Pandora Media Inc. (NYSE:P)
Q1 2014 Earnings Conference Call
April 24, 2014 5:00 PM ET
Dominic Paschel – VP
Brian McAndrews – Chairman, CEO and President
Mike Herring – CFO
Jed Kelly – Oppenheimer
James Marsh – Piper Jaffray
Michael Graham – Canaccord Genuity
John Blackledge – Cowen & Company
Ralph Schackart – William Blair
Heath Terry – Goldman Sachs
Douglas Anmuth – JPMorgan
John Egbert – Morgan Stanley
Jordan Rohan – Stifel Nicolaus
Kevin Cassidy – RBC Capital Markets
Peter Stabler – Wells Fargo
Anthony DiClemente – Barclays
Nat Schindler – Bank of America
Corey Barrett – Pacific Crest Securities
Neil Doshi – CRT Capital
Welcome to Pandora’s Calendar First Quarter 2014 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, Pandora.
Thanks, Julie. Good afternoon, and welcome to Pandora’s first quarter 2014 financial results call for the quarter ended March 31, 2014.
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 direct comparable GAAP financial measures are provided in the tables in 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 are available on the Investor Relations site. Today’s call is available via webcast and replay, and 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 IR section of pandora.com.
With that, let me turn the call over to Brian McAndrews, Pandora’s Chairman, CEO, and President.
Thanks, Dom. And thank you all for being on the call today. I’m excited to share details with you regarding the first quarter of 2014 as we continue to execute steadily against our strategic priorities.
Today I’ll review our first quarter financial highlights and share more details about our activities over the quarter, and then turn the call over to Mike Herring, our Chief Financial Officer.
Let me begin with a couple of financial highlights. First quarter non-GAAP revenue reached $180.1 million, an increase of 54% over $170 million in the first quarter of 2013. On a non-GAAP basis, our first quarter net loss was $25.5 million or $0.13 per share compared to a non-GAAP net loss of $30.2 million or $0.18 per share for the first quarter of 2013.
Despite typical Q1 seasonal advertising headwind, these strong financial results were driven by increasing user engagement, rising listening hours and our continued focus on improving monetization.
Active users increased 8% year-over-year from 69.5 million to 75.3 million in the first quarter of 2014. And our listeners are strongly engaged as listener hours grew faster at 12% increasing from 4.26 billion in Q1 2013 to 4.8 billion in Q1 2014.
In March, we experienced our first ever week with over 25 million active listeners every weekday. We also had more than 26 million daily unique listeners every Friday in March for the first time in any month in our history. For contacts, last year that high water mark as 23 million. Importantly those listeners are using Pandora for record lengths of time consuming an average of 21.9 hours per active user for the last 30 days of March.
The strengthening connection with listeners was supported by recent product enhancements like our alarm clock, sleep timer and station recommendations platform. To highlight just one example of incremental impact these programs can deliver, people using our alarm clock functionality on Android are listening to Pandora 30% more days per week and 3% more hours each day than they listened prior.
Additionally, we continue to expand Pandora’s availability wherever consumers want to listen with the focus on extending access and usage in autos and consumer electronic devices. As an example of our progress, Pandora is now available in 10 out of 10 of the best selling passenger vehicles, and we now more than 5 million unique users active in Pandora through all of our native automotive integrations.
All of this has contributed to our increasing market share. According to our estimates which includes third party data, our share of total U.S. radio listening increased from 8.1% a year ago to 9.1% at the end of March.
Our focus on monetization has continued to lead the strong results. Total non-GAAP RPMs reached $37.55 in the first quarter, up 37% compared to the year ago period RPM of $27.41. Advertising RPMs maintained the momentum we built in 2013 finding 34% from $24.85 in the first quarter last year to $33.40 this year.
And mobile monetization growth was significantly stronger, as mobile advertising RPMs reached $29.46 in the first quarter of 2014 increasing 44% from $20.43 in the same quarter last year.
Bolstered by the momentum in our monetization efforts, we made some important program changes to optimize Pandora One, including a modest price increase for new subscribers which will begin to take a factor in Q2. Mike will cover the details during his comments. But I am confident that we will continue to deliver a high-quality ad-free listening experience at a competitive price.
For the landscape around content licensing remains a complex topic. We reached the important milestone related to content cost during Q1, with a decision in the ASCAP trial. In her ruling, Judge Cote, confirmed our longstanding belief that “Pandora is Radio”. An important finding was wide ranging legal implications for our company.
Additionally the court set a rate of 1.85% of Pandora’s revenue for the five years ending December 31, 2015, which was the upper end of our proposed range of rates. And this decision followed the court’s issuance of summary judgment in September 2013 which upheld Pandora’s right to perform more compositions in the ASCAP repertory.
As you may have seen just last week, multiple record companies filed suit against Pandora in the New York State Court, regarding our use of sound recordings prior to 1972.
To be clear, we paid publish royalties on these spins. But like other similarly situated companies including Terrestrial Radio, we do not pay sound recording royalties. Pre 1972 sound recordings represent approximately 5% of total spins on Pandora.
Additionally this work is already at Pandora store delivers significant value to artist beyond just royalties. Including access to more than 75 million monthly active users and exposure to a large precedent catalogs that go largely unheard Terrestrial Radio, in many cases helping extend the longevity of an artist’s career.
