Pandora Rises On Prospects Of Continued Profits

| About: Pandora Media (P)

There have been many critics out there that said it could not be done, but Pandora (NYSE:P) is slowly proving them all wrong. The company announced its results today and, depending how you look at it, the company actually broke even. News of this event has sent shares of Pandora rising in after hours trading.

Yes, the business model of Pandora is challenging, but the company does seem to be getting that under control, and there is real potential that Pandora can continue the trend.

For Q2 of fiscal year 2013 total revenue was $101.3 million. This represents an impressive 51% year-over-year increase. The bulk of Pandora's growth came through advertising which was $89.4 million (a 53% year-over-year increase). Subscription and other revenue was a modest $11.9 million, but did manage to grow 36% from a year earlier.

Here is where things get tricky. On a GAAP basis Pandora actually posted a loss of ($0.03). It is the Non-GAAP earnings that were breakeven, and those exclude about $6.0 million in stock-based compensation. GAAP net loss per share is based on 167.4 million weighted average basic shares outstanding and non-GAAP are based on 190.0 million weighted average diluted shares outstanding. So while things are indeed improving, the company will certainly still have its critics because of the GAAP measurements.

Pandora did improve its cash position to $82.3 million in cash, up $1.7 million from the previous quarter. This is a positive sign as it is always better to put cash into the bank rather than have it dwindle to a point where it raises concerns.

The Pandora business relies on listenership, and that is what will drive advertisers to spend money with the company. Total listener hours grew a whopping 80% over last year to 3.30 billion.

Along with the financial results, the company offered up some new guidance that investors will certainly be discussing in the days ahead.

Q3 Guidance

  • Pandora expects Q3 revenue to be in the range of $115 million to $118 million.
  • Non-GAAP earnings per share are expected to be between breakeven and $0.01.
  • Non-GAAP earnings per share exclude stock-based compensation expense, assume minimal tax expense given the net operating loss position, and 194 million weighted average diluted shares outstanding for the third quarter fiscal 2013.

Full Year Fiscal 2013 Guidance:

  • Revenue is expected to be in the range of $425 million to $432 million.
  • Non-GAAP net loss per share is expected to be between ($0.04) and ($0.08).
  • Non-GAAP net loss per share excludes stock-based compensation expense, assumes minimal tax expense given the net operating loss position, and 169 million weighted average basic shares outstanding for fiscal 2013.

Overall Pandora seems to be headed in the right direction, and while full year numbers will not yet deliver a profit, the company seems to be managing costs and delivering better ad revenues that will drive this company. With royalty issues being discussed now at the Copyright Royalty Board, there is still a cloud. A positive result there could propel this company. A negative result could make an already challenging business even more challenging.

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