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Pandora Media, Inc. (NYSE:P)

15th Annual B. Riley & Co. Investor Conference Call

May 20, 2014 12:00 PM ET

Executives

Lizzie Widhelm - Head of Digital

Dominic Paschel - VP of IR and Finance

Analysts

Sameet Sinha - B. Riley

[No formal presentation for this event]

Question-and-Answer Session

Sameet Sinha - B. Riley

Good morning. My name is Sameet Sinha, I am the internet analyst here at B. Riley. Very happy to have Pandora here with us. Thus we have Lizzie Widhelm, she is the Head of Digital; Dominic Paschel, is the Vice President of Investor Relations and Finance. So we are going to have the fire side format here. I am going to ask some questions for 15-20 minutes and we are going to open it up, we've got 25 minutes in all.

So, Dom, Lizzie, really appreciate you being here. This is the first time that Lizzie is coming to such an event. So, I'm going to start off with her, she has been a long time Pandora employee about nine years I guess?

Lizzie Widhelm

Yes, I'm in my eighth year.

Sameet Sinha - B. Riley

That's in digital year that's quite a bit actually. So was any suffer for this. I mean Pandora obviously has emerged from its origins to now obviously a big change what is the big culture of thematic change that has gone through especially because now the old guard has moved on and the new guard is here. So, what's the big change that you have noticed?

Lizzie Widhelm

Yes. And I think if you are having me in I'm excited to speak here about what I care so deeply about which is how we effects advertisers and how they can be successful within the Pandora platform and talking to our listeners. Some of the old guards transition in other parts of the company specific to sales, we actually have not had a lot of turnover, we actually just got back from our National Sales Conference in Palm Spring. And I spend a lot of time talking to the sellers that are new less than a year which we have a lot of them about a hundred hands went up, people that were brand new to Pandora. And then kind of comparing that against our five, six year anniversary sellers. And I think what's most exciting and what's piece of the fact I think there’s been a little change is they are so much passion for the disruption we are causing. I think that in the world of sales, all you have is yourself the reputation and getting excited about what you go out and talk about every day.

And the idea that we are taking radio and doing some things so new with it that we have the ability to target and drive effective ROI and make that guy selling metal off of as lot or pieces out of his front door, be able to see success is what I think is, maybe what’s changed is there is more success. And I get to talk to a lot of new marketers and we have a lot of new sellers. But in some ways in eight years, the passion I had when I signed up hasn't [altered]. I think that we're attracting a lot of the cool kids and they’re here not because it's easy or because it’s not going to be a challenge, but because we're doing something so disruptive and that’s [bundling here].

Sameet Sinha - B. Riley

So I was looking at your bio and saw that data and insight and has become -- of course has become a key part of Pandora now and that's part of the disruption. Just taking a different direction, what's the most funny insight that you've seen from that data until now?

Lizzie Widhelm

I did have your email address, so probably your musical tastes are some of the funniest things I’ve seen today, I mean Journey and Celine Dion on the same station. No. When I sit down with CMOs and in my role it’s been a lot of time; at that level helping them understand how do they follow the consumer, ROI models are different, the cookies crumbling, the way they measured in web has changed a lot. And so the insights we have around our listenership, the logged in user and how we can connect Celine Dion fans with them if that's they're looking for is it's a funny moment usually when they pick their head up and think oh my god this is just Americans and it's just music and this is new radio and I have a great opportunity here to work with you. But it's definitely everybody's taste being so different. And I think there is a funny story about a marketer coming in and he says we’re 18 to 34 and [Band Millennials] and the cool kids listen to this stuff and it's got stuffed like Coachella and we need to be there. And I said, well let’s just pretend you don't know your customer and I'm going to look and make some suggestions and we came up with a very different strategy based on the data, which I think surprised him, his consumer insights team kind of had it slightly wrong. So that’s fun and intelligence at the same time.

