Good afternoon and welcome to Pandora Media’s first quarter fiscal year 2013 financial results conference call. [Operator instructions.] Opening today’s call is Dominic Paschel, VP. You may begin your call.
Good afternoon and welcome to Pandora’s first quarter fiscal 2013 financial results call for the quarter ended April 30, 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.
Also, I would like to remind you that during the course of this conference 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.
Thanks Dom. We had a strong start to the new fiscal year as Pandora continues to redefine radio. During the first quarter, we delivered excellent progress across every key aspect of the business. Consumer adoption of Pandora personalized radio continues at an extraordinary pace.
We’ve surpassed 150 million registered users, a level which only a very select few services have reached in the United States. Listener hours were 3.09 billion, up 92% year over year. In the trailing 30 days ended April 30, 51.9 million registered users were active on Pandora, up 53% year over year. And Pandora’s market share of all U.S. radio listening as of the end of April was just under 6%, up from 3.1% a year ago.
In the first quarter, Pandora’s total revenue grew 58% year over year to $80.8 million, exceeding the high end of our Q1 guidance by nearly $6 million. Ad revenue grew 62% to $70.6 million, as compared to the first quarter last year. Mobile and device revenue now represents roughly 55% of total advertising revenue. We expect continued strong progress for the rest of the year.
I’d like to focus most of the remainder of my remarks on monetization. Pandora today monetizes desktop usage at a significantly higher level than we do usage on mobile and other connected devices. In fact, we have already demonstrated the business model on the desktop, where content acquisition cost as a percentage of revenue is already at or below the long term target we shared during the IPO process. We believe that monetization on mobile and other devices has the same long term potential.
As we move forward and continue to turn that potential into reality, we are focused on two overarching strategies. First, continuing to rapidly grow revenue as interactive ad buyers move more and more dollars to communicate with their target customers where those customers are spending more and more of their time, on mobile and other devices. And second, disrupting the $17 billion market for traditional radio advertising.
In terms of the first of these two strategies, we have a powerful platform for interactive advertisers who want to speak with their target customers across the full range of connected devices that those customers are using today - on the desktop, on mobile phones, on tablets, wherever, whenever, and however those consumers are connected.
Pandora’s platform is uniquely powerful for these interactive ad buyers for four primary reasons. First, Pandora offers broad reach across both the desktop and mobile devices. Pandora is one of just a very small number of U.S. services that have tens of millions of users on the desktop and tens of millions of users on mobile.
Second, Pandora offers powerful targeting. Advertisers can focus on whatever combination of age, gender, geography, and music best matches their target customer. As a registration-based service, we are one of very few services that has this information for every user.
Third, Pandora offers advertisers an unusually large amount of visual real estate for their ads, which results from the fact that Pandora’s primary benefit is auditory. Yet users interact with the service an average of seven times an hour. Pandora serves visual ads only after such an interaction, guaranteeing the advertisers that the user is focused on the screen.
Most other internet-based services provide their content to consumers visually, creating a conflict between space for content and space for advertising, a conflict that is all the more acute on smaller screen devices such as mobile phones, meaning that this Pandora advantage only increases in a mobile environment.
And fourth, as a radio service, we operate in a category in which consumers are accustomed to some level of advertising between songs. As a result, Pandora offers advertisers the opportunity to speak with their target customers using audio advertising as well as visual advertising. Working in combination, these elements enable unique creative capabilities for multiplatform advertisers, which explains why the majority of the top 50 digital advertisers in the U.S. have bought multiplatform on Pandora.
Our second major monetization growth strategy is to disrupt the $17 billion market for radio advertising by bringing dramatically better advertising solutions than those available from broadcast radio. In the traditional radio world, our share and scale have made us highly relevant, and increasingly difficult for radio ad buyers not to consider.
With just under 6% share of all U.S. radio listening, we are already larger than the largest A.M. or F.M. station in many markets, and given our growth, are on track to be the largest station in most U.S. markets by the end of this year. For national network radio buyers, Pandora is already the largest radio network in the U.S. in the key 18-49 demographic.
