Pandora Media's CEO Discusses F2Q13 Results - Earnings Call Transcript

 |  About: Pandora Media (P)
by: SA Transcripts


Welcome to Pandora Media second quarter fiscal 2013 financial results conference call. All lines have been placed on mute. (Operator Instructions) Opening today’s call is Dominic Paschel, Vice President of Pandora Media Inc. Mr. Paschel, you have the line.

Dominic Paschel

Thank you, Sheela. Good afternoon and welcome to Pandora’s second quarter fiscal 2013 financial results call for the quarter ended July 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 risk, uncertainty and assumptions. Accordingly, actual results could differ materially. For a discussion of the 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 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

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

Joe Kennedy

Thanks, Dom. This quarter exceeded our expectations as our strong momentum continues with both listeners and advertisers. Consumer adoption of Pandora personalized radio continues at an extraordinary pace. At the end of July, active users were just under 55 million, an increase of 48% from just over 37 million during the same time period last year.

Listener hours for the quarter were 3.30 billion, an increase 80% year over year. More than 75% of total listening hours took place on mobile and other connected devices. To put our listener hours in a broader perspective, they exceeded the total number of hours US consumers spend on YouTube in the same time.

And Pandora’s market share of all US radio listening as of the end of July exceeded 6%, up from 3.5% a year ago. The second quarter financial results exceeded the high end of our revenue and earnings expectations. Pandora’s total revenue grew 51% to $101.3 million. Total mobile revenue including subscription revenue on mobile was approximately $59.2 million. Mobile revenue was up 86% year-over-year, quite close to our growth rate in mobile hours which was 96% meaning that we have narrowed the mobile monetization gap considerably.

In fact if one adjusts the mobile revenue from Q2 of last year to exclude the revenue associated with the single large advertiser we had at that time, our growth in mobile revenue year-on-year actually outpaced the growth in mobile hours. We expect continued strong progress for the remainder of the year and as Steve will detail later in the call, we are raising our guidance for fiscal 2013 based on our strong second quarter results and ongoing business momentum.

I would like to dive a bit more deeply into our mobile efforts especially mobile monetization and then speak briefly about our expansion into Australia and New Zealand. Our mobile monetization strategies are working. These efforts to further developed advertising monetization of mobile fall under two broad strategic themes. First, enabling interactive buyers to easily extend their previously web-centric spending to multi-platform spending on Pandora giving them a unique advantage in being able to speak to the full range of their target audience as that audience spends more and more time on mobile.

And second, disrupting the approximately $16 billion market for traditional radio advertising with add products that offer superior targeting, interactivity and measurability. Pandora has several unique and compelling advantages in the mobile advertising market. The auditory yet interactive nature of the Pandora consumer experience means that after consumers interact with Pandora, some of the song, change of station et cetera, we can provide display advertisers with substantial screen real estate since the consumer is receiving the benefit they want through their ears, not through their eyes.

The auditory nature of the Pandora experience also enables us to offer audio advertising which is being embraced by digital ad buyers as a powerful rich media ad products as well as by traditional radio ad buyers as superior to audio advertising on broadcast radio because it is targetable, interactive and measurable.

We continue to see good early progress in our efforts to disrupt the traditional radio advertising market. In addition to providing these advertisers with greater capabilities, our continued share growth enables us to also provide more and more audience reach. During the second quarter Pandora’s audience grew across all key radio buying demographics.

Pandora’s June 2012 Triton Webcast Metrics report showed continued average quarter hour and cumulative audience gains, both nationally and in the top ten local radio markets across the country. Based on Media Audit surveys from earlier this year, Pandora is already the largest radio station reaching adults 18 and over in 25 US markets including the two biggest markets New York and LA.

We also continue to make good progress in our development efforts to streamline the local ad buying process with the ultimate goal of making buying ads on Pandora as easy as buying traditional radio advertising. We expect that we will complete integration into the most important radio advertising in media buying platform by the end of this year.

Once integration is in place, we see tremendous opportunity for increased monetization and anticipate significant expansion of the number of markets in which we have a local presence. While we have tremendous focus on mobile monetization, we’re also investing heavily to ensure that we maintained and expand our category leadership as the best personalized radio experience in the world in the mobile environment.

Just last week we released a new version of our Android app, the most comprehensive update we’ve completed since launching the Android app three years ago. We also updated our iOS Apple app about a month ago. The feedback we received from our listeners has been enthusiastic and our efforts to deliver the category defining experience on mobile will continue.

While we still have an extraordinary amount of opportunity to grow in the US, we're excited about our first international expansion of Pandora into Australia and New Zealand. Our dream is to some day have billions of people listening to Pandora around the world. So we're excited to take this first step.

As we know from our US experience, the reality in the world of ad supported media is that advertisers are not interested in small audiences. So our primary focus initially in Australia and New Zealand will be to generate audience growth in order to achieve the scale needed to attract significant advertising revenue similar to how we develop in the United States.

Right now the roadmap for Australia and New Zealand includes creating specific mobile apps for the region and building the necessary infrastructure to develop the business in those countries.

In summary, Pandora continues to disrupt radio, providing listeners with the best in the world personalized radio experience and advertisers with unique and compelling opportunities to speak with their target customers across the full range of devices those customers are now spending time with.

As a result our market share gains and advertising revenue growth continue at an extraordinary pace. Our core mobile monetization strategies are working and we believe that our scale coupled with our products unique advertising capabilities give Pandora an advantage in capturing an out size share of media buying from advertisers as they shift their spending from traditional forms of media to online and mobile.

We're please with our second quarter results and our excited by the opportunities we see for the remainder of this year and for years to come.

With that let me turn it over to Steve.

Steve Cakebread

Thank you, Joe. I am also pleased with the second quarter performance from a revenue and profitability perspective. So I'll review our second quarter performance in some detail in addition to providing our updated financial plans for the third quarter and the fiscal year. And then we'll take your questions.

Pandora delivered second quarter revenue of $101.3 million representing 51% growth from the year ago quarter and a Joe mention above the high end of our guidance. Advertising revenue was $89.4 million, a 53% year-over-year increase and subscription in other revenues was $11.9 million and grew 36% year-over-year.

For the second quarter of fiscal 2013 on a GAAP basis, the net loss per share was $0.03. Non-GAAP EPS was breakeven excluding approximately $6 million in stock based compensation and exceeding the high end of our non-GAAP EPS guidance by $0.03. GAAP net loss per share is based on 167 million weighted average shares outstanding and non-GAAP are based on 190 million weighted average shares outstanding.

These calculations as well assume minimal tax expense due to our net operating loss position. On our fourth quarter call, we introduced monthly user metrics and we'll continue to provide this information until third party audience measurements are in place that would provide radio, mobile and cross platform advertisers’ accurate information on Pandora’s users and usage.

Moving forward, we plan on showing more detail on RPMs on a quarterly basis in order to help investors better understand our monetization efforts on both the desktop as well as mobile and other connected devices. Keep in mind, RPM is defined as revenue earned per thousand listening hours. Total RPM includes ad and subscription hours.

We are pleased with the 80% growth in our total listening hours from 1.83 billion in the second quarter of fiscal 2012 to 3.3 billion this quarter. Total listening hours on mobile and other connected devices have moved from approximately 70% to more than 75% of our total listening hours expanding our position as a leading mobile service for both consumers and advertisers.

On mobile and other devices, total mobile RPMs increased from 19.8 in the trailing 12 month period in the July 31, 2011 to 21.5 in the same period this year. Mobile and other connected device ad RPMs increased from [18.07] in the trailing 12 months period ended July 31 to 20.4 in the same period this year.

This represents a solid improvement and reflects our continued focus on monetizing our mobile opportunities. On to traditional computer, total RPMs decreased from 61.3 in the trailing 12 months period ended July 2011 to 54 in the same period this year. Traditional ad RPMs decreased from 65.2 in the trailing 12 month period ended July 2011 to 56.9 in the same period this year.

Primarily because we effectively eliminated the 40 hour per month free listening [cap] on traditional computers in September 2011 which contributed to the sharp increase in listener hours roughly an increase of 42% year-over-year for total traditional computer listening hours during the 12 months period and an increase of 46% year-over-year for ad supported desktop listening hours during that trailing 12 months.

As a result, total RPMs decreased from 34.9 in the trailing 12 month period from July 31, 2011 to 30.3 in that same period this year.

This reflects the continuing mixture from desktop to mobile listening and is consistent with what we expected in terms of RPM transfer for the year. Moving on to expenses, we increased headcount 38% year-over-year from 427 employees at the end of the second quarter of fiscal 2012 to 589 employees at the end of the second quarter of fiscal 2013.

We grew sales headcount 79% from the second quarter fiscal 2012. Our marketing and sales expense grew 62% from 14.5 million to 23.5 million compared to the year ago quarter as we continue to focus on building our sales team as effectively as possible while managing our growth and markets by territory to make sure our sales force additions are productive.

Product development expenses grew 31% from 3.4 million in the second quarter of fiscal 2012 to $4.5 million in the current year period and our largest single expense category content acquisition with $60.5 million or 60% of revenue and as a result of continued growth in our listener hours.

Pandora ended the second quarter with $82.3 million in cash, cash equivalents and short-term investments compared with $80.6 million at the end of the prior quarter. Cash provided by operating activities was $2.8 million for the second quarter of fiscal 2013 compared to $596,000 generated in the year ago quarter.

And we continue to expect to incur roughly $2 million to $3 million in CapEx per quarter for the rest of the fiscal 2013.

Please note a change in our financial reporting. Going forward, content costs will be included as part of Pandora’s cost of revenue, though content costs will continue to be disclosed as a separate line item. This will be reflected on our upcoming 10-Q filing.

Let me now finish with some thoughts regarding our guidance. Starting with the full-year fiscal 2013, we're estimating total revenues to be in the range of $425 million to $432 million, our growth at the midpoint of about 56%, an improvement from our prior guidance of $420 million to $427 million. From a profitability perspective, we expect fiscal 2013 non-GAAP net loss per share to be between $0.04 loss and $0.08 loss.

Fiscal 2013 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 a $169 million weighted average basic shares outstanding for fiscal 2013.

For the third quarter of fiscal 2013, we currently expect total revenue to be in the range of $115 million to $118 million and non-GAAP earnings per share are expected to be between breakeven and $0.01 positive for the third quarter. Non-GAAP earnings per share excludes stock-based compensation assume a minimal tax expense, given our NOLs and are based on a 194 million shares weighted average diluted for the Q3 fiscal 2013.

In closing let me take a minute to let everyone know I'll be leaving Pandora towards the end of this calendar year. Over the nearly three years I have accomplished the goals set out for Pandora’s finance function, build a great finance team, installed cloud based financial systems and improved Pandora’s process and controls.

Please note that there is no disputes or financial issues with the company. It’s time for me to consider other industry change and opportunities and I wanted to make sure we accomplished a successful transition to the next Pandora’s CFO.

Pandora’s market share of radio continues to increase and reach record levels. We've begun to expand internationally. It has significant market opportunity in front of it. The company had a great Q2 with strong revenue growth across the business and our outlook for the remainder of fiscal year 13 is strong. So I'll turn it back over to Joe now.

Joe Kennedy

While Steve will be with us for quite a while longer, I would still like to take this opportunity to share how much I've appreciated all his efforts and contribution since joining us way back early in 2010. When Steve joined us, we had a handful of people in the finance team performing the most basic of functions. And thanks to Steve’s leadership we now have a fully developed finance function designed for a publicly traded company, including great people up and down the organization.

From a very personnel standpoint it’s been a privilege for me to work with Steve through this critical period in the company’s development. With that we'll be glad to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Doug Anmuth from JPMorgan. Your line is now open.

Doug Anmuth - JPMorgan

Just wanted to ask two things, first can you help us understand more about what’s -- how the breakout works in the $59 million of mobile revenue, I mean how much in that is allocated towards subscriptions and how you determine how to allocate the subscription revenue between mobile and web? That’s number one.

And then the second question you’ve talked about local ad campaigns increasing from I think 400 in April to 800 in June and I was curious about what the impact is of the local reseller program or percentage of your business that is now and what do you think it could be going forward? Thanks.

Joe Kennedy

Doug this Joe, we are just looking at the details of the number. I believe of the total $59.2 million of mobile revenue $53.2 million is ad revenue and the remainder is subscription and the method we use to allocate the subscription is for subscribers based on what percentage of their hours are spent on mobile and other connected devices as opposed to on the desktop.

In terms of your second question about the reseller program we continue to develop a number of different initiatives particularly focused on local markets. That’s one of them that we started earlier this year. I think we will continue to have a number of different experiments in that category. Really too early to give any specific kind of results or prognosis for that piece of a puzzle. I think the core revenue generation progress that we are making is I said really driven fundamentally by our direct sales efforts, both interactive buyers moving to multi-platform as well as our direct sales efforts that are attracting radio ad dollars, both national and local.


Your next question comes from the line of So Young Lee from SunTrust. Your line is now open.

So Young Lee - SunTrust

I was just curious about your COGS, it’s down nicely quarter over quarter in your year to a low percent of revenue. I was wondering what’s driving that lower cost and is that sustainable cost for these expenses here today and also secondly just curious about your relationship with the ad buying network. I assume it is with [Media Ocean], wondering what your progress is with others and what road blocks you’ve had to go through to get that deal finished?

Steve Cakebread

I will talk about the cost of revenues. Obviously we (inaudible) both our serving costs as well as our trafficking costs for ads through our various ad servers. Those costs as we continue to grow will decline, just based on volumes. So you will continue to see and we expect slight improvements there, but nothing dramatic over time. It will just get better based on volumes.

Joe Kennedy

I think you see that generally across all the income statement expense line items except for content acquisition. There is a certain amount of leverage that comes from scaled or a fixed cost and even though we are investing heavily seeing in particular in the sales line we will continue to invest heavily in the product line. We do get just sheer revenue based leverage in those lines. On terms of the ad platforms really a broken record there in terms of the plans that we’ve outlined at the beginning of the year to make Pandora ad buying as easy as it is to buy your local FM radio station or your clear channel national network. You know, those efforts continue adding good taste and you know, we anticipate the completion by the end of this year which we see really opening up terrific opportunities for us.


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

Jason Maynard - Wells Fargo

First, Steve, congrats on the mobile (inaudible) and I know this is little sacrilegious to ask as an analyst but your performance on the operating profit line was impressive. Given the fact that you got such opportunity if I can, do you think you are hiring enough, I mean can you add more people on the sales side? Could you spend more money on marketing because the different between making a little bit of money and losing a little bit of money is not that big of a deal in the whole scheme of things? So, how are you guys thinking about that sort of balance of getting the profitability but frankly you know, putting more wood behind some of the investments you are making and actually spending more money to try and facilitate faster growth? Thanks.

Joe Kennedy

I think it really goes back to the previous question in terms of we are continuing to invest said, as Steve said, commissionable sales headcount was up 79% year-on-year. I think that’s [simplimatic] on very significant investment in the sales area and we will continue that. We will continue to invest heavily in product I talked about the investments we're making in mobile. We're making those investments but in those expense lines, we're also getting leverage because there are fixed cost components to sales or fixed cost components to product and our revenue growth is so rapid that we benefit from leverage in those line items. So I think we want to invest, we’ll continue to invest, are investing significantly but in those operating expense areas we will also continue to get some leverage and its due to certain extent more you know more counter balance each other.


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

Mark Mahaney - Citi

Two questions please, first your experience in Australia and New Zealand. Are they learning that you could find from the launches on all service stations from those markets to other markets or are each of these international markets can require about specific ramp ups in such there is no particular learning curves as you go from one market to another. And then you even comment about finding a Pandora is easier to buy a local advertising as traditional radio advertisers high level. What could you say would be two biggest [obstacles] why isn't it easier for local ads buyers currently to buy Pandora and how do you solve that? Thank you.

Joe Kennedy

Thanks Mark. In terms of the playbook for launching a market to a certain extent actually we are already, we are entering Australia and New Zealand with the sense of that playbook from our US launch. We really have talk away numerous listeners from the launch that we had in this country and although we're certainly modifying and innovating there is a core strategy to how we believe Pandora can be launched in a market and at least in markets that are reasonably similar to the US in terms of kind of basic kind of consumer structure.

We think that's the right playbook, that’s the playbook we are following in Australia and New Zealand and we believe that playbook will be replicable in other markets as well. In terms of your question about local ad buying, I think you know the keys really in terms of they know what’s the delta between where were we and what was the state that was going to make Pandora ad buying as easy as buying your local FM station. It starts with having the media buyer in an agency having access to third party audience information that enables them to see that information, that enables them to develop media plans based on that information to then based on that to electronically request proposals from Pandora to receive proposals from [Pandora] electronically to placing orders electronically and then do follow-up billing electronically. And as we have talked about we have been gradually making steps through that process using (inaudible) to surface audience information and then working on the various let’s call it e-business steps that follow that, that I have articulated and so it’s really working through each of those steps, so that Pandora buying is not a manual process that’s kind off the computer that the media buyer uses or is a very separate experience even on that computer by making it flow through that media volume platform in the same way that FM radio volume flows through that platform.


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

Laura Martin - Needham

Hi there just a couple of things, one is very nice guidance increases taking us up against for the both the quarter and the full year, but I am noticing that the EPS line is remaining unchanged so it sounds like there is a little bit of margin pressure going on in the second half of fiscal ’13. My question to you is as we look forward into the fiscal ‘14 numbers could you identify some of the categories of costs that will not recur in ‘14 that may allow us to get some margin expansion going into fiscal ‘14?

And then my second question is on the revenue side, Joe you said in the past the trajectory of pricing thanks for the pricing data by the way. You said the trajectory of pricing there were pricing trajectory on mobile is actually mired the original pricing trajectory on desktop and I am wondering whether that is continuing to occur because we are getting kind of similar growth on the listening side and is that the pricing tower keeping up on the mobile side, this is still mired what we saw on desktop? Thanks.

Joe Kennedy

Sure in terms of the operating expense investment they will make in the remainder of this year we as I indicated earlier continue to look to invest significantly in sales as well as significantly in product as I mentioned before, we are making those investments there is some offset in terms of scale based leverage but I think that continued investment in sales particularly local sales but also nationally and investment in product influences the guidance that we have given and personally in terms of the operating expenses.

As I mentioned, we anticipate continued expansion in the number of markets in which we have a local presence and accelerating our efforts as we get the media buying platform for audio into the position where we want it to be.

In terms of mobile pricing, we continue to see that where we direct sell advertising whether it’s on mobile or on the desktop that these CPM price realization of a direct sales product on mobile and desktop are in the same ballpark. I think what you can see from the numbers we released, the big delta as we previously articulated is the difference between when we direct sell an ad versus when it’s sold through a third party. The price realization through a third party is significantly lower compared with when we direct sell it or sells and that really is the dominant difference.


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

Unidentified Analyst

Hi, this is John for Scott. I just had a question about the relationship with PPNZ and PPCA in New Zealand. In your 8-K, it left a little unclear which organization you are working through. It sounds like PPNZ and then you maybe working through them for Australia as well because it said it was indicative of the going rate for Australia. We're just trying to figure out if there is some sort of relationship for both countries through one organization and if so, is that maybe a model you could follow in other countries?

Joe Kennedy

Yeah, the answer is we actually, our payments and processing will be through PPNZ, the New Zealand Collection Society for both Australia and New Zealand and the related territories down under. Between the organization there are agreements that enable cross licensing and the PPNZ organization is handling the relationship for the entire region down under.

In terms of is that applicable in other territories, I would say each country and each territory is kind of its own base. So I wouldn’t necessarily say that, that particular model is applicable going forward. We continue to pursue international expansion where we can achieve royalty economics that are consistent with long-term value. As we previously said, where we see those opportunities, we will pursue them quickly as we have in Australia and New Zealand and where those long-term economics are not right, we will continue to patience.


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

Jeff Houston - Barrington Research

You certainly have got some big shoes to fill with Steve’s departure. Could you talk a bit about where you are in the replacement search and some of the criteria you are looking forward in the replacement?

Joe Kennedy

We retain, Jeff standards of Heidrick & Struggles who is you know one of the A CFO recruiters you know in the category and he will be kicking off the search process and you know really looking for someone who can build on the terrific foundation that Steve has built.


Your next question comes from the line of Nat Brogadir from Stifel Nicolaus. Your line is now open.

Nat Brogadir - Stifel Nicolaus

Just you finally saw free cash flow inflect positive this quarter. It looks like DSOs came down nicely. Is there a change to how you guys are clicking on that front and than secondly how should we think about subscription, listening hours. I know you talked about the revenue split, but you could give some color on sub hours and maybe mobile sub hours if possible. Thanks a lot.

Steve Cakebread

On the DSO, you know we are always focus on cash flow and we continue to add staff in that area because collections is a big part of people and their knowledge and relationships with our clients and customers. So we did a great job this quarter. Some of it is seasonality because you have business and campaigns that run at certain quarters and you collect in another, but it’s an ongoing focus for the company and we've had a great collections team and we'll carry on.

Joe Kennedy

To your second question, Nat. One of our areas of focus over the past year, we haven't talked about it a lot is developing subscription on mobile as well and we have made some good early progress there in terms of the number of the subscribers that we have on mobile and both generated on mobile in terms of in app subscriptions and of course subscribers who split their listening across web and mobile.

So that has been an area of focus for us, we tend to speak a lot about the advertising side. But yes we certainly have a team that’s focused on subscription development particularly in mobile and are making good progress there and you can see that is helping the mobile monetization numbers as well.


Your next question comes from the line of Michael Graham from Canaccord. Your line is now open.

Michael Graham - Canaccord

Joe, you had the earlier comment that the rates on mobile for when you sell it direct are similar to desktop. So does that mean that the improvement that you are seeing in your mobile RPMs is due to the mix shifting more towards direct sales?

And then as a follow up to that, it seems like if the two rates are the same, mobile and desktop for direct sales, it seems like you would get a little less from the mobile because the screen is smaller and the display is may be a little less valuable, but you might get more because you can do more geo targeting. But could you just talk about some of the tradeoffs in terms of value to the advertiser on the two platforms?

Joe Kennedy

Yes to the first part of your question, really the difference in the desktop and mobile in terms of RPMs is really about sell through which is just another way of talking about what’s in the mix of what we direct sell versus what is sold through third parties or left completely unsold. And really the key opportunity for us is to increase that sell through, that percentage of the ad opportunities on mobile that we direct sell at premium rates.

In terms of how advertisers look at mobile, again I think as exemplified by a study that was put out by the Mobile Marketing Association today that in particular looked at the ROI of mobile and based on that ROI, how much of ad spend should be going via mobile.

It concluded by a way that 7% of the typical consumer marketers ad budget should go behind mobile. That contrast with 1% or less where just where the industry was a year ago and that’s based on pretty intensive ROI analysis.

So I think the bottom line is that particularly on Pandora, but even in the category generally advertisers are seeing ROI behind their mobile efforts. In particular as I talked about the distinct advantage we have of offering a lot of screen real estate to advertisers on mobile. Yes in terms of how many inches that is, that is less than it’s the case then on the desktop.

But the consumer’s focus on a mobile device is dramatically different and more intense than the focus that a consumer typically gives a consumer screen and I think that is reflected in the kind of quick through and other response rates that marketers have seen and continue to see on the mobile device.

Obviously we also have as I talked about a tremendous advantage in terms of the ability to offer audio advertising which obviously is a form of advertising that flows just absolutely without any barrier, completely seamlessly to the mobile environment.

So hopefully that gives you some perspective in terms of how marketers are viewing it and I think as more and more of the data comes in, marketers are concluding, I really need to spend more money on mobile, not just because my audience is spending so much time there but because the return is really there for me.


Your next question comes from the line of James Marsh from Piper Jaffray. Your line is now open.

James Marsh - Piper Jaffray

I was hoping you could comment on some of the proposed legislation out there involving use of licensing. If you could just briefly compare to have the two current [bills] that are out there and which one do you think makes more sense and if possible maybe just try to handicap their outcomes?

Joe Kennedy

Sure James. I will start with a narrow answer and go more broadly so people on the call may not know there are two bills that have been circulating in early form in Washington DC both on the topic of radio royalties, one from Representative Chaffetz; it’s one from Representative Nadler. In our view, the Chaffetz bill gets it right. It’s backed up by Brookings Institute Study that’s recently been released that it is very much line-on-line with the conclusions of a recent Brookings Institute report. The Nadler bill, I think most people have concluded is fundamentally fraud but going upper level, we're pleased that the issue of radio royalties and in particular establishing parity in the legislative foundation for the various digital forms of radio whether it's satellite radio, cable radio or internet radio that its good policy to have the same legislative foundation for all the forms of digital radio, having legislative differences that are tied to whether the bits or stream from a satellite or through a cable box or over the internet just doesn’t make good sense. So we're pleased that the number of legislators who are tuning into that issue and the increasing focus that’s receiving and we look forward to kind of more intensive congressional [inquiry] into those topics and definitely are spending time there to educate legislators and see if we can get the legislator foundation to the place where there is a really fair and equal treatment across all the digital platforms.


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

Aaron Kessler - Raymond James

Couple of questions. First, do you have sense for what percentage of dollars today are going through the ad buying platform just trying to figure out how much that benefited as you migrate to that ad buying platform. And second in terms of political advertising are you seeing any increases in that so far and have you included any political advertising in your guidance. Thank you.

Joe Kennedy

Aaron in essence the vast, vast, vast majority of ad buying goes through these platforms. You know I don't know what specific percentage is but it’s kind of like asking what percent of stock trading goes through manual processes versus computerized processes. And my guess that the overwhelming majority goes through computerized processes.

So it is very fundamental to the structure and function of ad buying to get on these platforms and to transact electronically. In terms of political advertising, there is a modest amount of political ad revenue in the numbers that we've just reported for Q2. Obviously most to our ad spending will take place in these final months here leading up to the election. We are seeing some of that activity, the fact that we enabled the ability to target geographically and demographically it’s highly attractive to political advertisers just as it is to virtually very other form of advertising so we are picking up some dollars there.

It’s not an insignificant amount but it’s not a huge amount either, political advertisers still overwhelmingly favor television as their medium of choice and I would be surprised well I think the internet share of political ad spending would probably be up this cycle. I would be surprised if the internet gets more than a single digit share of total political ad spend. So it’s a bit of a factor in Q3 but not an overwhelming one.


Your next question comes from the line of Martin Pyykkonen from Wedge Partners. Your line is now open.

Martin Pyykkonen - Wedge Partners

Two things, first on the ad buying platform again that you’ve talked about of being complete by the end of the year. I just want to get a sense and quality of basis, so this kind of a continuing whether getting to be more and more usage you go through these last four months or is it a fairly binary thing that you are doing the work and then it turns on at the end of the calendar year. I was trying to get a sense for that. And you mentioned the significant ramp in new local markets that you would open up I mean any more color on that either if it’s in terms of numbers or should we think of this as being fully integrated into December and early first quarter certainly first half that you expand your a number of local markets pretty significant, that’s way to…

Joe Kennedy

Yeah the ad buying platforms in terms of the first part of the question, I would say there is a first part that’s pretty binary in terms of the system works done and it’s available and then there is a second part which is just agency-by-agency kind of roll out in adoption it’s not as if every agency updates their version of the system overnight and you go from kind of nowhere to everywhere. So there is a certain amount of system work that has to be completed that processes we have mentioned continues to go well and then there will be a period in which the agencies kind of update their versions of the platforms so that they are able to use the new capability.

As we look at the increase in markets and increase in the number of salespeople we are not giving specific numbers at this point. We do if you looked at our history tends to focus that expansion in the Q4 and Q1 time period that time of year when it makes the more sense for us to hire those people, bring them up to speed and get them going and so we are definitely in the process of preparing for that kind of expansion which will be heavily centered in the Q4 and Q1 timeframe.


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

Brandon Ross - BTIG

It is actually Brandon Ross here for Rich. Your new iOS app appears to set you guys up for better mobile monetization and clearly it’s been working. However, there have been a number of complaints about the [bugginess] of the app and ratings have declined in the app store. I was wondering first of all why there hasn’t been an update to fix the bugs that have been out there since the beginning of July and secondly, how you guys think about the trade off between mobile monetization and users’ experience? Thanks

Joe Kennedy

Brandon, whenever we do a release whether it’s a web release or a mobile release we literally have a team of people who are studying every single aspect of user analytics by day and those reports propagate throughout the product team and the senior leadership and as we have launched the iOS update, you alluded to a month ago as well as the Android app last week, we had seen only positive movement in all of the user and usage metrics associated with those releases and feel very good about them.

In terms of the kind of trade off, I think your inference that we’re trying to do something on the advertising side in these changes is not correct. Really, the driver of these changes to iOS and Android, its fundamentally deliver a better consumer experience, both in terms of just the design and finish of the applications but also as you can see, we're bringing more and more of the functionality that’s being available on the web, artist information, lyrics etcetera, the ability to look back and rate songs that you heard five minutes ago or 10 minutes ago and that really is our focus and I think that’s why the user and usage metrics have been all positives from these releases as consumers embrace the expanded functionality and the cleaner execution of the apps.


Your last question in queue comes from the line of Ryan [Witz] from Barclays. Your line is now open.

Unidentified Analyst

This is Ryan, calling on behalf of Anthony Diclemente. I just had a quick question about subscription. It looks like it’s nice sequentially. I was wondering, what's driving that and how we should think about that going forward? Thanks.

Joe Kennedy

As I alluded to, we have had some focus that we haven't talked much about in terms of subscription in app on mobile and have seen some success there that is a piece of a puzzle in terms of continued progress of mobile revenue generation and mobile monetization.

We’ve even taken some of those lessons to the web where we have on mobile we experimented for the first time with a $4 a month plan as opposed to $36 a year plan that we had previously offered. And have seen good success there and in fact have rolled out a monthly plan on the web as well.

So subscription is very much an area that gets the focus of a team here and they are making good progress. That said we are also making great progress on the advertising side and so as we think about the overall mix of subscription in the total revenue pie, I think we continue to expect it to be in that 10% to 15% range that we have articulated since the time of the IPO.

Dominic Paschel

Great, thank you. With that we'll conclude today's conference call and look forward to seeing you throughout the month of September and October.


This concludes today's conference call. You may now disconnect.

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