Sameet Sinha - B. Riley

So obviously the last several quarters Pandora has been about enhanced [targeting], what radio you, we can, down to small minutia. So what is I mean how are marketers reacting to this? I mean is that something that this is awesome and let’s just give Pandora some money or is it still a learning process at this point?

Lizzie Widhelm

It’s both. Yes, they are excited about the notion that right time, right listener is what drives ROI for them, they know that. So when we are able to offer them just morning drive against a breakfast offering which is something you have Taco Bell nursing here, so that’s what kind of put that in my head and then following that listener throughout the day, the notion of that is just incredibly powerful for them. Marketers all know, you don’t something once, your wives probably know that too right, like three times and it might get done. That’s kind of the same thing for media. So the ability for us to find the right listener and then follow them throughout the day with smart messaging is kind of a sure thing.

Sameet Sinha - B. Riley

Promoter stations started seeing it pop up, seems like a good ad unit, good sponsorship opportunity, how is that coming on? And is this primarily we targeted at national brands or do you think some local outlets will have access to it as well?

Lizzie Widhelm

Yes. So for those of you that haven’t seen promoted stations taking a step back, it’s a beta program that’s in play for us right now. And the way this kind of came about is over the last eight years that I have been here we worked with a lot of brands to create and curate custom content, right, stations that include a specific artist, that include a sound that they are looking to align with their brand. And so, the opportunity with promoted stations is to take that great content and distribute it against the wider audience. It is our first kind of native replacement within the [tenure]. We have one here? There is one here. So the experience would be you come, you load Pandora for the day, you go into your station list be intend is you are looking for music discovery, so we are taking advantage of that intent.

We have promoted stations that show up you can -- in this case Don has added [fee to be at] radio which happens to be talk about, and where the promoted station actually was within our recommended or on mobiles within our recommended area and on web it is at the top of station list, but really the net-net on it is benefit of great content music discovery promoted in the place where listeners are in that right mindset and then drive that listener into essentially 100% owned brand environment where that brand can in the scope of music talk about what they are trying to put forward in terms of our product.

In this case (inaudible) was jumping into Breakfast. Breakfast is owned by another competitor. So it was really important that they have a conversation about how their breakfast offering was different and so they are a beta partner for us. And we are in beta, so your probably next question is, is it successful, what’s the plan.

And all I can say is that the early work we have seen with the 10 brands we are testing is great. Our listeners are engaged in these stations and that ends up driving ROI for those brands, so we are excited to that product mature?

Sameet Sinha - B. Riley

Don, I am going to move over to you for a second. Obviously, lot of news emanating industry, everyone is kind of focused on what does it take to scale somebody, and playlist technology has been very sticky, the Music Gnome Project, but different flavors are emerging, Akon is talking about something then there is [human curation] that needs. So I mean how do you see this emerge, I mean all those newer technologies, is there how are you superior to that?

Dominic Paschel

Yes, when you look at the Pandora. Pandora's history, Lizzie has been with us now going on nine years. The technology exists from roughly ‘14 years ago, when Tim their original founder started to essentially look at musicological DNA of songs, you guys know that as the Music Gnome Project, that's really Pandora 1.0. Pandora 2.0 is really around the data. The 40 billion elements of feedback that we now have that have been carried overtime and make fee stations better than virtually any other type of station you would have, it's not static, it's dynamic, it's reflective on time, on culture all of that evolves and we do that at the scale that's unrivaled by anybody.

When you look at how music is consumed, 80% of consumption takes place in a lean back environment, historically served by radio that's roughly 240 million people in the United States that listen to radio on a weekly basis. That's ultimately the market we are trying to disrupt. There is a lot that takes place in the own music category, which is the other 20% of consumption that's the beat of the world, that's [Botify, that’s raps, that's monk] this of that as iTunes.

