Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joe Kennedy - Chairman and CEO

Steve Cakebread - CFO

Dominic Paschel - VP, Corporate Finance and Investor Relations

Analysts

Doug Anmuth - JP Morgan

Scott Devitt - Morgan Stanley

Mark Mahaney - Citigroup

Laura Martin - Needham & Company

Jordan Rohan - Stifel Nicolaus

Nat Schindler - Bank of America Merrill Lynch

Heath Terry - Goldman Sachs

Jason Maynard - Wells Fargo

Jeff Houston - Barrington Research

Richard Greenfield - BTIG

Rich Tullo - Albert Fried & Co.

Edward Williams - BMO Capital Markets

Aaron Kessler - Raymond James

Ralph Shackart - William Blair

Pandora Media (P) Q4 2011 Earnings Call March 6, 2012 5:00 PM ET

Operator

Welcome to Pandora Media’s fiscal fourth quarter and full year 2012 financial results conference call. [Operator instructions.] Opening today’s call is Dominic Paschel, VP, corporate finance and investor relations.

Dominic Paschel

Good afternoon and welcome to Pandora’s fourth quarter and full fiscal 2012 financial results call for the quarter ended January 31, 2012. 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 listing of our 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.

I would also like to remind you that during the course of this call, we may discuss non-GAAP measures of our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release and form 8-K filed this afternoon with the SEC.

Today’s call is available via webcast, and a replay will be available following the conclusion of the call for two weeks. To access the press release, supplemental financial information, or the webcast replay, please consult our investor relations section of Pandora.com.

With that, let me turn the call over to Joe Kennedy, Pandora’s chairman and CEO.

Joe Kennedy

Thanks Dom. Fiscal 2012 was an extraordinary year for Pandora. We made great progress against our mission to redefine and disrupt radio, one of the largest consumer media categories, and where 80% of all music listening occurs.

Our purpose is simple: To enrich people’s lives by enabling them to enjoy music they know and discover new music that they’ll love. We do that by providing the best personalized radio experience in the world.

Our strong growth, both for the quarter and for the full year is evidence that our purpose-driven mission is working, and that Pandora is the future of radio. We continue to experience extraordinary growth in usage. Our audience continues to grow and the amount of time each listener spends with us each month also continues to grow.

Total listener hours reached a record 8.2 billion during fiscal 2012, up 109% year on year over the 3.8 billion in fiscal 2011. For the fourth quarter, our listener hours grew 99% year over year, to a record 2.7 billion, up from 1.3 billion in the same period last year. We also ended the year with 47 million active registered listeners, a new record, up 62% from the 29 million active users during the same period last year.

This remarkable growth triggered market share gains across the board. Our share of total radio listening in the U.S. increased to a record 5.55% in the fourth quarter of fiscal ’12, more than double the 2.71% level we saw in the fourth quarter of fiscal ’11. And our share of listening to the top 20 internet radio services in the U.S., according to Trident Digital, increased to a record 69.8% at the end of fiscal ’12, up from 58.3% at the end of fiscal ’11.

The expansion in our market share during fiscal year ’12 is particularly noteworthy in light of the fact that there were a wide variety of digital music initiatives launched by other companies over the course of the year. Consumers are voting with their listening hours and two things are clear. First, we are truly delivering the best personalized radio experience in the world, and second, our market leadership position is both strong and defensible.

Our expanding market share and strong user base are the driving forces behind our revenue growth. For the full year fiscal 12, total revenue grew 99% to $274.3 million, with ad revenue growing 101% to $240 million. For the fourth quarter, total revenue grew 71% to $81.3 million, with ad revenue growing 74% to $72.1 million.

We are very pleased with the full year revenue results, which significantly exceeded the targets we had established at the beginning of the year. Nearly doubling revenue at the scale at which we operate requirements both strategic and operational excellence.

While the 71% year over year revenue growth in Q4 was consistent with our guidance, fourth quarter ad spending was a bit weaker than our expectations, driven by two factors. First, holiday ad spending came in a few percent lower than expected, and second the ECPMs we saw on the remnant ad inventory we sold through third-party networks in January were lower than what we had modeled.

Given that January is a strong month for Pandora usage, but the weakest month of the year in terms of consumer-related ad spending, our premium sell-through rate is at its seasonal low point in January, and so we move a greater portion of our ad inventory through third-party networks than at any other time of the year.

Third party network ECPMs are more volatile and harder to predict than are the CPMs at which we sell our premium inventory. In most months, this volatility and lack of visibility would not materially affect our results, but January is an exception.

Long term, our revenue opportunity is fundamentally fueled by listener hour growth and we are thrilled to enjoy nearly 100% growth in our listener hours during the fourth quarter. Over the long term, we believe that the associated growth in our ad inventory will enable us to create significant value as we continue to increase our investments in sales and the markets into which we sell continue to grow.

I’d like to now dive a bit more deeply into monetization, with a particular focus on revenue per thousand listener hours, which we refer to as RPM, broken down between usage on laptop and desktop computers using a traditional web browser on the one hand and usage on mobile and other connected devices on the other hand.