Unlike traditional radio broadcasters, we offer targeted and interactive ads, which powerfully transform the efficiency, effectiveness, and measurability of radio advertising. For example, Planet Honda, a Union, New Jersey dealer that is among the largest Honda dealers in the greater New York-New Jersey area, gave up on terrestrial radio because it cast too wide and and expensive a geographic net. The dealership spent $10,000 in January using Pandora zipcode targeting. As a result, iPhone traffic to the dealer’s site quadrupled, so the dealership increased its ad spend to $15,000 and then $20,000 per month.
We love these success stories, and have loved seeing other dealers, including other Honda dealers in other markets, follow suit and come on board. We have the audience and the ad products to massively disrupt this market. The key for us now is to make the process of buying radio ads on Pandora as easy as buying traditional radio advertising.
There are two key pieces to doing so: third party audience measurement and integration into the systems that radio buyers use every day to plan, buy, track, and pay for advertising. We announced the first key piece this past week. Triton, a third party measurement firm whose webcast metrics product is accredited by the Media Research Council, is now providing audience measurement both nationally and locally using the same metrics that radio buyers are accustomed to using.
The second piece, integration into the systems that radio buyers use every day, is something we are actively working on and hope to have in place by the end of the year. Once the second piece is in place, we see tremendous opportunity for increased monetization, and will aggressively ramp our local radio sales teams to develop the opportunity fully.
Over the past six months, we have built initial local radio ad sales teams in most of the top ten U.S. markets. We now feel confident in the ability of our sales force to develop the radio advertising market, and as integration into the systems that radio buyers use on a daily basis is complete, we’ll be stepping up our sales force expansion aggressively.
Before I close, I’d like to just briefly review the continued progress we’ve been making in terms of our key long term strategy to make Pandora available truly anywhere, anytime. Nearly half of all radio listening takes place in the automobile, so there is no bigger long term opportunity for us than making Pandora as easy to use in car as A.M. and F.M. radio.
To this end, our progress continues with more automotive partnerships and model rollouts. At the New York International Auto Show we announced new relationships with Nissan and Suzuki. Pandora will be featured in the Nissan 2013 Altima model, which is expected to be available at dealers at the beginning of this summer.
On Suzuki models, Pandora will be available via a Garmin unit that will be factory installed on most 2013 model year Suzuki vehicles. Both manufacturers’ systems will support hallmark Pandora functions such as thumbs up, thumbs down, and the ability to skip to the next track. In both cases, in-car connectivity is enabled when the user pairs their smartphone to the vehicle.
In total, there are already 48 car and truck models that feature Pandora integration ability and are available now at dealerships, and auto makers have already announced another 10 more models that will launch this calendar year.
On the consumer electronics side, we have now teamed with DirecTV to enable DirecTV customers to easily search for their favorite artists, songs, or musical genres and create Pandora personalized radio stations using DirecTV’s new 1080p HD guide. In combination with our already launched relationship with Dish Network, Pandora is now available to all U.S. satellite TV customers.
In summary, we are pleased by the continued progress on all fronts that we have demonstrated during the first quarter, and are excited by the opportunities we see for the remainder of this year and for years to come. As we have said in previous quarters since becoming a public company, we expect to invest aggressively to accomplish our objectives and realize our full market potential.
These investments will include product and technology to expand the reach of Pandora’s service across the full range of connected devices, including the growing range of automotive brands and models. We will aggressively increase our investment in sales to capitalize on the power of our advertising platform and monetize its growing usage, and we will continue to invest in our highly passionate listening audience by engaging and enriching their lives through music as we redefine radio.
With that, let me turn it over to Steve.
Thank you Joe. I’m also pleased with our first quarter performance, in what is traditionally a seasonally weak quarter. I’ll review our first quarter performance in more detail, provide updated financial plans for the second quarter and the full fiscal year, and then we’ll open the call to questions.
So as Joe mentioned, Pandora delivered its first quarter revenues of $80.8 million, representing 58% growth from the year ago quarter. Advertising revenue was $70.6 million, a 62% increase year over year. Subscription and other revenue was $10.2 million and grew 38% year over year. Keep in mind this lower subscription growth reflects the effective removal of the cap on desktop listening last year.