That’s the area where we generally haven't spent a lot of time focusing, because we believe the larger market opportunity is really in the lean back environment which is the $50 billion market opportunity versus that, say own music which last year was $8 billion $9 billion in terms of total sales. So, we think we're focused on the right area, we think we provide a product that is unrivaled by anybody and you see that reflective in the market share.

So, Pandora now has 9.3% of owned radio. When you look at what that means for internet radio, Pandora over the last 2.5 years has gone since we have been public has gone from about 50% of internet radio according to Trident, now to more than 78% of Internet radio. All the while there has been perception of competitive launches, the reality is the number of shows, Pandora is the dominant share of Internet radio.

Sameet Sinha - B. Riley

So I mean talking about adjacent industry that you are going after. Can you help us break down I mean, sorry, radio advertising dollar, significant $15 billion. But what are the specific aspects of the $15 million that you're [talking] and how?

Dominic Paschel

Yes, when you look at radio. Radio has contracted a bit from the peak of late-90s of nearly $20 billion. But it's growing now, it's growing about 2.5% competitive on your growth rate, it should be somewhere in the range of $15 billion to $18 billion over the next three to five years. We are taking our market share, we want to align that with the wallet share of what we get. Probably throw the ball Lizzie in a second just in terms of how we're growing that radio market, how we're essentially going to market. When you think of the key characteristics of what we needed to go after radio, we needed undisputed scale which we now we have.

So we took in the early years of Pandora when essentially with financial press we are painting Pandora as a victim to our listener hours that was a conscious investment in our scale to be the number one radio station in Los Angeles, New York City, Chicago. The second component was to get that measured. Arbitron was eager [MSO] and measure us partially because of some of the conflicts of interests they faced from their customers into our broadcast radio.

And then finally the third piece was really about getting that data, Trident data integrated into the radio ad buying platforms like, STRATA and Mediaocean which we accomplished roughly a year ago. And now in the Planix offer for radio so you can buy WPAN or KPAN depending which side of the Mississippi you are on. You can buy it as easily as radio. An investment we have the fourth kind of puzzle piece which was invest in the sales team on the local side. We’d always been investing on the digital side, but now we had all the tools in place for the radio sales reps to be successful on that. And really the 5th and final piece of the puzzle is just how do you change inertia, how do you change the way buyers are buying, even getting them to move from Z100 to Pandora? Lizzie, I don’t know if you have any observations from those?

Lizzie Widhelm

Yes, I mean I think our approach was to two pronged approach, so the quantitative approach when we would -- the world of radio has brought slightly interest in their strategy, planning and buying and that’s kind of the food chain. And if you just get to the buyers all they are doing is negotiating rate, they are not having a qualitative conversation. So we worked really hard at the strategy and planning side to speak through what Dom was referencing, what was consumer sentiment around radio, where were the consumers moving in terms of internet radio, how much of this space did we own, would dive into individual markets because again in radio they buy by market. There is not really that many strategy or planning people out there that think of the nation, they are thinking of I have to buy LA, San Francisco, Seattle. So, we would dig into what the qualitative or excuse me what the quantitative outlook was just in terms of what Americans were doing in those markets.

So that helped to get us on the buy. Then we needed to get share and we needed to understand how we would get the most opportunity in those markets. And so we took the qualitative approach. If you listen to terrestrial radio and you listen to Pandora, it’s a very different ad load; it’s a very different advertising experience as it relates to audio. I think we could argue that it’s a better opportunity in terms of your ad being hurt. It’s probably not going to get changed the station, right. So just the measurement and not guaranteed delivery with such a better quality story that the combination of those two has worked for us. And then relationships which is the local marketers, the average expert in radio has been doing it for a long time, so to have that relationship and that trust to say look, this is new, but it is not that scary, it’s just consumers are changing. Your son or daughter, your husband or wife, they’ve changed their behavior, there must be a lot of other people and it’s worked for us.

Sameet Sinha - B. Riley

So, (inaudible) to my next question, when you talk about advertisers and how they look at it. Now where are they in terms of the awareness curve of Pandora? I mean is it, do you have to adapt to how they do business or either where are you in the adopting curve at this point?