We’re limited to what we can say regarding these 10 litigations and we’re confident Pandora’s legal position on this issue.
Now I’d like to speak for a few minutes about some exciting activities and developments during the quarter that have continued to strengthen our brand and our business.
Our relationship with our users has always been a priority at Pandora and we truly delight in introducing listeners to new music they love and reintroducing all their favorites.
As an industry leader at the intersection of technology and media, we are at the heart of the action including in forums such as South by Southwest, where we demonstrate live what we do at Pandora everyday online and through connected devices.
At this year’s South by Southwest tested in March, we showcased 37 live acts over four days at Pandora’s Discovery Den and streamed the event live. There was online engagement of 20% from last year with 419,000 live streams. These events are in natural environment for brands to partner with Pandora, connect authentically with engaged users much as they do online.
This year’s Discovery Den was sponsored by major national advertisers including DIAGEO, Sony Pictures, Unilever St. Ives, Revlon, Alex and Ani, Esurance, Nordstrom Rack and Sprint.
To further engage listeners, to provide new opportunities for advertisers and extent our presence in the music community, we continue to host a series of live personalized concerts designed to connect fans with artists they love in a live setting. Pandora has the unique ability to determine the optimal artist for each city by analyzing the musical preferences in local listeners.
We kicked off the 2014 Pandora presents concert series during Super Bowl weekend, at the Bud Light Hotel amphitheater in New York City. This event was headlined by Grammy Award winners Imagine Dragon. Invitation for this event was extended to a targeted group of passionate fans with an Imagine Dragon station on Pandora, who are located in the New York Tristate area, and were 21 ages or over, 21 years older.
Because of the strategic partnership among Pandora, Bud Light and Under Armour, Imagine Dragon fans could watch the concert free of charge or tune into the live audio stream.
As one of the leading innovators in the music space, Pandora is always looking for new programs to drive value to our users, artists and strategic partners. In March, we announced two new partnership with Peet’s Coffee & Tea, marking the first time Pandora has featured partner branded radio station in a brick and mortar environment.
Peet’s will now have its own customized radio stations on Pandora, that will be played in all of its nearly 300 stores across the U.S. and will be available to all Pandora listeners. The partnership with Pandora allows Peet’s not only to refresh the music experience in stores but also to offer customers more music options, aligning with our own mission to help consumers find and enjoy music they love anytime, anywhere.
On the local advertising front, we had a few local markets in the first quarter and three additional that have come on in April for a total of 37 local markets where we now have a sales presence.
We also employed an inside sales team of about 40 people to cultivate local ad revenue in the remaining 239 markets. Along with this growth, our strategy to integrate Pandora into the measurements and metrics of the buy-in platforms used by local radio ad buyers continue to gain momentum.
While Triton’s Webcast Metrics methodology has been accredited by the Media Ratings Council for nearly three years, were signs to report the Triton Webcast Metrics local report which provides radio metrics like Hume and average quarter hours in local market, received full MRC accreditation in February.
Having MRC accredited in local audience measurement is a major milestone in measurements for Pandora and our advertisers. The feel of approval underscores the fact that Triton’s measurement methodology meets the highest standards accepted by agencies, clients and publishers across our various industries. More importantly, it validates that the local audience data we provide to our clients is reliable and effective.
Triton and Telmar also successfully integrated Triton Webcast Metrics local data which includes Pandora, into the Telmar planning tool, Telmar which provides media advertising services and software, widely used across planning agencies in the traditional radio industry joined STRATA and Mediaocean as Pandora’s partners working to help us serve the radio advertising market.
Traditional broadcast radio planners can now more easily recommend Pandora in their local allocations of budgets to the radio buying group and include Pandora in their standard operations and workflow processes.
The inclusion of Pandora measurements via Triton Webcast Metrics locally in Telmar is yet another positive indication that the demand for online radio in general and Pandora specifically is growing among the broadcast buying community.
As we plan for the next phase of our growth, I’m very excited to welcome new members to our executive team. Sara Clemens, a season technology, media and telecommunications leader with extensive experience building businesses across the broad range of markets, has joined Pandora as Chief Strategy Officer. And she will lead to the development of the company’s ongoing business strategy and corporate development, as well as the exploration of new initiatives.
Also joining us as Chief Human Revenue Resources Officer is Kristen Robinson, who will lead or talent acquisition, development retention efforts. Kristen has extensive expertise in helping build global teams for technology companies.
For nearly 10 years Tom Conrad served as Pandora’s Chief Technology Officer and Executive Vice President of Product, building a great team and leading the market in innovation. In March, Tom announced that he would be leaving Pandora after our transition period.
Tom’s efforts and accomplishments over the years at Pandora are greatly appreciated and he has earned a well deserved break. Fortunately he created a deep venture talent that will continue moving forward without losing momentum.
We’ve named Chris Martin, former Vice President of Engineering as our new Chief Technology Officer and Steve Ginsberg, former Vice President of Technical Operations as Chief Information Officer. And we have begun an executive search or a Chief Product Officer.
I’m very excited about the wide range of skills and experiences we have represented in the executive leadership team at Pandora. To sum up, we kicked off the year with strong momentum and as our first quarter demonstrates, we’re executing well across the three strategic priorities outlined in our last earnings call, growing listener hours, improving monetization and managing cost of content.