We made tremendous progress in mobile monetization during fiscal ’12. Total mobile revenue quadrupled versus fiscal’11, growing from approximately $25 million in fiscal ’11 to over $100 million in fiscal ’12. In fact, based on recent data we’ve seen in an e-marketer analysis, we believe that Pandora achieved more mobile ad revenue last year than any entity other than Google.

As a result of this progress, our mobile RPM increased significantly, from approximately $13 in fiscal ’11 to over $20 in fiscal ’12. On the desktop, our monetization remained roughly constant year over year, in the $60-70 RPM range, roughly triple what we see on mobile and other connected devices.

As recently as full year 2009, our desktop RPM was under $20, lower than our current mobile RPM. As we have further developed our position in the desktop advertising market, and our desktop usage growth rate slowed, desktop RPMs more than tripled.

We see no fundamental difference in the long term monetization potential between the desktop and the mobile devices that now constitute the majority of our usage. The difference between the RPMs on the two platforms today is simply a function of two factors. One, the nascent state of the mobile advertising market, and two, the stratospheric growth rate of our mobile usage.

Numerous analysts estimate total U.S. mobile advertising to have been in the $1-2 billion range last year, but forecasted to grow rapidly to $13-20 billion by 2015. While our current growth rate in mobile listener hours may make it difficult to continue to improve mobile RPM in the near term, over the long term, we are very well positioned to take a significant share of this market, which we believe will enable us to achieve higher and higher mobile RPM levels, just as we have already demonstrated with our desktop RPM.

Another market that is just opening up to us is the traditional market for radio advertising. In growing our share of total U.S. radio listening from 2.71% to 5.55%, we have effectively transitioned from being a small to medium sized radio station in every market in the U.S. to one of the largest radio stations in every market in the country. Based on the growth we continue to see as we enter fiscal ’13, we anticipate that by the end of this year, we will be larger than the largest FM or AM radio station in most markets in the U.S.

As a consequence, our relevance to buyers of traditional radio advertising is skyrocketing. We have already begun to see the early benefits of this dramatic change. Audio advertising revenue on Pandora more than doubled year over year, and totaled more than $100 million in fiscal ’12, and we are clearly just beginning to scratch the surface of this $15 billion market.

To take full advantage of the opportunity that our large and growing radio market share gives us, we have accelerated our investment in radio ad sales personnel, both local and national, and in the systems and processes needed to make audio ad buying on Pandora simple, efficient, and effective.

We are now finishing the initial process of staffing local radio ad sales teams in most of the top ten U.S. markets, while also staffing a separate team focused on the national radio advertising market. We are also working closely with Trident Metrics to make third-party MRC-certified data available to radio advertisers in the same format they are accustomed to seeing for broadcast radio, so that our audience breadth and depth of engagement is easily apparent to them.

We and Trident are also working with the vendors who provide media planning and buying software to these advertisers to make the mechanics of planning and transacting an ad campaign on Pandora as seamless as doing so on broadcast radio. We have received every indication that radio advertisers and their agencies are very supportive of these initiatives, which enable them to take advantage of a powerful, more targeted, more measurable, and more interactive advertising solution than that provided by broadcast radio.

These initiatives, which are required to achieve significant scale in this market, will take some time, but we anticipate that we will begin to generate a meaningful amount of revenue from the local radio advertising market, approximately 18-24 months from now.

Until all of the third-party audience measurement pieces are in place that would provide radio, mobile, and cross-platform advertisers accurate information on Pandora users and usage, we will be releasing our key audience metric on a monthly basis. Tomorrow morning, we will issue a press release with our February 2012 data on active users, listener hours, and estimated share of total U.S. radio listening, which will demonstrate that our momentum has continued during the first month of fiscal ’13.

Specifically, as of the end of February, our trailing 30-day active registered listenership was 49 million. Total listener hours for February were a record 975 million, allowing us to reach an all-time high of 5.74% market share of U.S. radio listening, up from the end of the fiscal year market share which we just reported at 5.55%.

I would like to remind invest that the near term changes in these metrics may not necessarily correlate with near term changes in our revenue performance, as our revenue is driven not only by usage but also by the rate at which we are monetizing our usage. Throughout our 6.5-year history, revenue growth has typically lagged growth in usage.

I’d like to conclude my remarks with some thoughts on our overall strategic progress and future direction. Consumer demand for Pandora has resulted in enormous scale and listener engagement. Few companies engage with users at such scale, and few companies operate and manage the magnitude of data and feedback that results from this engagement.

On a typical week day, we now stream over 500 million songs. We also receive massive amounts of data each day, from tens of millions of user interactions, which improve our best in the world personalized radio experience, enable us to create innovative and highly effective advertising programs unique to Pandora, and fundamentally strengthen our competitive position. For example, our feedback database now includes well over 15 billion thumbs up and thumbs down, and is growing faster than ever.

