates when it reported its Q4 fiscal 2013 results. The reason behind the better performance was the continued improvement in mobile monetization. For the fourth quarter and full fiscal year, the growth in mobile revenues stood notably higher than the growth in mobile listener hours. As overall listener hours growth is slowing down, Pandora is diverting its resources toward expanding its sales team and selling more of its mobile ad inventory directly to advertisers. Although there is some pressure on desktop monetization due to the shift of ad dollars to mobile, it bodes well for the company from a long-term perspective. Pandora is battling high royalty costs, which are variable in nature, and gaining subscribers is not the solution. Pandora needs to sell more ads or resort to an ad-hoc or monthly subscription fee structure ultimately.

Monetization Trends Are Encouraging

For the fourth quarter, Pandora's mobile revenues grew by 111% amounting to over $80 million. On the other hand, mobile listener hour growth stood at around 70%. There was a clear improvement in monetization of the platform. Mobile RPM (revenue per 1,000 listener hours) increased from $20.15 in Q4 fiscal 2012 to $25.05 in Q4 fiscal 2013. If we look at the figures for the entire year, we see a similar trend. For the full fiscal 2013, Pandora's mobile revenues grew by 105% while listener hour growth stood at 89%, thereby increasing mobile RPM from $21.93 to $23.83.

Close to 80% of the total listener hours now come from the mobile platform for Pandora. The improvement in mobile RPM is a result of increased investment in the sales team and the slowdown in growth of listener hours. For the third quarter of fiscal 2013 (calendar 2012), the growth figures for Pandora's active users and listener hours stood at 47% and 67%, respectively. These figures have been steadily declining since then, amounting to 38% and 47%, respectively, for January 2013. A slowdown in listener hour growth is helping Pandora in direct sell-through of its mobile ad inventory. Earlier, the mobile usage was growing higher than the rate at which Pandora could sell ads. Since then, the company has invested significantly on building its sales force, which seems to be paying off.

While mobile monetization trends are encouraging, the downside is that desktop monetization has declined due to the shift of ad dollars to mobile. Mobile revenues are not completely incremental. However, from a long-term perspective, the improvement in mobile monetization will far outweigh the negative impact on desktop ad sales. Additionally, the content costs (as a percent of revenues) still haven't come down. It is critical for Pandora to demonstrate some improvement in this area going forward.

We are in the process of updating our price estimate for Pandora Media in light of recent earnings and will have an update ready soon. Our price estimate for Pandora stands at $9.75, implying a discount of about 30% to the market price.

Disclosure: No positions.