For the first quarter of fiscal 2013, on a GAAP basis, net loss per share was $0.12. On a non-GAAP net loss per share, it was $0.09, excluding approximately $5.5 million in stock based compensation. Both GAAP and non-GAAP calculations are based on 165.4 million weighted average basic shares outstanding, and assume a minimal tax expense due to our net operating loss position.
Our key nonfinancial metrics rose to record numbers this quarter. Listening hours reached 3.09 billion, representing 92% growth from the year ago quarter while active listeners increased 53% to $51.9 million, from the end of April 2011 to the same time this year. And looking at profitability, our GAAP net loss for the first quarter was $20.2 million.
In terms of dollars spent, we invested in all areas, with a focus on sales and marketing, and increasing our sales force 79% year over year. This reflects our investment in not only local markets, but continuing investment in national sales as well. We increased headcount 58% year over year from 359 employees in the first quarter of fiscal 2012 to 568 employees in the first quarter of fiscal 2013. Our largest single expense category, content acquisition, was $55.8 million, or 69.1% of revenue, primarily the result of continued increase in listener hours.
Pandora ended the first quarter with $80.6 million in cash, cash equivalents, and short term investments, compared to $90.6 million at the end of the prior quarter. Cash used in operating activities was $10.6 million for the first quarter of this fiscal 2013, compared to $2.8 million generated in the year ago quarter. For Q1, we spent $1.2 million in capex, but we still expect to incur roughly $10-12 million in capex for fiscal 2013 and expect negative cash flow from operations, resulting primarily from increased listener hours and resulting content spend.
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 $420 million to $427 million, up from our previous guidance of $410 million to $420 million for the year.
From a profitability perspective, we expect fiscal 2013 non-GAAP net loss per share to be between $0.07 and $0.11. Fiscal 2013 non-GAAP net loss per share excludes stock based compensation expense, assumes minimal tax expense given our net operating loss position, and is based on 169 million weighted average basic shares outstanding for fiscal 2013.
For the second quarter of this fiscal year, we current expect total revenue to be in the range of $99 million to $101 million. Non-GAAP net loss per share is expected to be between $0.03 and $0.05 for the quarter. And the 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 168 million weighted average basic shares outstanding for Q2 fiscal 2013.
In summary, we’ve entered the year with strong momentum from both users and advertisers. Our listening hours continue to grow and reach record levels along with our market share. At the same time, we continue to invest in our sales force to support increased advertising revenue and growing advertiser interest in local and mobile markets. Today’s investments in our growth are building Pandora’s future foundation for years to come.
We’re excited about our future, off to an excellent start for the year, and now we’ll take your questions.
[Operator instructions.] Your first question comes from Doug Anmuth with JP Morgan. Your line is open.
Doug Anmuth - JP Morgan
Just first on the significance of the Triton announcement last week, obviously a good breakthrough here, but can you help us understand if you only have Triton for some period of time, and you haven’t broken through yet with Arbitron. Can you help us understand just how penetrated you can get in the radio market? And then also, is there anything that you’re doing different here in terms of the trends that we’re seeing in mobile ads, in terms of the audio versus display mix and the number of ads per hour that we’re seeing?
We don’t see the absence of Arbitron as any significant impediment to our development of this market. Triton is actually out front in terms of internet radio measurement. They were the first person in the market. Their national webcast metrics product is Media Research Council-certified, and I think it’s an absolute, perfectly fine solution for us to grow the business on. So we certainly would welcome Arbitron joining the market, but don’t see that as any significant drag on our development of the radio advertising business.
In terms of trends, I wouldn’t say that there’s any step function change to the trends in terms of ad loads, etc., again adjusted for the season. I’d say generally in line with the trends that we’ve established, including a trend that there’s a very gradual increase in the level of audio advertising, but no different from the gradual upward trend that we’ve been on for over two years now.
Your next question comes from the line of Ralph Shackart with William Blair. Your line is open.
Ralph Shackart - William Blair
Joe, I think historically you’ve given us some incremental color on mobile RPMs. Just curious how they trended in the quarter. And then secondly, can you give some mobile engagement metrics perhaps, or a little bit more color, perhaps, on click through rates or engagement metrics? I think on the call you talked about seven times per hour interaction. Just curious how mobile’s trending versus overall internet and mobile engagement.