Our scale and multi-platform breadth enable us to truly redefine radio for consumers, and at the same time create new forms of innovation advertising, from web, mobile, and radio ad buyers who collectively spend $37 billion annually in the U.S. alone.

We’re very pleased with our progress and growth during fiscal ’12. While we have more than doubled our share of U.S. radio listening in the past year, from 2.71% to 5.55%, we believe we have barely scratched the surface of our market opportunity.

As we look forward to fiscal 2013, our primary objective is to continue growing our share of U.S. radio listening, which we believe will be the ultimate drier of value-creation for the company due to the long term monetization potential of the category. As we have said in previous quarters since becoming a public company, we expect to invest aggressively to accomplish our objectives and realize our potential.

That includes investments in product and technology to enhance our listener’s experience, as well as in sales to capitalize on the power of our advertising platform. We also remain focused on expanding the reach of Pandora’s service across the full range of connected devices, including a growing range of automotive brands and models, and we will continue to engage and nurture our highly passionate listening audience. Simply put, we will continue to redefine radio.

Finally, on a personal note, I would like to use this opportunity to publicly thank Jessica Steel, who will be retiring from Pandora in late May after almost eight years of service as head of business development for Pandora. She played a key role in building out Pandora’s strategic partnerships including those with CE device manufacturers, automotive OEMs, and suppliers that we have referenced on today’s and previous calls. Jessica had a baby two years ago, and she is leaving to spend her next chapter focusing on time with him before he starts school.

With most of the key partnerships now in place, much of the focus is now on working with our partners to market these Pandora integrations, and thus it makes sense to move the wonderfully capable team that Jessica has built under the leadership of our chief marketing officer, Simon Fleming-Wood. Jessica and Simon will be working together over the next couple of months, ensuring a completely seamless transition.

With that, let me turn it over to Steve.

Steve Cakebread

Thank you Joe. I’ll review our fourth quarter and fiscal year end 2012 performance and in addition provide updated financial plans for fiscal 2013, and then we’ll open it up to take some questions.

Pandora delivered fourth quarter revenue of $81.3 million, 71% growth from the year ago quarter. Advertising revenue was $72.1 million, a 74% year over year increase. Subscription and other revenues were $9.2 million, and grew 51% year over year. For the fourth quarter of fiscal 2012, on a GAAP basis, net loss per share was $0.05. Non-GAAP net loss per share was $0.03, which excluded approximately $3.4 million in stock based compensation.

Both GAAP and non-GAAP calculations are based on 162.3 million weighted average basic shares outstanding and assume a minimal tax expense due to our net operating loss position. As most of you know, the fourth quarter is our largest in terms of advertising activity, particularly brand and display advertising, and this quarter was no different.

The strength of our advertising revenue contributed to a strong sequential and year over year growth, which was consistent with our guidance. However, holiday spending came in a touch lighter, as Joe mentioned, and at the high end of our expectations, while remnant ECPMs in January also a bit lower.

We also removed the online listening cap, and saw an additional increase in listening hours during the quarter. Subscriber growth naturally moderated as the capital was removed on the desktop.

As a media business, we seek to monetize every listener, every day, primarily through advertising, by estimating the available of our rapidly growing inventory and matching our supply with advertiser demand on a guaranteed basis.

While our inventory is growing quickly, and the mix is often difficult to predict, advertising demand has its own dynamics, which changes quarter to quarter. We continue to grow our market share as a result of increased active users and our active users’ impact on our listening hours.

We ended the fourth quarter with a record 47 million active users, a 62% year over year increase. The total number of listener hours during the quarter increased to 2.7 billion, which grew 99% over last year, and the total listener hours for fiscal 2013 were 8.2 billion, an increase of 109%, compared to the 3.8 billion for fiscal 2011.

Hours listened per listener, per month, grew approximately 25%, or 4 hours from the 15.7 in Q4 of 2011, to 19.7 in Q4 of 2012. As a reminder, for the trailing 30 days ended January 31, 2012, active users are defined as the number of distinct registered users that have requested audio from our servers.

Listener hours drive the number of opportunities that we have to sell advertising, as well as our content acquisition cost. The more listener hours we stream, the more ad inventory we have an opportunity to sell. We’re very pleased to report continued strong growth across all of these user metrics for the fourth quarter and for the fiscal year.

And turning to profitability, our GAAP net loss for the fourth quarter of fiscal 2012 was $8.2 million. We are seeing stability and leverage in our direct controllable costs. As a percentage of revenue, our controllable costs, excluding stock based compensation, decreased during the quarter from 51.1% in the fourth quarter of fiscal 2011 to 46.5% of revenue in the fourth quarter of fiscal 2012.

In terms of dollars spent, we invested in all areas, with a focus on sales and marketing. As Joe mentioned previously, we believe that we’ve just begun to scratch the surface of our $37-billion-plus market opportunity, and we’ve continued to invest in our business.

Increases in our operating expenses was primarily driven by increased headcount, from approximately 480 employees at the end of the quarter to approximately 530 total employees at the end of our fourth quarter.