We’re excited about our role in the industry and our ability to leverage our leadership position to redefine radio for a connected world. We will continue to invest in our business while remaining focused on our strategic priorities to capture our full market potential. We’re off to a good start to 2014 and I look forward to the rest of the year ahead.
Now I’d like to turn the call over to Mike Herring, our Chief Financial Officer for more details regarding our financials.
Thank you, Brian. I’ll walk through our first quarter financials, discuss our business strategy and then finish with some thoughts regarding guidance for the second quarter and full year 2014.
Starting with revenue. We ended the first quarter of 2014 with non-GAAP total revenue of $180.1 million representing 54% growth from the year ago quarter, above the high-end of our guidance range.
As mentioned in our Q4 call, we now have sufficient operating history to estimate a reserve for in-app subscription returns and release to be accumulation of these previously held adjustments in the first quarter. As such, GAAP revenue of $194.3 million for the first – calendar first quarter of 2014 includes the one-time reversal related to the subscription return reserve of $14.2 million.
Advertising revenue increased 45% in the first quarter of 2014 to $140.6 million, compared to $96.7 million in the same quarter last year. Mobile execution continues to drive ad revenue and for the first quarter, mobile ad revenue was $103.1 million, an increase of 59% over $65 million in the same quarter last year.
Turning to subscriptions, for the first quarter, non-GAAP subscription and other revenue was $39.5 million, an increase of 94% over $20.3 million in the same period in 2013. Since its debut in 2009, we have offered Pandora One with $36 per year. And later a monthly option of $3.99 per month.
Over the past five years, content cost for this service has increased 53%. And in order to optimize our business in a market with increasing content cost, we are implementing changes to our Pandora One pricing, resulting in a modest price increase to $4.99 per month for new subscribers and a discontinuation of our annual subscription option.
Current monthly subscribers will be grandfathered at $3.99 per month for the foreseeable future and will not currently be affected by the change.
First quarter GAAP basic and diluted share loss per share was $0.14. Basic and diluted non-GAAP loss per share of $0.13, which excludes $14.2 million in revenue related to the subscription return reserve, approximately $17.4 million in stock based compensation expense and few hundred thousand in amortization of intangible assets, was better than guidance of a loss of $0.16 to $0.14. GAAP and non-GAAP basic and diluted EPS were based on 199.9 million weighted average shares outstanding.
EPS performance above guidance was driven by better than expected advertising revenue in March as the sales payments ramped into the New Year.
Our ability to improve our bottom-line is largely dependent on leverage, we can realize on content cost, which are significant. This quarter, Pandora paid more than $100 million in content royalties to right holders.
In 2013, Pandora contributed approximately half of the statutory royalties collected by sound exchange, making Pandora the single largest contributor of royalties paid to sound exchange among those in the global radio industry.
Our ability to drive leverage on these costs is driven by a central financial dynamic. The ability to drive RPM in essence of LPM was licensing costs with 1,000 hours. LPMs are largely fixed with annual increases and thus to the extent, RPMs expand, we are able to commensurately expand our gross margin.
This quarter’s results continued to reflect this dynamic. Despite content cost increasing in January based on the statutory rate schedule, RPMs grew faster year-over-year and thus for the first quarter in non-GAAP gross margins expanded from 18.7% to 32.1%.
To walk through the specifics, when measured on a non-GAAP basis, total RPMs within quarter grew 37% year-over-year to $37.55 compared to $27.41 for the first quarter of 2013.
Mobile monetization continues to show strong momentum with total non-GAAP mobile RPMs for the first quarter increasing 49% to $34.15 compared to $22.92 in the same period last year.
Total non-GAAP web RPMs for the quarter increased 17%, to $52.92 from $45.36 in the first quarter last year. This compares to LPMs for the quarter of $22.57 up 12% from 2013. That total RPM growth, including advertising and subscription revenue in excess of LPMs continues to be a cornerstone of our future success and our performance in this regard has been solid.
Turning to operating expenses. Q1 is typically a quarter where we hired aggressively in sales to set ourselves up for success for the year. This quarter, we added 56 quota-bearing sales reps to bring the total team to 328 feet on the street about 100 of which are in 37 local markets.
We are still adding salespeople in Q2, but the addition of sales resources earlier in the year is important as our sales team has historically ramped over the second and third quarters, fully ramping by the fourth quarter.
Turning to the balance sheet, Pandora has ended the first quarter with $445.9 million in cash and investments compared to $450.1 million at the end of the prior quarter. Cash used in operating activities were $2.2 million for the first quarter of calendar year 2014 compared to the $12.9 million used in the year ago quarter.
Capital expenditures were $11.8 million for the quarter, primarily driven by new office expansion and leasehold improvements in New York City, Los Angeles, Chicago and Oakland.
We increased headcount 47% year-over-year to 1,206 employees in the first quarter of calendar year 2014 from 820 employees in the same period last year, primarily the results of new additions to our sales team as discussed previously.
For the first quarter of 2014, non-GAAP sales and marketing expense revenue added 30% of total non-GAAP revenue and increased 59% from $33.6 million in the first quarter of 2013 to $53.6 million in the first quarter of 2014/
Non-GAAP product development expense in the first quarter of 2014 represented 5% of non-GAAP revenue, and increased 60% compared to the first quarter of 2013, from $5.2 million to $8.4 million. We now have more than 150 engineers working on the future of radio.