Sure. We’re not planning on releasing the RPM for desktop and mobile every quarter. One of the reasons I think it’s very important to look at those metrics on an annual basis, as opposed to a quarter by quarter basis, clearly as Steve indicated this is the quarter in which we are seasonally weakest in terms of consumer advertising, but very strong in terms of consumer adoption.
In terms of engagement, we continue to see very strong engagement with Pandora whether it’s on the desktop or on mobile, seven or more times an hour with no material differences between the platforms. So it’s still, I think, this wonderful combination of a product whose primary benefit is auditory but one with which consumers interact very consistently on an hour to hour basis. And as I said, I think that sets up a lot of the unique monetization potential that we have, including the unique monetization potential that we have on mobile.
Your next question comes from Mark Mahaney with Citigroup. Your line is open.
Mark Mahaney - Citigroup
I’m wondering if you could address the potential for content royalty rates. And I know those are up for renewal several years out, but any new thoughts you have on the ability of Pandora as a company to negotiate those separately? Is that something that investors should look at as an option, positive potential, or negative potential?
No change versus what we’ve previously shared there. We are already preparing for the next royalty arbitration, which will begin in early 2014, end in 2015, and set rates for the 2016-2020 time period. We will be extremely well-prepared to make a case as part of that arbitration process, and I wouldn’t set any expectations that those rates will be negotiated or settled prior to that arbitration.
Your next question comes from the line of Heath Terry with Goldman Sachs. Your line is open.
Heath Terry - Goldman Sachs
Last quarter you discussed the mix that you were seeing of premium versus non-premium. Can you give us a sense of what the impact of that mix was this quarter on pricing and to the extent that you’re seeing better pricing in the network or remnant area this quarter versus last quarter?
As we indicated last quarter, really the remnant market, or what we do with advertising that we can’t direct sell at premium rates, is not particularly material to our results outside of January, and consistent with that, I would say that the story of this quarter has literally or almost nothing to do with what goes on in the remnant market. Our teams are out there selling Pandora advertising, multiplatform, desktop, mobile, etc., directly to advertisers at premium rates and that is really the story of the progress that we made this quarter from an ad revenue standpoint.
Your next question comes from Edward Williams with BMO Capital Markets. Your line is open.
Edward Williams - BMO Capital Markets
Just a quick thought. Can you give us some color as to what the principal hurdles really are as far as local advertisers adopting Pandora for their advertising needs? Is it the measurement side of it? Is it the ability to kind of buy the ad efficiently? What are the principal roadblocks they’re encountering?
With the Triton metrics now out there, I think the measurement issue is essentially behind us. I think in our experience, having been out in local markets now for, in some cases up to six months, we don’t face a lot of resistance from advertisers who question the size and scale of Pandora. I think they generally are inclined to believe that, and with the Triton numbers now out there, providing those numbers both nationally and locally, using the metrics that radio ad buyers are used to, I think that issue is behind us as a hurdle, as you would say.
And so I really think that the key thing for us at this point is making Pandora as easy to buy as broadcast radio. And we’re working intensively on that at this point. Clearly, related to that will be continued significant growth in our sales force, but we’re actually quite confident, based on what we’ve already seen, that we can hire the right people to develop this market. And so I think really the catalyst for significant development is really around enabling the ease of buying Pandora, which is really the system integration work that we refer to.
Your next question comes from Aaron Kessler with Raymond James. Your line is open.
Aaron Kessler - Raymond James
First, political advertising. Are you seeing any strong demand yet? And is that built into forecasts for the year? And also, the marketing and sales spend came in a little below my estimate for the quarter, and I guess slower than the ramp we’ve seen in the last couple quarters. If you can just provide a little more color there, especially considering I thought you’d been building up the local sales a little bit more aggressively.
In terms of political advertising, we have positioned ourselves to take advantage of that opportunity. Again, as a registered user base service, we have zipcodes for every single user, and we have actually packaged that product for political advertising purposes into something that political advertisers can buy on a congressional district basis. If they want to buy the third district in Ohio, they can buy the third district in Ohio from Pandora, as well as on a state basis. So we’re well structured in terms of targeting to meet the key needs of political advertisers.
