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Pandora's mobile monetization keeps improving; sales spending takes a toll

  • Pandora (P) expects FQ4 revenue of $185M-$190M and EPS of $0.02 vs. a consensus of $187.3M and $0.04. Investors were apparently hoping for better numbers given the company's huge YTD gains.
  • Ad revenue (79% of total revenue) rose 36% Y/Y in FQ3 to $144.3M, after growing 44% in FQ2. Mobile ad sales grew 58% to $104.9M.
  • Salesforce investments continue to pressure EPS: sales/marketing spend rose 90% Y/Y to $50.6M (they rose 95% in FQ2). But content acquisition costs only rose 32% (they rose 35% in FQ2), trailing revenue growth of 50% thanks to improved monetization.
  • Pandora's total ad revenue per thousand listening hours (RPM) rose to $40.11 from $38.87 in FQ2 and $32.40 a year ago. A gap still remains between mobile and PC monetization, but it's narrowing: Mobile ad RPM was $36.00, up from $33.90 in FQ2 and a mere $25.59 a year ago, and PC ad RPM was $57.54, down slightly from $59.51 in FQ2 and $58.03 a year ago.
  • Listener hours, aided by the September removal of Pandora's free mobile monthly listened cap, totaled 4.18B, up 8% Q/Q and 17% Y/Y.
  • P -5.4% AH. CC at 5PM ET. FQ3 results, PR.
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Comments (10)
  • toonies
    , contributor
    Comments (440) | Send Message
     
    Not enough air in earnings to continue inflation of this stock. Time to decrease pressure in this bubble.
    21 Nov 2013, 04:48 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (627) | Send Message
     
    Analysts expect revenues to grow by 40% next year. Given that the ad revenues rose only 36% in Q3, the growth expectations for the next year will have to come down.

     

    Last year the company made $2m in profits in Q3 on $120m in revenues. This year it made $180m in revenues and still lost $1.7m.
    21 Nov 2013, 04:51 PM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3136) | Send Message
     
    content costs are still too high...the key input in formula is a huge anchor
    21 Nov 2013, 06:10 PM Reply Like
  • dgulick
    , contributor
    Comments (2000) | Send Message
     
    "ad revenues rose only 36% in Q3"

     

    Yeah but sub revenues grew 162%, and total revenues grew 50%.

     

    "growth expectations for the next year will have to come down"

     

    I doubt that.

     

    "Last year the company made $2m in profits in Q3 on $120m in revenues. This year it made $180m in revenues and still lost $1.7m. "

     

    It's all about scale, they are targeting breakeven to grow as fast as possible. They could have easily shown better profit by just leaving the cap on free listening in place, but they removed it in order to grow, and they are succeeding.
    21 Nov 2013, 06:24 PM Reply Like
  • dgulick
    , contributor
    Comments (2000) | Send Message
     
    Pretty solid quarter. A few observations:

     

    Total and mobile RPMs (ad and ad+sub) all at record highs, mobile RPM (P's Achilles heal over the past couple of years) up +48% y/y

     

    Subscriber rev up +25% q/q (I estimate they added ~800k subs last quarter (+2.4M y/y), now totaling ~4M subscribers, despite removing the cap on free mobile listening which was pushing conversion. Subscriber rev now 20% of total)

     

    P's share of Internet radio holding steady (actually up slightly) at 72%

     

    Cash & ST now at $448M (up from $69M, successful secondary, obviously, question on call about plans for all this cash, all they offered was that a strong balance sheet will help with royalty negotiations, hinted at direct deals)

     

    Guiding for full yr profit (adj earnings)

     

    Here are some more comments from the call:

     

    What is audio to display/video ad sales split? 60/40

     

    What is current ad load? Max of 6 ads at :15 or :30/ea per hour, so 3min/hr max, small group testing ad load, double ads w longer uninterrupted music, etc (testing is not possible for traditional radio since they can't know how their audience reacts to changes, whereas P knows, from inc/decreased listening, to become ad-free subscribers, etc). Ad load could dramatically improve ad revenue. At the current RPMs, P is at 70% of traditional radio monetization but only 20% of their ad load.

     

    Improving cost per listener hour.

     

    There was a question about next full year guidance, they wouldn't answer directly except to say Q1 is seasonally bad for ad sales, but the dramatic improvement to ad RPMs from all of their investment in sales force will provide for another year long ramp up and should be a good year.
    21 Nov 2013, 06:11 PM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3136) | Send Message
     
    investing in sales is smart. I cant think of anything else to invest in really.
    21 Nov 2013, 06:17 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (627) | Send Message
     
    Pandora lost $38m over the past 9 months, and it's likely to be close to break-even (on GAAP) over the next 3 months. Thus, the company needs to grow from negative $35-36m to positive $400m net income to make their valuation look reasonable (20 P/E). How many years will it take them? Most likely, they will never get there.
    21 Nov 2013, 10:52 PM Reply Like
  • dgulick
    , contributor
    Comments (2000) | Send Message
     
    At current market cap of $5.7B and a P/E of 20, earnings would only have to be $285M, not $400M, and my model says they get there in 3 years (or so, need to update my model, for this qtr I was a bit high on ads but low on subs). But it's not like they sit there, the numbers in 5, 7 and 10 years out are why everyone is bullish on the stock. (I'll get around to writing all of this up in an article some day)

     

    And btw, a couple of things to consider, the 60/40 split of audio to display/video is way lower than I assumed, and the display/video market is expected to be bigger (~$20B) than the current FM radio ad market ($15B). The comment from the call that really stuck out for me is that they are already at 70% of FM monetization across all platforms for only 20% of the FM ad load, meaning so much room to tweak ad load or add higher paying rich media that FM can't match, all the while managing growth targets, just so much wiggle room to get that split just right and it is just absolutely lights out for traditional radio, it's only a matter of time.
    21 Nov 2013, 11:56 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (627) | Send Message
     
    You forgot the income tax :) $285m in earnings is equivalent to $407m in net income at 30% tax rate.

     

    And the fully diluted number of shares is higher - we will see the exact number in 10Q, but the "average" number for Q3 was 208 million shares. Considering that the secondary offering was in September, the number should be around 215m shares now. At $29 per share the market cap is $6.24 billion.

     

    If you expect to make a very modest 10% return on your stocks, the market cap will be $8.3 billion in 3 years (assuming no further dilution), by which time you need to have $790m in net income to get to P/E 15.

     

    I very much doubt that Pandora can go from $640m in revenues to $790m in earnings in 3 years...
    22 Nov 2013, 12:25 AM Reply Like
  • User 9578921
    , contributor
    Comment (1) | Send Message
     
    The bullish forecast of continued market expansion for Pandora seems silly. There are other internet radio platforms that are gaining acceptance faster than Pandora. Most of the people I know either use Spotify or other service for Internet Radio. Pandora doesn't have a defensible moat to justify its massive valuation. Also, iTunes radio is getting better everyday-- they are improving their algorithm.
    22 Nov 2013, 11:37 AM Reply Like
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