Our G&A expense represented 12% of non-GAAP revenue in the first quarter, and increased 64% compared to the year ago quarter from $13.1 million to $21.4 million.
Now, I’ll wrap up with thoughts regarding our guidance for the calendar year 2014 and the second quarter of 2014.
Starting with the full year 2014, we estimated non-GAAP total revenues in the range of $880 million to $900 million or year-over-year growth at the mid-point of 37% up from the prior range of $870 million to $890 million given on our quarter ended December 31 call in February.
We expect non-GAAP diluted earnings per share between $0.14 and $0.18 up from the prior range of $0.13 to $0.17. Full year non-GAAP 2014 earnings per share excludes revenue related to our subscription return reserve, excludes stock based compensation expense and amortization of intangibles, assumes minimal tax expense given our net operating loss position and it’s based on 227 million diluted shares outstanding.
For the second quarter of 2014, we estimate total revenues in the range of $213 million to $218 million or year-over-year growth at the mid-point of 36%.
We estimate second quarter 2014 non-GAAP diluted earnings per share to be between breakeven and $0.03. The second quarter 2014 non-GAAP earnings per share excludes stock based compensation expense and amortization of intangibles, assumes minimal tax expense given our net operating loss position and is based on 226 million diluted shares outstanding.
In summary, our growth strategies are working and we’re executing well across our strategic initiatives. We wanted typically an investment quarter where we hired drastically, primarily in sales and engineering and give return on those investments as the year progresses. And this year the business is usual.
As expected, the content cost increased 16% during the first quarter, yet we are managing to those cost to improve leverage and with the recent ASCAP rulings, have greater certainty on majority of our content costs through 2015.
We closed a strong quarter in an industry leading position and look forward to 2014 as we build on our momentum and execute the cost of our growth strategies.
And with that, we’re ready to take some questions.
(Operator Instructions). And your first question comes from the line of Jason Helfstein.
Jed Kelly – Oppenheimer
Good afternoon, this is Jed on for Jason. Just looking at your desktop RPM, it seemed to have pretty nice acceleration of 18% versus single digits last year. Is there anything extra around that like they could speak on to? Thank you.
Yes, this year we’re – the momentum we built in our advertising sales force last year, really carried forward into Q1. And so, the difference in RPM is really driven by sell-through rates and higher pricing that we’re able to maintain even in the seasonally third quarter.
Jed Kelly – Oppenheimer
Okay, thank you.
And your next question comes from the line of Robert Peck.
Hi, thanks for taking my question guys. It’s actually Matt in for Bob. First question, do you guys have any early data on the incremental lists that you’re seeing in listener hours for an existing Pandora user who is also adopts Pandora in auto?
So, that’s a great question. That’s not something we have focused on as an internal metric. Generally speaking, we see a bit of an integration. They’re listening as Pandora user increases around 20% that’s just second half of last year’s stat. So, I don’t have an updated version of that.
All right, that’s helpful. And then just quickly on guidance, the 2Q guidance if I look at the sequential move in last year, I think you were up sequentially about 35% of your guidance implies away about 20% for 2Q. Is there anything different in the calendar that would kind of impacts 2Q or push revenue from 2Q out into the second half of the year? Thanks.
So, no, actually the real difference is that Q2 last year is a tougher comp frankly. I mean, last year we made a lot of investments in Q1, we rolled out integrations in the Mediaocean and STRATA, hired a bunch of salespeople and started to see the beginnings of that in Q2.
So, from Q1 to Q2, we were just executing a lot better from a revenue perspective. And this year, although we’re escalating at a much higher level year-over-year, Q2 is going to be comparing against a quarter where we were operating more efficiently from an advertising sales perspective.
And your next question comes from the line of James Marsh.
James Marsh – Piper Jaffray
Great. I just wanted to talk a little bit about competition. I guess, really the nature of competition how that might evolve. I think like to date, most of your competition has been mobile and desktop and I think that gets one set of competitors and you guys have handled that very well.
But is it pushed into the corner, because of integration issues and other things, it seems like you’re less likely to see some of those competitors, and you’re more likely to see broadcast radio and SiriusXM. I just wanted to get a sense, do you guys think different way about your content offering and skill sets in the car when you think about buying this car?
James, I would say, in the short run though, and the sense that we think that our offering, we’re constantly trying to improve it and invest in the playlist technology and think of other ways to delight our listeners. And I think that would be consistent across devices.
Over time, there are things that might evolve in the car that might be – you need to the car, I think that’s certainly a possibility. But at this point, we see tremendous growth just to evolving our model consistently across different devices.
Your next question comes from Heath Terry.
Heath, make sure your line is not muted. Okay, operator, can we come back to Heath on the next question.
Your next question comes from the line of Michael Graham.
Michael Graham – Canaccord Genuity
Hi guys. Brian, on the last call you mentioned one of the strategic priorities for the U.S. to grow the listener base which was a little bit new. And you guys have 250 million accounts. Can you give us a sense for out of that 250 million relative to the 75 million there active, do you have a number that’s like a real addressable sort of market to go back and try to win back some of those centers.