Our single largest expense category, content acquisition, was $48.2 million, or 59% of revenues. This was up from 50% of revenues in the year ago quarter and was driven by the continued rapid growth in hours during the quarter. The increase was also driven in part by one month, being January, of increased cost of content that resulted from the scheduled 2012 content rate increase, as we detailed in our previous filings. These increased rates will apply for the rest of calendar 2012.

For fiscal year 2012, total revenue was $274.3 million, a 99% year over year increase. Total advertising revenue was $240 million, 101% year over year increase. And total subscription and other revenue was $34.3 million, an 87% year over year increase.

For the fiscal year 2012 on a GAAP basis, net loss per common share was $0.19. Non-GAAP net loss per common share was $0.02 excluding approximately $13.7 million in stock based compensation and warrant remeasurement expenses.

GAAP and non-GAAP calculations are based on 106 million and 158.3 million weighted average basic common shares outstanding respectively, and assume, again, a minimal tax expense due to our net operating loss.

During the year, we increased the number of total employees by 80% from approximately 295 employees in Q4 of fiscal 2011 to approximately 530 employees in the fourth quarter of this year, as we continued to invest in the business. And again, we’re managing our direct controllable costs, which decreased from 48.8% of revenue in 2011 to 46.5% of revenues in fiscal 2012, when you exclude stock based compensation in both years.

As a result of our continued positive increase in listening hours, our content costs increased from 50% to 54% of revenues during the year. And again, we’ve just scratched the surface of the $37 billion market potential, and believe our current investments are positioning us to realize our future full market potential.

Pandora ended the fourth quarter with $90.6 million in cash, cash equivalents, and short-term investments, compared to $90.8 million at the end of the prior quarter. In the fourth quarter, Pandora generated $2.4 million in cash from operating activities, compared to $1 million generated in the year ago quarter.

For fiscal 2012, we generated $5.9 million in cash from operating activities compared to $3.2 million in the year ago period. We do expect to incur roughly $2-3 million in capex per quarter for fiscal 2013 and a negative cash flow from operations.

Let me now finish with some thoughts regarding our guidance, starting with the full year fiscal 2013. We are estimating total revenues to be in the range of $410 million to $420 million, or a growth at the midpoint of about 51%.

There are a number of reasons that support our expectations for another year of strong revenue growth and market share gains. We’re coming off a quarter in which listener hour growth was nearly 100% and continued listener hour momentum in February as Joe mentioned. We more than doubled our market share from 2.71% to 5.5% during fiscal 2012, and we expect to continue to grow at a much faster rate than the market.

In addition, we’ve been investing significantly in the expansion of our sales capacity, and that will continue in fiscal 2013. We expect our expanded sales capacity to become increasingly more productive over the course of the year.

From a profitability perspective, we expect fiscal 2013 non-GAAP net loss per share to be between $0.11 and $0.16. Fiscal 2013 non-GAAP net loss per share excludes stock based compensation expense, again assumes minimal tax expense given our net operating loss, and is based on 166 million weighted average shares outstanding for fiscal 2013.

Now, for those of you who are new to our business, the first quarter is historically seasonally slow when you compare it to the fourth quarter, with subsequent quarters building up to seasonally high Q4. And keep in mind Q1 and Q2 last year included one notable customer representing more than 10% of total revenues, thus obscuring our traditional seasonality.

With that in mind, the first quarter of fiscal 2013, we currently expect total revenue to be in the range of $72 million to $75 million. This also represents a sequential decline from the fourth quarter, which is not unexpected considering the fact that Q1 is always a seasonally slow quarter because of lower ad spend in the first quarter timeframe.

Non-GAAP net loss per share is expected to be between $0.18 and $0.21 for the first quarter. Non-GAAP net loss per share excludes stock based compensation expense, assumes a minimal tax expense given our net operating loss position, and is based on 164 million weighted average shares outstanding for Q1 fiscal year 2013.

In summary, fiscal ’12 was a very successful year for Pandora. We more than doubled our market share, rapidly grew our revenue, and made significant progress putting in place the foundation to make Pandora available anywhere, anytime.

As we start fiscal ’13, our momentum is strong, our listener hour growth points to continued market share gains, and our guidance calls for continued revenue growth. Pandora is the future of radio.

And with that, we’ll be glad to take your questions.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of Doug Anmuth from JP Morgan. Your line is now open.

Doug Anmuth - JP Morgan

Two things. Can you give us a sense of where mobile premium sell-through rates are, and what the trend has been there over the last several quarters? And then secondly, just on the remnant CPM impact that you saw in 4Q, assuming that will continue into the first quarter here, can you talk about exactly how you’re selling remnant, and if there’s anything that you can do to increase the CPM there in the near term, other than just increased premium sell-through, obviously.

Joe Kennedy

To your first question about mobile premium sell-through, no material change there from where we’ve been. Again, basically roughly keeping up with the growth in hours. And in the context of, for the full year, as we mentioned, quadrupling ad revenue and actually gaining a significant growth in our mobile RPM. But at this point, we would project kind of stability, no material change. Adjusted for seasonal factors, we wouldn’t expect any change in mobile premium sell-through.