We have begun to see some activity there. We do have resources focused on it. Historically, political advertising on the internet has been a small single digit percentage of total political advertising spend. It’s been growing each election cycle, but still relatively modest as a percentage of the overall mix. I think everyone certainly expects that to increase this year, and clearly there’s a lot of political ad spending that is being queued up.
So it’s hard for us to know exactly what the magnitude of the opportunity is this year, but we are positioning ourselves again, in terms of ad products, and in terms of sales resources, to get the maximum out of that opportunity this year, and we have incorporated that into the guidance that we’ve given you.
The second question, marketing and sales. Maybe you’re looking sequentially. I think Steve talked about we’re actually up year over year in terms of sales reps, between 75% and 80%. So we continue to be very aggressive in terms of ramping the sales force. A lot of our ramp actually was in our fiscal Q4, and so if you look simply on a sequential basis, the increase in marketing and sales might not be as much as you’d think.
But we continue to grow our sales presence, both nationally and locally, and as we indicated, as we see the catalyst coming into view on the radio side, we’ll become increasingly aggressive on the radio ad sales front.
Your next question comes from Jason Maynard with Wells Fargo. Your line is open.
Jason Maynard - Wells Fargo
I wanted to kind of drill down a little bit more on that topic of local hiring, and just get sort of an update on how you’re thinking about penetrating the existing markets you’re in. And then as you gain success in those markets, expanding to other segments. And in essence, as you look at the plan for this year, if you gain some early success, could you expand to other markets more aggressively? Do you go deeper in current markets? What’s the potential, if you will, for some variability on that sales and marketing, and basically the people side of it in terms of how fast you expand?
We anticipate both increasing the sales force in the markets where we already are and expanding the number of markets and doing so quite aggressively, but we’ll want to sync that up with the work that we’re doing in terms of enabling Pandora buying to be as easy and efficient as A.M. and F.M. radio. That’s really the catalyst we believe for getting the mainstream local radio ad buyer on board, and so we’re not going to be as aggressive in hiring at this moment as we will be as we get to the point where that catalyst kicks in, at which point you’ll see us be very aggressive again, both within the markets where we’re already present, and expanding pretty aggressively across other markets.
Your next question comes from Steven Frankel with Dougherty & Company. Your line is open.
Steven Frankel - Dougherty & Company
I wonder if you might give us a little more insight into what percent of the listening hours came from mobile and what percentage of revenue came from your largest customer this quarter.
Percent of listening from mobile is still roughly 70%. I’d say there is a modest upward trend to that number, but still roughly in the 70% range. I actually have no idea who the largest customer is. I don’t believe it’s anywhere close to the concentration limit. And in fact, as we have implemented these strategies that we’ve talked about, and in particular added the development of the radio advertising market to our already intensive efforts in terms of developing the interactive market, the number of advertisers that were serving and the diversity of the revenue base has only continued to increase.
Your next question comes from Rich Tullo with Albert Fried & Company. Your line is open.
Rich Tullo - Albert Fried & Company
Content as a percentage of revenue expanded to roughly 69% from roughly 59% in the prior quarter. How much of the expansion is due to the new Sound Exchange rate card rate? And how much was attributed to increased performances? And was the new rate covering the entire quarter?
It’s pretty simple. The new rate covers the entire quarter, and the content acquisition is driven overwhelmingly by the increase in consumer usage.
Your next question comes from Scott Devitt with Morgan Stanley. Your line is open.
John Egbert - Morgan Stanley
Hi, this is John Egbert for Scott. Steve mentioned about the slowdown in subscription revenue being due to the 40-hour cap being lifted, which makes a lot of sense. Can you guys comment on whether the slowdown is more related to listener hours going into the subscription bucket, or the actual subscription RPM coming down as a result of that change?
It’s just a slowdown in the sheer number of subscribers. So we built the initial subscription base largely off of the 40-hour cap that existed on the desktop. Yes, there were other reasons people subscribed - to get no ads, to get higher bitrate streaming on the platforms that enabled it - but it was fundamentally driven by the 40-hour cap.
