It has been a little over two months since Pandora Media (P) filed its hype-filled IPO. I say this for many reasons and not the least of which arrived as the supposed “death knell” to Sirius XM (SIRI) or the constant hyperbolic filled article titles proclaiming “Pandora Will Crush Sirius XM.” This was all before the company could even pin 2 red cents together and call it a profit. Now mind you, during the excitement surrounding its IPO, Pandora which initially sought to offer each share at a price of $7 received enough interest to offer the shares at $16; more than doubling the initial offering price.
Pandora, itself was offering 6 million shares of the stock with another 8.7 million shares being offered by the venture capitalists. Now when you consider that there were an additional 2.2 million shares of what was considered an over-allotment; these were shares that the company could have chosen to sell, this brings the total share count to roughly 17 million shares. If you are keeping score at home, these shares were a pretty decent portion of what were approximately 160 million shares as part of the IPO. If you are still keeping score, that is a $2.6 billion market cap company. The question many Sirius XM investors were grappling with was why? How can a company that had yet to make a profit be valued so highly? But the answer was simple, and right in front of our eyes.
You see, the recent success of Sirius XM, allowed many investors to take risks they ordinarily would not take in a company such as Pandora; one that has loss money since its inception. Pandora’s potential success has always been a sensitive topic for many Sirius investors, but the irony is that any potential sign of optimism that the company generates has been due to the success of Sirius. It was not too long ago when Sirius XM was where Pandora is today. There were many investors who risked and ignored fundamental wisdom to invest in a satellite radio idea that had showed no clear signs of earning a profit. Today Sirius is the most dominant audio entertainment platform around; one that is producing earnings and growing both cash and subscribers at a rapid rate. But what has Pandora learned so far?
Can it follow Sirius’ blueprint?
Someone once said it this way, “when opening Pandora’s Box what you find may seem very valuable, but it also may turn out to inflict a lot of pain and suffering in the long run.” Well, if something ever has a chance at value, it tends to grab my attention. I tend to take my chances with the rest. So I became intrigued by the company’s Q2 earnings results. Actually, “intrigued” may not be the right word and I suppose “curious” would be more fitting. The fact of the matter is, where there has been so much hype with the company, I wanted to see if it was matched by the performance. After all, Sirius has raised guidance twice already this year, what was its supposed “death knell” going to produce?
When looking at the numbers, total revenue came in at $67 million, which was a 117% year over year increase. Advertising revenue arrived at $58.3 million. Subscription and other revenue registered at $8.7 million. On a GAAP basis, the net loss per common share, basic and diluted, was $(0.04). Also Pandora generated approximately $0.6 million in cash from operating activities, compared to the $3 million used in the year-ago quarter. The company ended the second quarter with $95.3 million in cash and equivalents, compared with $43.7 million at the end of the prior quarter.
Now, I can admit that these numbers are more than decent; mostly because my expectations were somewhat low from the beginning. But I could not help but realize that the increase in cash to the level of $95.3 million was due to cash it received from its IPO filing. I think investors need to pay attention to this. This leads me back to the company’s S-1 filing. Now where there was so much hype initially with the IPO, I wanted to know how the company was going to use the cash that it generated for the offering. Most companies who receive excesses of cash through IPOs often plan to use the capital to further expand and grow the business, but it was interesting to discover that Pandora allotted 25% of the IPO cash it received to pay for unpaid dividends. A bullet in the S1 filing states the following:
- We intend to use a portion of the net proceeds of this offering to pay accrued and unpaid dividends on our redeemable convertible preferred stock in connection with the automatic conversion of such redeemable convertible preferred stock into common stock upon the closing of this offering. The amount of such accrued dividends will be equal to (1) approximately $29.7 million.
- As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.
The other interesting bullet happens to be the second and one of the boldest admissions ever by a public company where it states clearly that “we are a money loser.” This is where Pandora states that it cannot follow Sirius’ blueprint but it will continue to learn from how Sirius operates. Clearly Pandora is not a threat to Sirius or any other media company for that matter.
There were some other discoveries in the S1 that I found very compelling; many of which discusses concerns surrounding patents. It is clear that Pandora, a company that has been around for quite some time now, may continue to be around for quite some time and play a significant role in the future of the audio entertainment industry. But, by its own admission, may one day be a liability due to the questionable foundation of its technology and its business. Pandora has the benefit of learning from Sirius’ mistakes, but during the course of its apprenticeship it has neglected the most important lesson of all, it needs to own something of its own.