In terms of the remnant ECPM and networks, again that’s actually a pretty complex part of the business. We work with numerous networks. I think the overall headline is in most months it’s not a particularly material amount of our business in terms of is the pricing a little up or a little down versus what we expect. January is a unique month because it’s a heavy usage month, and the lightest month for consumer advertising of the entire year. And so a far greater portion of our inventory moves through those networks in January.

We attempt to estimate based on historical factors what the December to January decline is in that market. It was a little greater decline this year than in the past, and hence our modeling was a bit off. But we don’t believe that that whole category or factor should be a material part of our overperformance or underperformance the remainder of the year.

Operator

Your next question comes from the line of Scott Devitt from Morgan Stanley. Your line is now open.

Scott Devitt - Morgan Stanley

Just trying to better understand quarterly modeling and Steve, you mentioned on the call the one time effects in the first fiscal quarter last year. So is it best to go back to two years ago in terms of looking at the sequential revenue per thousand hours as a starting point for the year? And then the cadence throughout the year building based on the sales force efficiency and seasonality? But using that, I think you were down 24% sequentially two years ago 4Q to 1Q. And then I had one follow up.

Joe Kennedy

Yeah, I think that’s the case. Clearly the first half of fiscal year 2012 was influenced dramatically by our 10% customer. I think if you go and kind of look at the last two years before that, and take out that estimate of what you might have for that 10% customer, you’ll get a more normal seasonality. And I think it’s been fairly traditional that our Q1 is clearly lighter than Q4 on a sequential basis, although we’ve had strong growth Q1 over Q1 year over year. You’ll also see that on the earnings side. We’ve got strong listener base that continues to grow, so you’ll see earnings traditionally drop off in Q1 and then build through Q4 as well.

Scott Devitt - Morgan Stanley

And would you mind giving the mobile web split? You gave, I think, revenue, but could you give that on an hours basis? Is the split fairly consistent with what it was in the prior quarter?

Joe Kennedy

It’s moved a bit above the 70% figure, and we do anticipate that throughout the course of this year, rising gradually. As you would anticipate. Still not materially different from 70%, but I’d say a trend line that’s beginning to take it above there, and we anticipate the mobile hours as a percentage of total hours will grow as a percentage over the course of the year.

Operator

Your next question comes from the line of Mark Mahaney from Citigroup. Your line is now open.

Mark Mahaney - Citigroup

Can you talk a little bit about how you think about the timing of the local sales force rollout, and what financial governors you have around that? And then specifically the number of cities that you want to roll out. Do you accelerate that, or decelerate as you hit or miss certain financial metrics? How do you think about that, and so how should we plan to react to the success that you have in the local markets?

Joe Kennedy

I’ll give a little bit longer answer here, because it’s such an important topic. In terms of how we think about developing the radio advertising market, which is virtually all incremental opportunity for us, we’re really looking at three things coming together over the next 18-24 months.

The first is our continued growth in share, which as I talked about has taken us from being not particularly relevant to a radio ad buyer to extremely relevant to a radio ad buyer. As we’ve said, larger than the largest AM or FM radio station in most markets by the end of the year. So that growth in our share defines our growth in relevance, and is the first of the three factors coming together over this time period.

The second, as you alluded to, is actually putting the feet on the street, the human capital, in place. And we’ve already hired dozens of people for that. That process will continue giving us an initial staffing. Far from final, but an initial staffing in most of the top 10 markets.

In some ways, the most gating factor from a timing standpoint is actually the third and most obscure piece of this puzzle, which are all the processes and systems. Starting with audience measurement, it’s crucial that radio advertisers be able to have information on the reach and intensity of our audience listening in the forms that they’re traditionally used to seeing for radio ad buying.

Moreover, it’s important that that information be integrated into the media planning and media buying systems that they use, systems provided by players like Donavan and Strata. We are working together with Trident Media to address that third component.

When they all come together, we believe we are powerfully positioned to disrupt radio advertising and begin to deliver a truly material amount of local as well as national radio ad dollars. But it really is those three things coming together.

The first is clearly on a tremendous path. We’ve made, and are continuing to make, the initial moves in that second category, and are working hard on the third piece. But that’s the element that’s not 100% in our control. But in partnership with Trident are actually working pretty hard on that, and I think are making progress on that front. And we really look forward to those three things coming together.

I think once they’re together, to your point about further expansion, it would be stunning if we stopped with the initial markets that we’re staffing. As those pieces come into place, and we believe that we’ve learned the detailed lessons we need to learn, I would anticipate that we will continue to roll out more people in those top markets as well as expanding the number of markets in total.

Operator

Your next question comes from the line of Laura Martin from Needham & Company. Your line is now open.

Laura Martin - Needham & Company

First question on seasonality. It sounded to me like what you were saying, Joe, in your prepared remarks, was that you had a lot of high usage in January but then you had kind of advertiser demand slows. Is that primarily what’s driving the low first quarter numbers? It doesn’t sound like ECM is really continuing to be a problem in the February, March, and April timeframes. Do I have that right is my first question?

