Pandora Earnings: What Will Happen?

| About: Pandora Media (P)

Summary

Past earnings reports show Pandora is increasing RPMs and consistently growing revenue. But the 2015 audience numbers have disappointed.

My Q4 predictions are that audience numbers will rebound and record results for Total Listener Hours, RPMs and revenue will be announced.

Guidance on core business and any growth drivers, including international, connected car usage, Ticketfly and on-demand service launch is critical for 2016.

Pandora (NYSE:P) stock was starting to build momentum in the second half of 2015 until the bottom fell out with the Q3 earnings announcement. Concerns about slowing growth, coupled with the general market meltdown, have recently dropped the price to multiple 52-week lows. The upcoming Q4 2015 earnings call on Thursday will give visibility into the current strength of Pandora's business and possibilities for growth in 2016.

Those who have knowledge, don't predict. Those who predict, don't have knowledge.

As elegantly stated above in the Tao Te Ching, any prediction is an admission of ignorance. Nevertheless, after presenting and analyzing Pandora's recent history, this article forecasts the audience and revenue numbers for Q4 using third party data, and concludes with some potential growth factors impacting 2016.

Here are company reported numbers for the past six quarters:

Quarter

Total Revenue (NYSE:M)

Advertising Revenue

Subscription Revenue

RPM

Total Listener Hours (NYSE:B)

Active Listeners

Q3CY15

$311.60

$254.70

$56.90

$60.52

5.14

78.1

Q2CY15

$285.60

$230.90

$54.60

$53.91

5.3

79.4

Q1CY15

$230.80

$178.70

$52.00

$43.53

5.3

79.2

Q4CY14

$268.00

$220.10

$47.90

$51.54

5.2

81.5

Q3CY14

$239.60

$194.30

$45.30

$48.00

4.99

76.5

Q2CY14

$218.90

$177.30

$41.60

$43.41

5.04

76.4

Click to enlarge

Revenue has set new records every quarter except for Q1, which has seasonally sluggish ad sales. RPMs (revenue per 1000 hours of user listening time) shows remarkable acceleration. Total Listener Hours and Active Listeners have slumped in 2015.

Prediction #1: Active Listeners

Pandora's Active Listeners are defined as the number of distinct registered users that have requested audio from Pandora servers within the trailing 30 days to the end of the final calendar month of the period (Source: 12/2/15 Pandora Investor Presentation Q3 CY2015). Understanding this, we can compare comScore numbers for the last month in each corresponding quarter to the reported Active Listeners.

Pandora Quarter

Pandora Active Listeners

comScore UVs

comScore Month

Q4CY15

89.702

December 2015

Q3CY15

78.1

84.822

September 2015

Q2CY15

79.4

84.86

June 2015

Q1CY15

79.2

87.796

March 2015

Q4CY14

81.5

89.437

December 2014

Q3CY14

76.5

84.879

September 2014

Click to enlarge

Source: comScore monthly rankings

The comScore Unique Visitor (UV) numbers are not a direct match to Active Listeners, but can be used for directional guidance. Since the December 2015 UVs recovered to December 2014 levels, it follows that Active Listeners would improve to 81.5 million for Q4.

Prediction #2: Total Listening Hours

During the Q3 earnings call, CFO Mike Herring set expectations for a 3% increase year-over-year in TLH and Cannaccord has recently affirmed this. Close examination of Q4 data from the Triton Digital Top 20 Rankers now reveals more insight. My comparison of the quarterly figures reveals a 3.65% increase YOY and yields a forecast of 5.39 billion TLH for Q4.

Prediction #3: RPM and Revenue

Pandora's overall revenue is derived from a simple formula: Overall RPM * TLH = Revenue. We now have an estimate for TLH, so let's look at the RPM trends:

Quarter

Total Revenue

Advertising Revenue

Total RPM

Q/Q Total RPM change

Ad RPM

Q/Q Ad

RPM change

Q3CY15

$311.60

$254.70

$60.52

12.26%

$56.84

13.82%

Q2CY15

$285.60

$230.90

$53.91

23.85%

$49.94

30.39%

Q1CY15

$230.80

$178.70

$43.53

-15.54%

$38.30

-20.52%

Q4CY14

$268.00

$220.10

$51.54

7.38%

$48.19

8.66%

Q3CY14

$239.60

$194.30

$48.00

10.57%

$44.35

10.57%

Q2CY14

$218.90

$177.30

$43.41

$40.11

Click to enlarge

Note the massive increases in both ad and total RPM for the last two quarters in 2015. Although it's tempting to anticipate another double digit increase in RPMs, CFO Mike Herring has said about Q4, "We might see an increase in RPMs sequentially slightly, but we've already seen that jump baked into Q3." This indicates most of the shift from lower value performance advertising towards premium direct sales along with big RPM increases has already occurred.

So turning to Q4 expectations, company guidance is revenue in the range of $325 to $330 million. Using the midpoint of $327.5 million and a TLH of 5.356 billion (based the 3% increase from the Q3 call), the calculated RPM is $61.15. The following chart shows revenue produced using my estimate of 5.39 billion TLH and various potential RPMs.

Q4 RPM

TLH

Revenue

RPM change from Q3

Comments

$60.30

5.39

$325.02

-0.36%

Low end of guidance

$60.52

5.39

$326.20

-

Q3 RPM

$60.76

5.39

$327.50

0.40%

Midpoint of guidance

$61.15

5.39

$329.60

1.04%

RPM calculated in text

$61.23

5.39

$330.03

1.17%

Top end of guidance

$62.16

5.39

$335.04

2.71%

$5M beat

$63.08

5.39

$340.00

4.23%

$10M beat

Click to enlarge

The calculated RPM of $61.15 gets us to the top of the guidance and is the safe bet. But pricing has been increasing all year and Q4 is always the strongest quarter. My more aggressive prediction is an RPM of $62.16 and total revenue of $335M, with a split of 82.2% advertising and 17.8% subscription (same split as Q4 of 2014).

Potential drivers for growth in 2016

Along with core guidance for revenue and listener hours in calendar 2016, investors should expect to hear more on these topics on February 11.

  • International expansion. Currently Pandora operates only in the US, Australia and New Zealand. Now that the CRB decision is a done deal, it could open the door to complete global licensing deals and allow service in more countries.

  • Connected cars. Automotive is Pandora's fastest-growing listening category and According to AdAge, in-car users listen 57% more than average. Connected cars are a huge opportunity to grow hours and sell premium advertising.

  • Ticketfly guidance. 2016 is the first full year of integration; synergies should abound.

  • On-demand service launch. Pandora acquired technology and intellectual property assets from Rdio to jump start development of their own on-demand streaming music service. Launching in calendar 2016 may prove material for the business.

Conclusion

My forecasts for Pandora's Q4 2015 are:

Quarter

Total Revenue

Advertising Revenue

Subscription Revenue

RPM

Total Listener Hours

Active Listeners

Q4CY15

335

275.4

59.6

$62.16

5.39

85.1

Click to enlarge

My Q4 estimates show Pandora getting back on track with audience numbers and exceeding expectations for revenue. But more critical than Q4's performance will be full year guidance and discussion of growth factors for 2016. "May you live in interesting times" is a proverb easily applied to Pandora investors at this juncture.

Disclosure: I am/we are long P.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.