And then, you didn’t talk very much about any efforts that you might be have underway in terms of marketing and try to go back and win back some of those peoples. So I just wonder if you could comment on that.
Sure. Yes, in terms of the numbers I would say, we think there is a lot of headroom there as you said, there is obviously a gap between registered users and unique users. But really what we’re focused on even more so, it’s just overall listening hours whether they come from new listeners or existing listeners. We think there is room in both camps.
And so, we’ve really focused more on creating, more of a focus internally on growth and retention. Historically, as you said we hadn’t spent a lot of time thinking about growth because it was coming very easily with word of mouth and in fact as you know, a year ago, we were actually in some ways worried about growth on the mobile device happening too quickly.
So, we just – as we get larger and you start to hit the large numbers, we continue to see what growth are very pleased with but we want to make sure we’re continuing to invest there.
So, things like the enhancements we’ve made in the listener experience, we think are very positive towards that. And we’ve seen as I mentioned in my comments, improvement already along those lines.
And in terms of marketing, we have increased our marketing spend. In the past, we primarily spent just on SEM. We have increased our marketing spend, we’re not doing Super Bowl commercials but we are investing in other ways, in ways we haven’t in the past. And for example, we are doing some advertising on our own Pandora, on our own content, we created some video and audio. And we’ve actually already seen some increased listening based on those as well.
So, overall, it’s a scenario that we’re focused on more simply because it makes sense to be a key strategic initiative over the coming years. We feel good about the way we’re – the direction we’re growing and the growth we’re seeing and we’ll continue to invest.
Your next question comes from John Blackledge.
John Blackledge – Cowen & Company
Great, thanks. I’m just wondering if you can give us the total audio in-car modes and minutes in the quarter, maybe the max per hour and the average in 1Q versus 1Q last year. And then, just a follow-up question, what’s the total in-car listening at this point as a percent of total listening hours? And how should we think about one pit or good hit critical mass in the car in terms of listening hours? Thank you.
So, I’m starting with the second piece of auto listening that we know is in the car, so it’s done through integration. It’s still low single-digit percentages of listening. There is, if you are listening using a phone and just a Bluetooth connection rather than a formal integration, we don’t know that you’re in a car.
And we think that our survey results show that probably if you include that type of listening, it increases the percentage 2x to 2.5x from where our integrated listening is or if not more. There is no way of knowing exactly what percentage that is at this time, is actually in the car.
In terms of ad loads and sell-through rates, last year we were at a maximum of four ads per hour. And this year we’re at six ads per hour and three double thoughts. And in terms of sell-through rates, sell-through rates are up pretty significantly year-over-year despite the fact that there is 50% more inventory available. The sell-through rate varies dramatically between various types of advertising but if you just start thinking in terms of audios, those sell-through rates are up around 50% is well year-over-year.
Your next question comes from Ralph Schackart.
Ralph Schackart – William Blair
Mike, historically you’ve given some directional guidance or some orders of magnitude on local rollout in terms of sort of quantifying it. Just curious if you could give us any color on this call, in terms of the ramp or how it compared year-over-year, any color that would be great?
Sure. So, we’ve added pretty significant number of local salespeople. We only added from Q4 to Q1, five additional markets where the total 37 local markets today up pretty significantly year-over-year about 8 year-over-year. And then we now have 100 feet on the street specific local salespeople spread among those 37 markets.
So, one way to think about that though is that the 72 local salespeople we had last year are now at full capacity in the 28 to 29 markets that they were in by the end of last year. And the additional 30 or so that have been brought on in Q1 and in the initial five markets generally come up to speed over two quarter period, so that’s by Q4 we are at full capacity.
And I think as we, and started January 1, with those 72 people in the 29 markets. And I think that spoke a lot to the momentum in advertising particular in March, in sort of revenue that’s coming in later in the quarter that we didn’t have – don’t have as much visibility in earlier the quarter because of the shorter sales cycles in local.
I do want to make the comment that we continue to hire sales people. We – kind of the primary time to hire is February 1 to about April 30 in terms of salespeople after they are finished with and paid out of the prior year and before we get too deep into the next coming advertising cycle. And so, we continue to hire people in April but by mid-quarter here in Q2 we should be fully staffed for the year in terms of QBSRs.
Your next question comes from Heath Terry.
Heath Terry – Goldman Sachs
Apologies for the dead there. Curious if you could give us an idea as we go through a bit more normal second quarter from a usage standpoint than maybe what we saw last year with the listener caps. From a sequential growth perspective, what should we be thinking about – should we be seeing sort of steady sequential growth in the – or month to month sequential growth in usage hours during this last quarter that you’re going to be reporting monthly usage?
And then if I may, in monetization perspective obviously, you’ve always taken pretty significant steps in Q1, with the additional sales people, and particularly going into the second quarter where you may have more ad inventory available to you with the change in the subscription pricing. How should we think about any sort of seasonality going from Q1 to Q2 from an RPM perspective?
So, Heath, thanks for the question, and thank you for bringing up the hours pacing. I mean, last year, we saw a dip in hours after March-April when the cap noble listening restrictions was put in place that’s 40 hours max for free listeners, it didn’t relent until September when we released that.