Joe Kennedy

I think the basics of that are right. The bulk of our revenue is based on consumer targeted advertising. The first quarter of the current year is historically the low point for consumer related ad spending, and that drives seasonality in our business, both the last month of fiscal Q4 as well as the majority of our fiscal Q1 and hence the typical seasonal characteristics that Steve talked about, that are behind our guidance for Q1, but also reflect the continued growth in revenue throughout this coming year, peaking in the fourth quarter.

Laura Martin - Needham & Company

Okay, so the ECM is really behind this, that weakness.

Joe Kennedy

The vast majority of the year, it’s really about our premium selling effectiveness. It’s not really about remnant ECPMs. It would be very surprising if that were a material factor most of the year.

Laura Martin - Needham & Company

Perfect. And then my last question is I want to make sure I had these mobile numbers right. We had a mobile RCPM of $13. It went to $20. I remember when the desktop was $20, but anyway. Now those are $60-70, and it sounds like you’re pretty confident that that gap is going to close. Could you remind us what the timeframe was over the time when your desktop went from $20 CPMs to kind of $60-ish, so we can kind of model that in as we look forward over the next several years on the mobile side?

Joe Kennedy

As recently as fiscal year 2009, our desktop RPM was under $20, less than where our mobile RPM is today. And over the course of the last four years, as we’ve developed the market for desktop advertising, and as the percentage growth rate of desktop listening as moderated, we tripled RPM over that period on the desktop.

Laura Martin - Needham & Company

That’s how we should model it on the mobile side, pretty consistently rising?

Joe Kennedy

I think there’s specific factors that drive that, but I’m not sure exactly how to model it year by year. But I think that’s the overall development that we’ve seen. And as you’re alluding to, that’s the development that we anticipate on the mobile side. In the case of mobile, we’re selling into a nascent market. We have an extremely strong position, over $100 million in mobile ad revenue, second only to Google. But we also have stratospheric growth rates in our mobile usage, and it will take the development of that market and some moderation of our usage growth rate, and we’ll begin to see the same kind of growth in mobile RPM that we’ve experienced over the past four years on the desktop side.

Operator

Your next question comes from the line of Jordan Rohan from Stifel Nicolaus. Your line is now open.

Jordan Rohan - Stifel Nicolaus

A few odds and ends here, and one forward-looking question. I didn’t quite hear if there was a forecast or some guidance on the content costs as a percentage of total revenues for the fiscal first quarter. I think there was some comment on 50-54% over the course of the last year. How should we think about that during the course of the year, given that it’s a little bit difficult to figure out the RPMs on that.

Second, HTML5 seems like a sea change in how devices are presenting applications and functionality, particularly for things like Pandora. Is that an advantage or a disadvantage for you guys? Does it somehow eliminate all the good hard work you guys have been doing to get integrated into automotive? Or does it make it easier for you to be integrated into future devices?

Joe Kennedy

On the content cost side, I think the overall guidance that we’d give is that we expect RPMs for mobile and RPMs for desktop to be relatively flat year over year, with some growth in the mobile hours percentage of total. That will mean the blend will drive the content acquisition costs percentage of revenue up a bit. But again, the fundamental monetization by platform we expect to be stable year over year with the mobile ad revenue keeping up with the tremendous growth in usage and staying in the very strong $60-70 RPM range on the desktop.

In terms of HTML5, great question. We actually continue to invest in that area. Really, are a leader with both CE device makers and automotive players. We have demonstrations that we’ve made in both technical areas of Pandora solutions that leverage HTML5. We consider that, to your question, a plus and fundamentally kind of easing the process for us in terms of growing our penetration and providing a great personalized experience on CE devices and in cars.

We don’t think that the key defensibility of our position in CE and cars is about the technical difficulty of the work. That certainly is an impediment to perhaps a startup player. Our real defensibility in those categories is our absolutely dominant share of internet radio listening. As we talked about, essentially 70% of all internet radio listening in this country is on Pandora today, a record level.

And that overall position that we have in terms of total U.S. radio listening, that’s what’s driving auto makers and CE manufacturers to incorporate Pandora. That’s what’s driving Buick to include Pandora in the TV advertising that you see currently. And so in that context, a move to HTML5 fundamentally enables a better experience and is all good news from our standpoint.

Operator

Your next question comes from the line of Nat Schindler from Bank of America Merrill Lynch. Your line is now open.

Nat Schindler - Bank of America Merrill Lynch

Two really quick ones. How reliant are you on third-party ad networks currently, and how should this trend going forward as you build up the sales force? And also, just quickly, you said in your target business model that you expected to be about 40% content costs eventually. With the usage growth and revenue growth now diverging, they have to cross at some point, with revenue growth growing faster than usage growth. How do you see this happening? Are you willing to go more interruptive ad in the near term, given that competition doesn’t seem to be slowing you?