With the lifting of that capital, we have focused intensively on developing subscription off of those other benefits - no ads, high bitrate streaming, etc. - and I think we’re excited about the progress we’re beginning to make there, but in this transition from having the cap as a tremendous inducement to subscribe, to kind of the new world we’re in, in which there is no such inducement, and it’s those other benefits, I think there’s a natural and understandable drop in the growth rate of subscription.
Obviously, the hours aren’t going away. In fact, if anything, we have unleashed more hours, and in particular desktop hours, by lifting the cap. So we still see that move, overall strategically, as absolutely the right move. And I believe, as we said at the time, we anticipated that it would slow our subscription revenue growth, moving a bunch of that usage effectively into ad-supported free usage.
Your next question comes from Anthony Diclemente with Barclays. Your line is open.
Anthony Diclemente - Barclays
In just listening to the conversation, a lot of questions about the opportunity for Pandora in local markets, and I just wanted to ask about the national advertising market, on the display side, in terms of market share dynamics, the competitive landscape, CPM, dynamics that you’re seeing. And along that theme, wondering, as you go out and hire folks into sales and marketing, as you’ve discussed, what percentage of that headcount is going to be dedicated incrementally to national as opposed to local ad sales?
It is very important to emphasize that we remain every bit as focused and enthusiastic about the national opportunities that we have in front of us. Most of the interactive ad sales that we’ve had really for the 6.5-plus years that we’ve been around have been focused on national interactive ad buyers. We continue to develop that market, are excited about it.
And as I said, are particularly excited that we’ve now had the majority of the top 50 digital advertisers in the country buy multiplatform desktop and mobile on Pandora, and that reflects the focus we have on continuing to develop those national interactive ad buyers and really to be their key partner as they learn how to speak with their target customers, not just on the desktop but on the range of new devices - phones, tablets, etc. - that their consumers are adopting at a very rapid pace.
So we’re excited about that opportunity. We continue to develop it well. I think that’s reflected in the stat about our penetration of the top 50 advertisers with multiplatform. And so sort of all excitement there. On top of that, we have added the opportunity of disrupting the traditional radio advertising market, which itself has both local and national components, and we’re excited about the national components of the radio ad market as we are the local ones.
In terms of the last part of your question, on the percentage of headcount, national versus local, because we have been pursuing national advertisers for over six years now, as you would expect, while we’re continuing to grow that market, we do get some leverage there and some efficiency as we have relationships with a large percentage of that market.
So I think it would be safe to say that as our sales headcount grows in the coming quarters and years, that that will be more local than national, but I think, again, that’s understandable given the history, and in no way does it reflect any lack of enthusiasm or sense of opportunity on the national side. It just means we have a very strong foundation already built there, whereas we’re just beginning to build the foundation on the local radio ad sales side.
Your next question comes from John Tinker with Maxim. Your line is open.
John Tinker - Maxim Group
Can you just give us a little more color on how you envisage listening in cars to proceed. Do you think people will listen differently in any way? A different kind of content? And whether you see any difference in the demographics.
The first point about listening in cars is that we are laying a terrific foundation for that market, but that is a market in terms of listening volume that will develop gradually. The replacement cycle for vehicle ownership in this country is about seven years, and so even as we begin to get a higher and higher percentage of the fleet covered with Pandora integration capability, it will literally take many years before we’re penetrated at the levels we’d like in terms of cars on the road.
In terms of how that changes the experience, I think for those of us who listen to Pandora in the car and the people that we’ve talked with, I think in many ways the most game-changing part of listening to Pandora in a car is that if you don’t like a song you can skip it. And once you’ve had that experience, and you kind of come out of a world of A.M. and F.M. radio, that is quite transformative.
I don’t really see that, necessarily, as different from what Pandora delivers already today on mobile phones and on the desktop, but I think it’s in the car where broadcast radio is essentially your only choice in many ways, that that greater ability to control and shape your experience just really kind of hits the consumer, and is a great big positive. So we’re very excited about the car market.
As I said, it’s almost half of all radio listening in this country. I like to think of it as a snowball, that starts very, very small, but we’re just building it, building it, and building it in the background and it will just get bigger and bigger.
I think in the short run, smartphones remain the major catalyst from a device standpoint. While, yes, about half of American cellphone users now have smartphones, that also means there’s another half yet to come. And we will continue to benefit greatly as smartphones penetrate the population, and that will be almost certainly the primary driver of our growth in the short term.