And so, this year we’d be not set to seeing step like that. And if you go look at historical years, it’s a pretty even increase in the first half of the year, kind of flattens out from an hour’s perspective over the summer. And then, increases again towards the back half of the year. So we could see a more normalized seasonal pattern rather than a big dip in hours in the middle of the year, we don’t expect that to happen.
A couple of things around monetization seasonality, the big difference between Q1 and Q2, despite having more inventory and more – something more out increase in hours over time. We don’t have January in Q2. So, from an advertising perspective, we get sort of the full three months of monetization strengthen.
And so, we feel pretty good about that, I think that’s a big part of it jumps from $180 million that we did in revenue in Q1 to the $213 million to $218 million were set in Q2. That amount of just pure dollars comes from both. Some might have been inventory growth and mostly much higher monetization in Q2 on those hours, because advertising piece is really kicking in.
I do want to just take that opportunity to say that, last year we saw a big jump in subscription numbers and revenue to a large extent because of recap, mobile listening from a free ad supported perspective. And that impetus to subscribe doesn’t exist this year.
So, subscription revenue would grow about slower through the year. So, our growth is really going to be driven by advertising and we expect advertising to continue to increase as a percentage of revenue over time. And so, subscription revenue to fall to total percentage of revenue by the end of the year of around 19% for the year, and that’s going to be a sound reflection of the ramp in advertising revenue we expect to see this year.
Your next question comes from Mason (inaudible).
Yes, thanks. Two questions, I guess on foreign market opportunities going forward, I know you’ve kind of used the term prudently opportunistic and so forth. I know licensing can be very complicated but you guys update in terms of against when you’re thinking like enter another market, how much of a priority of it is relative to the domestic growth so that you’re obviously focused on primarily?
And secondly, just a follow-up on that last question, when you get past the mobile cap comparison that’s relatively easier just at the end of August starting September, so the back half of the year. I know you can’t forecast or you would want to forecast, listener hour number. But you kind of commented if you expect fairly linear usage growth from there based on everything that kind of netting out as you get into that back half of the year? That would be helpful. Thanks.
Mason, I’ll take the first part and let Mike address the second part. On the international piece, I mean, it’s certainly something that we are long term interested in exploring and investing inappropriately. I would say right now we do think clearly there is a lot of low hang through and a huge opportunity in the U.S. given what we’re doing seeing the monetization growth that we’re seeing and how big a market in the U.S. is in terms of advertising.
One of the things that as I mentioned our new Chief Strategy Officer in my comment, one of the areas that she will be spending time on is new initiatives including international and beginning to better understand what are the different opportunities from a royalty standpoint over time. So I would say there is no specific timeline, no specific goals that they are at this point, we’ve really got focused on building what we have in the U.S. and then figuring out over time along with other opportunities we have, where other countries fall.
In the meantime, Australia and New Zealand are doing well. We started selling advertising in December, well over 1 million registered users now. And so that continues to be great learning for us and kind of a b-check for us to take that learning as we try to expand to other countries over time.
And from listener hour growth trajectory perspective, I think the way I understood is to expect listener hour growth to grow linearly through the year. There is some seasonality to it, I think I mentioned that in the summer, we kind of see it flattened out on a sequential basis and then accelerate especially towards the end of the year, I think in the holiday listening period we see hours grow.
We’ve been able to sustain that engagement in the Q1, which has been part of our momentum and success coming out of this first quarter. But it’s one of the reasons why advertising tends to lead backend weighted, not only is the market but very heated up for advertising in that period, everything from starting with back-to-school until the holiday period.
But the inventory levels are much higher in content like Pandora that are very holiday oriented. And so we’ll see like the percentage of our total advertising for the year, that we sell be closer to north of 30% of our advertising for the year to occur in Q4. I think historically it’s been around 31% to 32%. And expect that same thing for this year.
So, the timing of when that advertising dollar comes in, is somewhat seasonality affected, not just by the advertising demand but also by the pattern of hours consumption.
Your next question comes from Douglas Anmuth.
Douglas Anmuth – JPMorgan
Great. Thanks for taking the question. So, I think you guys you could just talk to formal integration of Telmar, how much of local is that covering, how much real is that? And then, also just on the actives number from 4Q to 1Q and a bit of decline that you saw there on an R&D rationale around that?
So, I’ll comment on the active number. I mean, we’re just talking about hours and the momentum of holiday listening. There is always a combination – there is always a burst of activity around the holidays, not just listening to holiday music but also people get a lot of new devices in that timeframe.
There is a reason why it’s such a big commerce period, lots and lots of new phones and tablets and TVs and all kinds of things where people are experimenting. And there is lots of different connections made in new hours and the usage done. I think the fact that we’re at 76.2 million in Q4 and at 75.3 million at this point in Q1, we consider that as a strong tailwind entering into the back half of this year from a user perspective.
A slight decline as you point out, but certainly not one that we are worried about at all, but in fact if anything we feel like, we’re building momentum from a user perspective and certainly from an engagement perspective.
And then the first part of this question at Telmar. Telmar really addresses the planning aspect of radio buying. It’s not competitive directly with STRATA and Mediaocean it’s complimentary. So we’re really filling in the various pieces of the buying workflow. And so, it’s really important from that perspective to have Pandora’s metrics integrated into that. It has – it’s much applicability though in national sales if it does into local. But it matters in particular for regional agencies that use it to plan spot buying.
