After the close on Thursday, Pandora Media (P) reported some encouraging trends that sparked the stock higher in after-hours trading. The company though continues to lose money questioning the validity of any rally on whether meaningful profits will ever be produced.
The company is a leader in custom-radio internet services.
Even with competitors such as Google (GOOG) venturing into the online radio market, Pandora continues to trade towards the all-time highs around $20 back after the IPO in the summer of 2011. The question is whether this service has a profitable future.
Pandora has finally started reporting encouraging trends such as the following:
Subscribers surpass 2.5M: over 700K net new subscribers were added during the quarter to increase the total to 2.5M. The subscriber base grew by 114% year-over-year.
Revenue growth exceeds listener hour growth: revenue grew 58% year-over-year while listening hours only grew 35% year-over-year.
Mobile revenue growth exceeded 100%: mobile revenue reached $86.7M; growing 101% while listener hours only grew 47%.
Strong Revenue Guidance
The company provided this updated guidance for fiscal 2014 in the Q114 earnings report:
2Q14 Guidance: Non-GAAP revenue is expected to be in the range of $155 million to $160 million. Non-GAAP EPS is expected to be between ($0.02) and $0.01 based on 175 million basic and 196 million diluted weighted average shares outstanding for the second quarter of fiscal 2014.
Fiscal 2014 Guidance: Non-GAAP revenue is expected to be in the range of $615 million to $635 million. Non-GAAP EPS is expected to be between ($0.02) and $0.08 based on 176 million basic and 197 million diluted weighted average shares outstanding for fiscal 2014.
The revenue guidance was very favorable to analyst expectations of $149M for Q214 and $616M for the year. The earnings though aren't as impressive as the Q2 guidance is lower. The full-year earnings guidance is slightly higher at the mid-point, but any investors should have concerns that the company will actually meet earnings guidance.
Google A Threat?
Google is starting a $9.99-a-month online music subscriber service that some fear will take away listener hours from Pandora. Wedbush analyst Michael Pachter claims the streaming service called Google All Access is not a direct rival. Though Android Engineering Director Chris Yerga sees the product as an upgrade from Pandora calling the new service "radio without rules."
The bigger concern would be for Google to lower the pricing. For now though, the 70M active users of Pandora aren't likely to switch services for a cost of $10 each month.
While Pandora had numerous positive trends of being more productive with revenue per listener hour, it still saw the net loss increase by $4M over last year. With content acquisition costs sill as high as 66% of revenue even with the lower hours growth, the company is going to struggle to generate significant profits.
With nearly 200M shares outstanding, the market cap surged to over $3.6B in after-hours trading. The stock is over-valued until the income trends match the revenue trends.
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