Why Pandora May Not Be Profitable Until 2013

| About: Pandora Media (P)

When will we find profit in Pandora’s Box?

For me at least, Pandora Media’s (NYSE:P) recent IPO has raised a big question: When will this company see profits? During a CNBC interview with Pandora CEO Joe Kennedy, it was publicly stated that the company had no plan in place for future profitability. I have since spent hours crunching numbers and reviewing Pandora’s filings. My conclusion is as follows: If Pandora Media does not maintain or exceed its current growth rate, it will not be able to procure profits until the end of its fiscal year in 2013.

First, let me discuss the idea behind Pandora's revenues and potential profits. Pandora calls its key metric “listener hours”, and by using this they “inventory” advertising dollars. As listener hours increase, so do the fees they must pay in content acquisition. Ultimately economies of scale will never exist in a structure like this. All of the information presented comes from the statements filed with the SEC (here) along with my own projections.

Seen below is a table that uses trend analysis, via Excel, to “trend” the growth of listener hours. The first two quarters were not used in calculating the trends because of their 0% growth rate.

Listener Hours in Millions

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

400

400

400

600

700

800

1,000

1,300

1,600

Listener Hours Growth Rate

0%

0.00%

0.00%

50.00%

16.67%

14.29%

25.00%

30.00%

23.08%

Click to enlarge

Listener Hours in Millions

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

1,670

1,861

2,052

2,241

2,430

2,621

2,812

Listener Hours Growth Rate

4.40%

11.43%

10.26%

9.20%

8.43%

7.86%

7.29%

Click to enlarge

*These quarters in bold are projections using trend analysis

The next table shows the growth rate of listener hours on a yearly basis along with the average of all years based on the numbers provided above.

Growth Rate Yearly

2010

2011

2012

2013

12.50%

21.49%

12.29%

8.61%

Average Growth

13.72%

Click to enlarge

Now we can take a look at revenue and expense projections using the same trend feature used above.

Revenue Trend

2008

2009

2010

2011

2012

2013

$14,300.00

$19,333.00

$55,189.00

$137,764.00

$158,208.50

$198,833.30

Growth

35.20%

185.47%

149.62%

14.84%

25.68%

Click to enlarge

*The figures in bold and underlined are projections using “Trend” function.

Total Operating Costs ($M)

2008

2009

2010

2011

2012

2013

$28.98

$46.74

$70.65

$138.09

$158.93

$194.05

Total Op Costs Per Share

$0.18

$0.29

$0.44

$0.86

$0.99

$1.21

Click to enlarge

*The figures in bold and underlined are projections using “Trend” function.

Revenue Net of Content Aq. Costs

2010

2011

2012

2013

$14,901.03

$67,504.36

$71,567.72

$87,215.03

Revenue Per Share Net of Content Aq. Costs

$0.09

$0.42

$0.45

$0.55

Total Revenue Per Share

$0.35

$0.86

$0.99

$1.24

Click to enlarge

*The figures in bold and underlined are projections using “Trend” function.

Shares Outstanding (Mill)

159.7

Click to enlarge

All in all you come to this final table:

Gross Profit Per Share

2010

2011

2012

2013

-$0.10

$0.00

$0.00

$0.03

Click to enlarge

In conclusion, if Pandora is not able to accelerate or maintain its current growth rate, it won’t be profitable until at least 2013. After delving deeper into the filings, evidence of exponentially growing sales and marketing expenses will certainly reflect on Pandora’s upcoming income statement. The increased advertising revenues generated through the increase in selling expenses will be squelched by the approximate 50% of revenue already spent on content acquisition. The listener hour base must grow rapidly, or advertisers will find paying for space less attractive because of the limited pool for customer influence. The truth derived from the data clearly states that as listener hours grow (and subsequently revenue grows), so do content acquisition costs in a near linear fashion. This makes it extremely difficult to produce profits.

Lastly I would like to point out that the number of registered users on Pandora is a completely irrelevant number. For example, one user can have multiple accounts. So if one user wants to create 1000 accounts he/she is free to do so. Listener hours are the most important figure because if a user created 1000 accounts, they are not going to listen using all accounts simultaneously.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in P over the next 72 hours.