Joe Kennedy

Third-party networks, the great majority of our ad revenue comes from advertising that we sell directly at premium rates. We do use networks throughout the year, but the kind of ups and downs within those markets are very unlikely to be material to our overall performance. January is an exceptional month, in terms of extremely heavy usage combined with being the lightest advertising month of the year. And so I would not expect us to be talking about volatility in network ECPMs in any month other than the January timeframe.

Relative to your comment on the long term model, 40% content cost, I really point you to the detail that we shared in the core script around the progress we’ve made from a desktop standpoint going from under $20 RPM on the desktop in fiscal 2009 to over $60 RPM on the desktop today. If you do the math, you can see that the desktop is actually outperforming that target model that you just referenced. So really the key for us is taking mobile through the same kind of transition in terms of RPM development that we’ve taken desktop through over the past four or five years.

And we really do see that as the mobile ad market continues to develop as the stratospheric growth rate of mobile usage begins to moderate, and further enhanced by our penetration of the radio advertising market.

Operator

Your next question comes from the line of Heath Terry from Goldman Sachs. Your line is now open.

Heath Terry - Goldman Sachs

Joe, as you’ve talked about using radio, and basically talked about your business in terms of traditional terrestrial radio, I’m wondering if maybe we’re missing the opportunity here. Or how do you think about the opportunity in terms of leveraging what Pandora can do that traditional radio can’t in terms of personalization of advertising inventory, in terms of real hyperlocation targeting. How long do you think it will be before we see Pandora really taking advantage of the same kind of technology opportunity from an ad sales perspective that you’ve clearly already taken advantage of from a product perspective?

Joe Kennedy

The answer is we’re already beginning to do that, even with local radio advertisers, but it’s just the beginning, and it’s not at a scale that’s going to move our numbers significantly in the very near-term. But just to give one anecdote, on my drive in, I heard an ad for a Berkeley Fiat dealer. I know that ad is not targeted even to the entire Bay Area, but is just targeted to the geography that’s relevant to a Fiat dealer in Berkeley.

So that kind of targeting, using the fact that we not only have tremendous scale, but we’re a registered user base system, so we have age, gender, zip code, for every user. All of those foundation elements are in place. Advertisers are using them. The national advertisers tend to really focus on the power of using the demographic information in terms of age and gender. As we move and do more and more business in local markets, particularly focused on local radio advertisers, that geo capability really is significant.

And as I said, the earliest adopters that are getting on board are using that capability. And combined with the greater interactivity and greater measurability of the Pandora advertising product, I think we really have something that’s more compelling than traditional radio advertising for that market.

Operator

Your next question comes from the line of Jason Maynard from Wells Fargo. Your line is now open.

Jason Maynard - Wells Fargo

I just wanted to hit on the mobile question again. I’m curious, from your standpoint, do you think the monetization on the mobile side is going to be more push-driven from your sales efforts? Or do you think it’s more evolutionary, pull-driven from advertisers investing in the new medium? And I guess on the push side, part of it being sales and then part of it also being, like the prior question, technology related, or perhaps even bringing in HTML5 to the mobile devices. How do you sort through all the variables in terms of thinking through the ramp on the mobile opportunity?

Joe Kennedy

We have two big opportunities to improve mobile monetization. One is on the display side, and is tied into the continued growth of the mobile display advertising market. And again, as I reference, there’s a range of forecasts, all of which really pointing to explosive growth over the next few years.

There are advantages, obviously, having one of the single biggest mobile platforms in the country, and considerable experience in the category, being, as best we can tell, the second biggest seller of mobile advertising at this point. But also having, because of our desktop position, a very large number of relationships with a great majority of the nation’s leading advertisers.

And our opportunity is to work with them as they transition from being desktop centric interactive advertisers to expanding their spend to encompass mobile as well as the desktop. So I think we have considerable advantages there. But there is also an element in that context of the overall market moving.

The good news is it’s forecast to move very significantly over the next few years. But in the grand scheme of things, to some extent advertisers control that more than we do. But the good news is there’s every evidence they’re looking to make that move, and we’re extremely well-positioned to work with them there.

The other big opportunity for mobile monetization improvement really comes from the radio advertising side, which again is entirely incremental to our entire business. And again, historically, radio advertising is not bought platform-specific. So when we sell a radio ad campaign, it’s usually across the entire set of distribution platforms that we have - mobile, desktop included.

In that case, the market is there, and we have every evidence that advertisers there are interested in the Pandora product, is that more targeting potential, more interactivity, more measurability. And there I think it’s the case of just us working to get the pieces in place in terms of our staffing and then those systems and processes that are required to make it as easy for that Berkeley Fiat dealer to buy advertising on Pandora as it is for that dealer to buy advertising on traditional AM and FM radio. That’s kind of ball in our court. We’re working with the right players to get that done and excited about the potential there as well.

Operator

Your next question comes from the line of Jeff Houston from Barrington Research. Your line is now open.

Jeff Houston - Barrington Research

Regarding the mix of audio categories, I know your focus remains on music, but could you update us on the comedy initiative and which of the other categories such as sports and talk are you likely to move into next, especially given your increased focus on local?