Your next question comes from John Egbert.
John Egbert – Morgan Stanley
Hi, thanks. I was wondering if there are any plans for launching new types of ad formats or methods of ad targeting this year. And we’ve also heard anecdotally from some ad agencies that STRATA and Mediaocean, still might not be using all of the types of targeting that there could be. And it’s more of a system issue than it is on Pandora side. I was wondering if there is anything on that front that’s being improved either. Thank you.
So, I’ll start with the second part. Say, STRATA and Mediaocean are built around traditional radio buying. So it’s the basics of demographics, it’s age, gender, and then you use patient types in order to determine kind of some level of demographics whether you’re buying country music or rock music. And you get a natural sort of geo-location by essentially where – what counties these stations have a tower and what’s within 50 miles of that tower.
So, it’s very high level sort of targeting. And that’s what those platforms are built around. Pandora is because of our first party data we collected at registration, we actually have all that information in extremely accurate fashion. So it fits very well into the radio buying profile once converted into AQH and Q, and the metrics that radio buyers buy.
So we feel very good about how it fits into that the next generation of targeting. So if you want to get into specifics around targeting Hispanic voters or parents, first time parents and things like that. Those kinds of targeting segments certainly are not built into these platforms today. And those are sold outside of those platforms in more direct relationship.
Pandora has always been close to our clients from that perspective and are well suited to go have that consultant to sale with the agency or with the clients or equity to make that happen.
From a new ad formats in 2014, we’re always about the new ad format. We’ve started rolling out kind of basic experiments around doing things with the welcome screen and sponsors listening. And there is more to come on that. I don’t want to reveal too much for competitive reasons as people are trying to crack the code and what we’re advertising.
And I guarantee there is more than a few competitors wondering how Pandora does it, so well outside of the audio environment. We’re really proud of our innovation in that area. And there is going to be lots of good things to come this year.
Your next question comes from Jordan Rohan.
Jordan Rohan – Stifel Nicolaus
Hi guys, I have two questions. The first is, can you walk through why the logic behind – the logic behind why you can get judge it’s state that Pandora is radio, if I got that correctly applies to the future content cost discussions or arbitration processes and for that matter reference SiriusXM which I think may have also been classified as radio perhaps maybe not by this judge.
You mentioned Mike, political happens to some degree certainly at the local level senate gubernatorial and stuff like that this year. Is that factored into your guidance, I know it wouldn’t necessarily be as big as 2012 all else equal? Thanks.
Fair enough. I’ll take the first part and then let Mike answer the question you asked him. Just in terms of Pandora’s Radio, it’s important because judges of the need in the past, there is a difference between radio where someone doesn’t pick the specific songs and interactive where a person can pick the specific song.
And in the context of that catching BMI, Terrestrial Radio pays 1.7% and as radio and we’re now 1.85% and the ASCAP judgment whereas interactive services pay 10.5%. So, it’s an argument we made our long that we are radio and this judge clearly agrees with our argument.
Exactly, yes. And as far as seasonality from a political perspective, we don’t have a specific number built into that. We certainly have a go-to-market strategy from that perspective. You might have heard back in January, we talked a lot about political segments and our ability to serve with advertisers in unique way. We think there is opportunity there but those plans are still getting put together. So we have targets for Q4 that we are putting in front of our sales team to go hit that we believe are pushing them. And that’s one way they’re going to try and achieve those targets.
Your next question comes from Mark Mahaney.
Kevin Cassidy – RBC Capital Markets
Hi guys, it’s Kevin on for Mark. I believe you guys started advertising in connected cars during Q1. Any color on how this impacted Q1 results or is it just still too early to be material? Thank you.
Yes, so. We did start in January to serve advertising in connected cars that now 5 million activation that we’ve seen cumulative among connected, these are in-dash integration. Those were sold specifically to National advertisers out the gate, something we talked about in our last call. We didn’t give a specific dollar amount but we essentially sold out that inventory effectively for millions of dollars, it was a very successful campaign.
Advertisers really value being inside the automobile environment, as a captive environment, it’s something they know well from a radio perspective. The major brands that started launch with us and that were BP and Ford and State Farm, Taco Bell, people who know the national radio market extremely well. And we’re excited about that opportunity.
Your next question comes from Peter Stabler.
Peter Stabler – Wells Fargo
Thanks for taking my question. First of all, great news on Telmar, that’s a really important tool for media planners, I speak from experience there. Secondly, a question on programmatic and display, mobile display is feeling problematic in terms of execution probably faster than perhaps display.
I’m wondering if you could update us on your thoughts and the opportunity whether you guys think that you have a meaningful opportunity to increase effective pricing on your middle display inventory which seems pretty significant. Thank you very much.
Peter, I would say, certainly we see an opportunity in programmatic. I would say that in the market now we’re engaging in programmatic display in terms of the desktop. And that is where most of it is going on now, it’s still is early days in mobile for sure. We do think we haven’t quite an advantage there and heard the most players. And we are taking the opportunity to kind of like what we can learn in the desktop into a mobile environment.
And so, we do see an opportunity there over time. But I would still say, we still see it as relatively early. And again, most of the focus has been on the desktop in the market.
Your next question comes from Anthony DiClemente.