Lizzie Widhelm

It depends on the market, I think as it relates to radio, we are adapting. We’re one of a lot of places they can spend their money and we want to be conscious of that and respectful of that. So that’s probably a little bit of being better than but looking a little bit more like the competition. And in the digital space, I would say more often they’re lenient to us saying let’s think different, like you have this massive audience and you are at scale, you have a really unique product, you have this lean and experience across platform when someone’s opening the Pandora app, now I think we can all remember Myspace homepage or AOL homepage and these are big opportunities for marketers to reach a wide spot of America.

The cross platform homepage is someone opening their app, right. And we have that great opportunity to drive significant ROI there. So I’d say their most marketers are thinking differently which is nice. That wasn’t happening for me six years ago of course, but we’ve delivered, I think we’ve hired great people and we have really good research to backup why the Pandora listeners are good consumer for them [speak to].

Dominic Paschel

Yes. And I think the evolving landscape, as we see the shift from desktop to mobile and now to the internet of things tells me that the way mobile was a big topic over last two, three years to street, I think it’s going to and advertisers, I think the next medium of that will be internet of things where Pandora arguably is probably on the forefront of that. We now get approximately 15% of our monthly 1.7 billion hours are now coming from that other category. So, Lizzie has unique insight in terms of where she oversee as we move from that, take this shift from desktop to mobile and even farther. I know we were talking about it at breakfast this morning, some of the insights that you’ve seen and the benefits that Pandora has as it relates to the new wave, the new medium of advertising.

Sameet Sinha - B. Riley

So, when will my (inaudible) to me?

Lizzie Widhelm

You know what your refrigerator can think to you. We have a refrigerator that’s trends Pandora and energy cozy, so the combination of the two seems like a party. But yes, I think that -- again sit with a lot of marketers, I sat with one yesterday and he said I think I'm finally at a point where I don’t care where these moms are. And I just need moms and I -- you can with the power of logged in user, with the way audio is needed to the experience reach them in a place where they are comfortable, whether that's their refrigerator streaming Pandora, the Samsung connected TV, their brand new car, that wires Pandora, is that a mobile budget; is it a digital budget; is it a radio budget? I think we're getting to a point where they realize it is a matter; it's the ability to reach the right consumer at the right time and then drive ROI. And that's been next thing we're working through its marketers is attribution in this internet of things, where it's just slightly more challenging to measure in-store purchases and in-store visits and all that kind of fun stuff that was easier in the world of web desktop.

Sameet Sinha - B. Riley

Sure, definitely getting complicated. Let's in terms of its -- we have a few minutes before we go into Q&A, so let's talk to few numbers. We obviously saw the last quarter RPMs moved up nicely next couple of quarters, I think we are going to see tough comps. What is different this time versus last year that's creating these tough comps?

Dominic Paschel

Sure. Pandora over the last 18 to 24 months is really engaged in tuning the financial model. Once we talked about Sameet that we want to victim to our listeners, but we're investing in growth. We do operate within kind of the multi-varied equation when you look at kind of puts and takes associated with hours growth, with monetization. All of those because we pay for every hour that is streamed, there are tradeoffs that we have to make.

So about a year ago, we decided to cover the growth of hours in favor of taking the gross margin leverage there and reinvesting in the core of the business so been able to hire the 100 plus sales new faces that Lizzie saw over it at The Sales Kickoff Conference. We made that conscious decision, that governed hours by about 10% and so you saw that really hit in Q2 and Q3 of last year. As a consequents, the couple of things happen, it push users to become subscribers for those that would hit the 40 hour cap, so we drove nearly 1.2 million subscribers which obviously resulted in subscription revenue increasing in Q2 is up 151% last year for the year is up 135% in total.