Your next question comes from the line of Richard Greenfield of BTIG. Your line is open.
Richard Greenfield - BTIG
Just responding to Joe’s comments at the beginning about the Arbitron versus Triton, if you could just help us understand, as you’re trying to really target radio advertising budgets - because it seems like more and more of your focus is kind of taking on that segment - the way Arbitron works, I believe, is that they actually know which person in the household is listening, and whether they’re actually actively listening. Whereas Triton, for both you as well as for traditional online streaming radio, just knows the I.P. address and doesn’t actually know if you’re sitting in front of your computer or a device in the living room. If you could just explain why that difference doesn’t matter as you try to attack radio ad budgets, that would be helpful.
Arbitron measures radio today in the major markets with a device called the Portable People Meter. So they seek to recruit a sample of individuals in each market representative of that market in total and incent them to wear that Portable People Meter literally for all of their waking hours. And that Portable People Meter picks up encoded signals in the broadcast A.M. and F.M. signal, and the Portable People Meter records that. And on that basis, Arbitron makes projections about the audience size and usage of broadcast radio.
Triton, on the other hand, is a census approach. Literally, every user of internet radio is measured using the Triton approach. There is, in essence, what might be considered to a layman a beacon signal that is sent as the user uses Pandora or some other internet radio service measured by Triton that lets the Triton servers know that someone is actively listening to Pandora on their desktop, on their mobile phone, whatever.
I think in many ways the fact that the Triton service is a census-based service makes it compelling, and is the basis for the Media Research Council certification that Triton has for that product. Arbitron has struggled to get Media Research Council certification for the PPM product, because of the difficulty of recruiting adequate sample to be properly representative in all of the markets.
It is true that in the case of the Triton measurement, there is a presumption that there is one and only one listener on the end of the radio signal. So in cases where Pandora’s actually playing in my living room and I have the rest of my family, or a party, or whatever, listening, that listening is only counted once. Whereas under the Portable People Meter approach, based on the way the statistics are run, it would effectively capture all of the listening to a signal if there are multiple people tuned in.
So I think there are differences, but I think we ultimately look at the Media Research Council certification that Triton has received and are excited about that, and I believe that advertisers have fully embraced their solution.
Your next question comes from Martin Pyykkonen with Wedge Partners. Your line is open.
Martin Pyykkonen - Wedge Partners
I just want to kind of calibrate what you were saying about the sales force growth, and all of this with Triton, which I think is certainly a positive from the mission side. And you obviously grew the sales force pretty substantially on maybe a lower base. But is this really a key trigger to you to believe in the ability to capture advertising growth at an accelerating base just kind of going forward from here?
And then secondly, not necessarily on a quarterly basis, but any comments you could make in terms of the timeframe you think where revenue growth would be exceeding the content licensing costs, or content licensing going up as a percentage of revenue? And again, I don’t mean nailing that down to a quarter, but some ball park timeframe on that, kind of tied into the first part of the question.
Yeah, I think the two are very much related. Again, everything we’re doing in terms of disrupting the $17 billion market for radio advertising is incremental to all of the work that we continue to do in terms of developing the interactive market, whether it’s for the desktop or mobile, or what we like to think of as multiplatform. And so our development of that radio advertising market, because it’s incremental, we believe can act as an accelerator of our overall monetization. And, as all of the pieces come into place this year, we believe that does set us up for an acceleration of the sales force and we have previously indicated that we anticipate that overall RPM we would hope to see begin to increase next fiscal year versus this fiscal year.
Your next question comes from Jeff Houston with Barrington Research. Your line is open.
Jeff Houston - Barrington Research
You touched on this a bit earlier, but I was hoping to dig a bit deeper. What levers do you have to increase mobile RPM longer term, besides increasing ads per hour, and I guess the general adoption of mobile advertising?
I think perhaps the best way to frame the mobile opportunity is really just to put it in a context of what we’ve already done on the desktop. On the desktop, we monetized, last year, at over $60 of revenue per thousand listener hours, or over $0.06 per listener hour. We did that on the strength of the visual ad opportunities that come as a result of the seven interactions per hour, and as a result of the roughly 1.5 audio ads per hour we ran versus kind of an artificial cap of three audio ads per hour.
