Pandora Competing With iTunes Radio

| About: Pandora Media (P)
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The online radio industry recently got a new player, with Apple (NASDAQ:AAPL) launching its service under the banner iTunes Radio. For now, online radio player Pandora (NYSE:P) has managed to successfully thwart this stiff competition, as is evident in both user metrics and the company’s improving financial performance. But whether it will manage to grow market share with Apple now in the run remains to be seen.

Pandora’s Financials

Pandora’s Q3 revenues grew 50% over the year to $182 million with an EPS of $0.06. The market was looking for revenues of $177 million with an EPS of $0.06.

During the quarter, advertising revenues grew 36% over the year to $144.3 million. Subscription service and other revenues accounted for 20% of the quarter’s revenues and grew 162.1% over the year to $36.0 million. Monetization for the site has continued to improve, with advertising revenue per thousand listener hours growing 24% over the year. Mobile has also driven growth as mobile advertising revenues grew 58% over the year to $104.9 million in the quarter, with advertising revenue per thousand listener hours growing 41% for the mobile segment to $36.

Pandora had earlier restricted listening hours available for free subscribers to 40 hours per month. Last September it lifted the restriction, which helped listening hours improve 17% over the year to 4.18 billion. It commanded an 8.06% share in U.S. radio listening market in October compared with 6.61% a year ago and 7.8% in September 2013.

For the current quarter, Pandora expects revenues of $185 million-$190 million with EPS of $0.02-$0.04. It expects to end the year with revenues of $657 million-$662 million with EPS of $0.03-$0.05.

Pandora’s Growing Competition

Last September, Apple launched its radio service, iTunes Radio. Soon after its launch, iTunes Radio amassed more than 20 million users. Pandora managed to survive the onslaught, though it did see some decline in operating metrics. It ended the quarter with 72.7 million active listeners. However, following the launch of iRadio, October’s active users fell to 70.9 million while still maintaining growth of 20% over the year. Pandora believes that the decline was on account of the casual listeners experimenting with iTunes Radio.

Pandora’s Mobile Initiatives

Meanwhile, Pandora continues to improve its mobile offerings to ensure that it retains the loyalty of these consumers. During the quarter, it released an upgraded Pandora 5.0 for iPad, which is the biggest redesign for iPad tablet app since its launch. The new app features a more efficient use of the larger iPad screen while improving on the ability of listeners to personalize, discover, and share their music preferences. It also released a new version of the android tablet platform, which now ensures that the Android app is on par with the iOS apps.

As Pandora continues to attract the home-based consumer, it is tying up with OEMs to ensure that they are included in TV-connected devices. Last quarter, it tied up with Google (NASDAQ:GOOG) so that Google’s Chromecast’s users will be able to listen in to Pandora by clicking the “Cast” button included in Pandora’s Android and iOS mobile app.

Pandora’s Advertising Growth

Over the last quarters, Pandora’s growth in advertising has been impressive. It recently began to mine their user’s information to create highly targeted audience segments. For instance, it has identified two proprietary targeted ad audience segments – Hispanic listeners and a sub-segment of Spanish-speaking listeners. Categorization of audience segments is at least 10% more accurate than the audience segments based on third-party data. Pandora plans to identify two new segments every four to six weeks to identify categories such as listeners with high-household incomes, men aged 18 to 34 years who listen to electronic music, and the age group of children in a household, to name a few. By creating such focused audience categories, Pandora will be able to offer better targeted ads on its streaming music service.

Pandora’s stock is trading at $27.96 with a market capitalization of $5.16 billion. It touched a high of $31.94 earlier this month.

My take: if the iTunes offering doesn’t do as well, Apple may simply acquire Pandora. If it does well, then other players like Samsung (OTC:SSNLF), Microsoft (NASDAQ:MSFT), or Google may acquire the company as well. At any rate, Apple’s entry into the category is, after all, good news for Pandora.