That was one consequent. The other was that we're able to govern the hours on the denominator of the RPM equation for those that are not familiar of RPM, it's revenue per thousand hours, you basically take your inventory times, your CPM, times your sell though divided by your hours and that results in your revenue for a thousand hours. And so as we started to get control over those hours, the RPM decline grew roughly 40% and 50% depending on which quarter you look at last year and that's great, that means that we were, the success of Lizzie’s sales team was taking into place all the initiatives we had as it related to local all that started of work in on favor.

Once we reached a point of monetization in the mid $30 level, we then did not need to shift users to become subscribers because when you look at the profitability of each cohort they basically became equal at that level. And as the success of the ad sales team continue even further then you have kind of a level where your contribution margin as an ad support of listeners start to become higher. And so that’s when we started to contemplate given that cost had risen 53% on subscription then we decided to raise subscription pricing as well to help offset some of that cost and then also to allow for the opportunity cost between an ad support listener and a subscriber to not give us more headroom there.

We removed the cap in September of last year, we also learned how to fine tune the model so we instituted in June of last year skip limitations and time outs. So we are able to reduce the impacted audience from less than 4% to less than 2%. So allowing for a better consumer experience with some level of governors in control. As we lap that one year you will see kind of what looks like a reacceleration of hours and you saw that in the April figures in January and in February the last two months, the 12 month period you saw hours grow 11% in January, 9% in February and you saw the reacceleration in March growing 14% and then 30% in April.

Now that’s a good thing because the way you ultimately maximize the value of Pandora would be to, that’s [weighing] economic power that Lizzie’s team can go out and sell. And so at this point in our stage, in our lifecycle we want to grow those hours as much as possible. And we have the fortune of having an extremely viral application, if you think about it Pandora’s app activated on one out of every two smartphones in the U.S. and we fully expect to grow hours, continue to grow hours, we fully expect to continue to grow hours, we fully expect to continue to grow active users because we have a very large addressable market here in the U.S. Internationally that’s an option for us as well, we just hired a Chief Strategy Officer, Sara Clemens who shall be focused on how do we continue to increase hours, active users and hours per active in terms of engagement.

Sameet Sinha - B. Riley

I think we have about two minutes for Q&A, so is there anything in the audience? Just go ahead.

Unidentified Analyst

(Inaudible).

Dominic Paschel

Sure. So the question was about in the car for the webcast. And so Pandora is essentially is the leading application in the U.S. auto fleet. I mean we’ve had relationships with them now going back seven, eight years. And so Pandora is available on a 135 different models. We have 5 million unique activations. We believe that to be a massive opportunity that’s where half of radio is consumed. We are not going to have necessarily the digital app opportunities, but we will have the native audio app ad opportunities. That will scale over time. The replacement cycle for a phone is one out of every 18 months; for cars it’s one out of every seven years, but that’s nice layered growth that will continue to add to Lizzie’s inventory. She is a crazy driver and I have some experience but we make the application pretty safe in the car which is great. And then from an audit how do you see it evolving?

Lizzie Widhelm

Yes. So we launched with our six partners in car, yes. You can go back and look at that announcement from January. And we are going to ramp that up as move into back half of the year. I think from an advertiser lens, the most exciting thing for them is that the use case combined with our native audio product is allowing them to have a lot of creative fun. We’re working with the brand that’s going to launch back half of the year, that’s going to run maybe up to eight different spots and targeting different spots to men versus women based on what they sell. That's a first for in-car. There is not logged in user base in the car outside of Pandora that has even the scale we have. And so being able to customize messaging, it's a huge opportunity, because the most intimate place and often where Americans are alone is in the car. And so that recall more finding is a really positive thing that will create a lot of opportunity there for us.

Sameet Sinha - B. Riley

I think we're probably out of time at this point. Lizzie and Dom I appreciate it. And if we have any follow up question.

Dominic Paschel

Yes. Follow us, we’ll be up.

Lizzie Widhelm

Thank you.

Dominic Paschel

Thank you.

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