Anthony DiClemente – Barclays
Thanks for taking the question, just one also on automotive since the ad format in the car is all audio and a video. How do we think about that does this mitigate RPM growth as higher percentage of units are coming on at I guess a lower blended price, am I thinking about that the right way or is it, and maybe if the answer is yes, maybe just there are too few units at this point for it to make a difference in your overall blended RPM results for some time?
So, first of all the latter point is definitely true. And the word is, there is not enough inventory there for it to make a material difference in our RPMs as a company. But and there is some aspect, the first part of it you said it’s very true which is, because there is no display or video opportunity there, the total potential RPM is limited in automobile from the number of ad units or different types of ad units that have potential there.
There is a lot of other things that can be done however. Right off the bat, it is a premium CPM or premium price per point for the automobile advertising. So we get – we get a lift naturally there. And there is also an argument that we’re testing which is that in automobile, higher ad loads are more accountable to listeners because they’re just used to higher ad loads from Terrestrial Radio, not something that’s currently being rolled out, currently we run the same ad load which we that we do on regular mobile audio advertising.
So, that said, I think there is – it’s not material enough to factor RPM growth in the short term. In the long-term I think we have a lot of opportunity to solve monetization in the car. If you’re targeting through different types of monetization strategies including paid and listening inscriptions where traditional radio just would have only have just added more minutes of audio advertising.
Your next question comes from Nat Schindler.
Nat Schindler – Bank of America
Yes, hi guys. Just one question, I wanted to ask about the decision to remove or to stop giving the monthly figures. That data basically just comes from Triton, does it not? And if it’s just coming from an external source, isn’t it data that you would provide to advertisers anyways? Why remove it from your monthly reporting to industries?
Yes, I’m actually searching exactly why. And what we’re removing is, Pandora’s announcement of this data because its’ being essentially reported on by third parties effectively whether it’s striking to advertisers or ComScore 2 to the general public or to investors.
The need for us that to put these out independently, our own internal metrics is the need isn’t there. And so, rather than do that without to rely on third party metrics, which have more credibility maybe in the market. Certainly, from an advertisement perspective, our monthly internal metrics are of little value. They focus on Triton’s measurements and ComScore’s measurement and how they are relative to other competing services out there when they’re making advertising decisions.
That was the foremost reason. And those people who are tracking the number of unique users etcetera, ComScore publishes that – that’s every month Triton publishes the top 20 radio advertising properties with shared numbers etcetera. So the holy grill would be to have that side-by-side with Terrestrial Radio numbers. We would love to see that at some point and you advocate for it.
But in the meantime we think that the majority of our needs from a metrics perspective were handled by a third party.
Yes, and Nat, you’ve been covering us for the last three years. So, when we initiated it two years ago in March of 2012, the first time we put it out, it was with the original intent that it wouldn’t be lasting the perceptivity and just until the third party metrics were sophisticated enough to handle it.
Your next question comes from Corey Barrett.
Corey Barrett – Pacific Crest Securities
Hi, thanks for taking my questions. First, do you expect any noticeable return impact following the price increase in Q2? And then secondly taking sort of a longer term look at the auto and typically there is a delay between scaling usage and scaling monetization. How do you think about that delay trending as you scale in the auto, particularly in the sense that you’re going to be selling very similar adds to what you’re reselling on mobile?
Yes, I think we can scale along with usage in auto. That is, this is a matter of balancing the growth from usage per second, our growth and ability and our expansion of our ability to monetize it. Today, I think we’re ready to monetize it. We’re ready for that transition. And we’re going to be aggressively pursuing the growth of auto usage. So I don’t think that changes much if at all. So, if you really get about that piece.
And your last question comes from Neil Doshi.
Neil Doshi – CRT Capital
Hi, thanks for taking my questions. Couple of questions. On the cost side, we were guesstimating, but it looks like they’re publishing royalties enough a little bit. Is there more to come here or is that pretty much stable for now after the ASCAP position, if any agreements that you guys made, the BMI rolling?
And then on the CapEx side, it looks like that’s been picking up a little bit over the past couple of quarters. Any color there what’s been driving that up and how it’s picking to our CapEx? Thanks.
Yes, thanks for the question. Yes, so the cost in Q1, most of the increase, in cost were driven by increase in hours and a step up in sound recording fees that we paid-down exchange, the cash drawer increased.
There was an increase for sure and to some extent a one-time increase in just Q1 related to publishing payments we made to publishers around some direct deals that were acquired as the BMI case went through its convolution at the end of the year last year. We do feel like that’s been put back in the bottle through 2015 and feel good about it going forward.
But it takes a lot of management to keep those costs under control and keep those pieces in place. And we think really that we’ve got a lot of that behind us and looking forward to some time to execute here.
From a CapEx perspective, it definitely was a peak in CapEx, in fact that’s a drop now over the next three quarters. We have a lot of growth in headcount and we really needed to upgrade and expand our offices both in – well, New York, Chicago, LA and in Oakland.
And we’ve done that to handle growth now for the next year or a year and half, two years and so that was a bump up specifically and needful improvements to handle that growth. And so, that piece is behind now.
Neil Doshi – CRT Capital
With that, we’re a bit over-time. Julie, can you take us back to Pandora’s country – today’s country station.
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