Pandora Media (NYSE:P) will report its Q1 2014 results on April 24th. We want to remind investors that the company has changed its fiscal year to calendar year and that the results will indicate its performance for the three-month period ending March 31. Given the recently disclosed operating metrics, we expect strong revenue growth and an improvement in margins. Excluding the impact of seasonality, Pandora’s ad monetization is expected to go up, driven by the continued uptick in its mobile ad business. The company has come a long way in terms of creating a sustainable business model. We expect Q1 results to reinforce this development.
Our current price estimate for Pandora stands at $24, implying a discount of about 20% to the market price.
Continued Market Share And Listener Hour Growth
Pandora reports certain operating metrics on a monthly basis. The figures reported for the first three months of 2014 suggest that the company continued to gain share in the U.S. radio market. Even though there was a decline in the number of listener hours in February as compared to January, much of that can be attributed to seasonality. The Internet radio market share is a seasonally adjusted figure and gives a truer picture. Pandora grew its share both year over year and sequentially, ending March with 9.11% market share. While year-over-year growth in the number of listener hours was slightly less in February as compared to January, the figure picked up substantially in March amounting to 14%. This happened despite the active listener growth falling slightly, which suggests higher engagement.
Ad Monetization Will Continue To Improve, Seasonal Effect Will Be Visible
We expect ad RPM levels (revenue per 1,000 listener hours) to be up compared to the first quarter of 2013. There may be some sequential decline due to seasonality, as advertisers tend to divert disproportionate amounts of their annual budgets to the fourth quarter. Pandora has done exceptionally well in ramping up its mobile ad business. Its mobile ad RPM has shot up from merely $17.88 in the first quarter of 2012 to $36 in the fourth quarter of 2014. Except for the seasonality effect observed in the first quarter of the year, the figure has seen an impressive year-over-year as well as sequential growth over the last 8 quarters.
Pandora is improving its profitability, which has remained one of the biggest concerns around the company’s business. With royalty rates expected to rise each year, the company will focus on improving its ad targeting in order to command better pricing and selling more mobile inventory slots. Pandora states that its royalty rates have increased by 53% in the last five years and will go up by another 9% in 2015. Its subscription service under the name "Pandora One" is also seeing some traction, and the company recently raised the monthly pricing. The incremental profits from higher pricing, assuming that it doesn’t deter subscriber growth significantly, will further add to the bottom line.
Incremental Profits From Price Hike
Pandora has raised the monthly price of its Pandora One service by $1 to $4.99, making it the first price revision since the service’s launch in 2009. However, this move will not impact Q1 2014 results, but will have a moderate impact on the company’s full year performance. Subscriber ARPU (average revenue per user) will definitely go up meaningfully next year as most subscribers migrate to the new pricing structure. The price increase will directly flow down to Pandora’s bottom line. Currently, the company has about 3.3 million paying subscribers, which represents a small fraction of its overall user base. If the price increase of $1 were to be rolled out to all subscribers immediately, it will result in incremental revenues of close to $40 million. This will lead to cash flows jumping by a similar amount. This is a huge improvement considering that the operating cash flow was negative in 2013, according to our calculations. Going forward, these incremental revenues will see strong growth as we expect Pandora to continue gaining subscribers rapidly.
Disclosure: No positions.