So that basic framework, in terms of the seven visual ad opportunities per hour and the 1.5/3 audio advertising opportunities per hour, is capable of generating very significant monetization. We don’t need to increase the inventory level that we have per hour in order to meet and exceed the target business model parameters that we outlined during the IPO.
The key, really, on mobile is really taking full advantage of that inventory that we already have relative to visual advertising, increasing the percentage of those seven or so visual ad opportunities that we’re able to direct sell at a premium rate and to get that percentage of premium sell-through to the same ballpark as where we are in desktop, and similar to the audio ad opportunity, which is actually quite similar already, between mobile and the desktop.
So again, in summary, the levers that we’re pursuing don’t require any fundamental change in ad loads, ad inventory, etc. It’s just about as simple as catching mobile up to what we’ve already demonstrated on the desktop. As we alluded to, because of the nascency of the market for mobile visual advertising, that is not something that’s going to happen overnight.
But I think we’ve already demonstrated with what we shared earlier more and more advertisers are adopting Pandora’s multiplatform solution, buying both the desktop and mobile, precisely because they need to talk to their target customers everywhere those customers are connecting to the internet.
So we remain confident that the long term monetization potential of mobile is similar to that of the desktop, and that we are taking all the right steps in terms of turning that potential into reality.
Your next question comes from John Blackledge with Credit Suisse. Your line is open.
John Blackledge - Credit Suisse
Just wondering if we could put some numbers around aggressively expanding the sales force. I’m wondering, on average, how many local sales people you have in the top ten markets right now, and what’s a good target over the next year or two. And then also, in the same area, how many markets you’d be looking to expand to, say over the next year or two.
The initial team size that we have for local radio ad selling in most of the top ten markets is on the order of five or six people per market. That’s a kind of critical mass, early team, size in the world of local radio ad sales. So that’s our starting point.
Perhaps to give just some reference point of what a fully developed local radio ad sales force looks like, CBS Radio, in their disclosures, I believe has indicated - and they’re one of the top three radio groups in the country - that they have something like 1,300 radio ad sales people spread around the markets in which they operate. About 130-135 stations. So that, perhaps, gives some sense of the scale of what a reasonably developed radio advertising sales force looks like.
And clearly, we have growth ahead of us, both in terms of the markets in which we have already launched sales teams and have significant opportunity in terms of adding the number of markets, beyond the markets that we’ve already launched in. I think we’re not in a position to share the specific numbers of what we plan, and when we plan it, but I think we’ve given the key indication that the pieces of the puzzle are coming together in a way that would lead to a significant step up in terms of our sales force expansion behind the development of the local radio ad sales market.
And your last question comes from Nathaniel Schindler with Bank of America. Your line is open.
Jacob Sonnenberg - Bank of America
Hi, this is Jacob Sonnenberg for Nathaniel Schindler. Can you give us some color on what the advertising revenue line item looked like on an organic basis, excluding your 10% customer last year? And also, can you give us a little bit of color on any of the impediments you might be facing on the local sales force, building it out, if those people coming from your competitors?
I think the first question is relative to whether we did have a concentrated customer in the comparable quarter last year. I believe that it was 16% of revenue was the disclosed number. So if you want to adjust the basis for a year on year comparison without that concentrated customer, take out 16% from the prior year figure, and that will give you an adjusted year on year growth rate.
In terms of the second question, the overwhelming majority of the people that we are hiring in terms of local radio ad sales force and national radio ad sales force are coming from the existing broadcast radio groups. We’re finding good ability to attract great people who see Pandora as the future of radio, and as the future of radio advertising. And we would expect, as we continue to grow, that we’ll continue to attract a number of great people from the major radio broadcasters.
Our focus really is not in terms of where the ad dollars come from, but really in terms of focused on each of these advertisers and providing them with a superior solution to their advertising needs, better than anything they’ve ever seen before.
Great. With that, we’d like to conclude our first quarter fiscal ’13 call. We thank you for dialing in, and we’ll continue the conversation throughout the 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: firstname.lastname@example.org. Thank you!