Joe Kennedy

At this point, we still remain very focused on music. It is the vast majority of the consumer radio experience. We do have comedy. It’s an important part of our offering. It’s drawn a decent audience, but in the grand scheme of things, Pandora is extremely well-positioned in terms of transitioning consumers from AM/FM music radio listening to Pandora. We continue to explore our opportunities in other spoken word categories. I think when the time is right, driven by a number of factors, we may make a move there, but historically 80% of AM/FM radio listening is to music format stations. And that’s really the foundation of our market position and I think our overwhelming primary focus at this point.

Operator

Your next question comes from the line of Richard Greenfield from BTIG. Your line is now open.

Richard Greenfield - BTIG

First, on the mobile audio CPM, can you give us a sense of within that $20 CPM you’re now up to on the mobile side, if you were to carve out and look at the audio CPM side of the equation, where does that stand today?

Joe Kennedy

The audio component of our mobile monetization is significant. I actually don’t have the exact percentage off the top of my head. But I would say broadly speaking our mobile monetization is neither dominated by display nor dominated by audio. They are both significant components of the mobile monetization at this point.

Operator

Your next question comes from the line of Rich Tullo from Albert Fried & Co. Your line is now open.

Rich Tullo - Albert Fried & Co.

In regard to the seasonality, what gives you confidence that you’d be able to expand revenue, first, I guess, to $100 million, and then to essentially to a buck and a quarter to make your guidance. Are there contracts in place? Is there anything that you can hang your hat on in regard to deriving higher CPMs from more bespoke deals that is going to offset the loss incurred in the first quarter?

Steve Cakebread

You know, as we talked about, we’re in the consumer ad spending, so we have a fair amount of history that suggests that with the addition of our sales team, we’ll be able to increase the ad revenues and we feel fairly comfortable with that. We didn’t suggest - and I don’t think you should think about us increasing CPMs or RPMs, in our terminology, over this year. We’re getting huge growth in listenership, predominantly in the mobile space. But we feel comfortable with the clients that we have, the team that we have in place, that we’ll continue to see from Q1 through Q4 that sequential growth in our ad revenue.

Operator

Your next question comes from the line of Edward Williams from BMO Capital Markets. Your line is now open.

Edward Williams - BMO Capital Markets

I was just wondering, can you share your thoughts at this point on the current competitive landscape, particularly with the recent personalized P2P radio offering?

Joe Kennedy

As I alluded to on the call, there have been a number of other initiatives in digital music of the prior year. And I think the growth of Pandora is very clearly completely unaffected by any of those initiatives. We clearly are delivering the best personalized radio experience in the world. Consumers are embracing it. As we’ve talked about, the kind of experience that we provide represents 80% of the overall consumer music listening experience and we continue to feel very good about our position in that category. 70% of all internet radio listening in this country on Pandora. And unaffected by the other initiatives, whether in internet radio or in other parts of the consumer music category. And I think the results that we continue to release, the fourth quarter results as well as the February results that I mentioned, just continue to demonstrate we have a very strong position and a very sustainable position.

Operator

Your next question comes from the line of Aaron Kessler from Raymond James. Your line is now open.

Aaron Kessler - Raymond James

Quick question. If you can update us on the ad impressions per hour on mobile, and maybe where you see that going over the next year or so, just as you try to increase monetization?

Joe Kennedy

In terms of the amount of inventory we have, which is fundamentally a function of how much consumers interact with the service - just to remind everyone on the call, we show display or video advertising only when a consumer has interacted with Pandora, given a thumbs up, thumbs down, skipped a song, changed stations, and we continue to get at least seven of those interactions per hour across all of our primary platforms. That has not changed, and continues to be a core advantage of Pandora in terms of that engagement and interactivity we get with the consumer. We don’t see that changing in the foreseeable future.

In terms of our sell-through rates, as Steve alluded to, we would basically guide people to think about our RPMs, which are largely driven by our sell-through rates, as remaining roughly constant within mobile and roughly constant within desktop with where they’ve been the past year adjusted each quarter for seasonality.

Operator

Your last question comes from the line of Ralph Shackart from William Blair. Your line is now open.

Ralph Shackart - William Blair

Joe, I think you touched on the call that Q1 remnant won’t matter as much as it did in Q4. Just curious on the pricing for remnant inventory in Q1, what are the trends there? And then also Q1, now that we’re through March a little bit, are you still on plan in terms of your mix between premium sell-through as well as remnant inventory?

Steve Cakebread

As Joe said, remnant was pretty much driven by January. We’re into direct selling, and I think we get less and less over the year in terms of remnant, so we don’t see an impact there. I would say that for the last six months, last three quarters, we’ve been 70% mobile listening. As Joe mentioned earlier, that’s going to continue to go up just slightly, but there’s no significant changes in our mix between desktop and web and mobile.

Dominic Paschel

With that, we’ll conclude today’s fourth quarter fiscal 2012 call, and we look forward to chatting with you over the course of the next quarter.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pandora Media's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts