By RJ Towner
On Wednesday afternoon, online radio service Pandora (P) reported strong results for its fiscal year 2013 second quarter. Revenue increased 51% year-over-year to $101.3 million, which was in-line with consensus estimates. Non-GAAP earnings per share fell about $0.02 year-over-year to breakeven, which was a few pennies better than consensus expectations. As a result of the quarterly performance, the firm increased both its revenue and earnings guidance for fiscal year 2013. The company expects revenue for the year to be $425 million-$432 million, up from its previous guidance of $420 million-$427 million and above consensus (which called for $424 million). Its non-GAAP loss per share is now expected to be between ($0.08)-($0.04) for the year, compared to the consensus estimate calling for a loss of ($0.11) per share.
Though we're not jumping into the shares anytime soon, we are becoming more constructive on the company. While fellow rapid growth tech companies like Facebook (FB) struggle to monetize the shift to mobile computing, Pandora seems to be on a clear path. Total listener hours during the second quarter surged 80% year-over-year to 3.3 billion, with over 75% of this listening occurring on mobile devices. The firm subsequently grew mobile advertising revenue 86% year-over-year, to $59.2 million. In fact, management noted that mobile ad revenue may become more lucrative than advertising profits on traditional desktops. The radio station's app is able to display large ads that garner the majority of the screen (and the user's attention), without negatively impacting the listener's experience. On top of that, GPS installed in mobile devices and music selection will allow marketers to reach extremely specific demographics, bolstering the company's advertising opportunity.
Additionally, the firm nearly doubled its market share to 6% in the United States. Pandora also intends to enter new markets, including Australia and New Zealand. We predict the company will be relatively successful and has a long runway in terms of international expansion. Still, the firm's future remains contingent on lowering content costs, which amounted to 60% of revenue during the second quarter. Pandora doesn't generate significant cash flow at this time, though that could change if content costs decline considerably. We're confident consumers will continue to gravitate to the Internet radio provider, but as we've stated before, this won't matter unless the firm can generate meaningful profits over the long haul. We remain on the sidelines in our valuentum style actively-managed portfolios for now.