Pandora Media's (P) CEO Brian McAndrews on Q2 2015 Results - Earnings Call Transcript

Jul. 23, 2015 9:15 PM ETPandora Media (P)2 Comments
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Pandora Media (NYSE:P) Q2 2015 Results Earnings Conference Call July 23, 2015 5:00 PM ET


Dominic Paschel - VP, IR

Brian McAndrews - Chairman, President and CEO

Mike Herring - CFO


Michael Graham - Canaccord Genuity

Peter Stabler - Wells Fargo

Amy Yong - Macquarie Capital

Heath Terry - Goldman Sachs

Rich Tullo - Albert Fried & Co.

John Egbert - Stifel

James Marsh - Piper Jaffray

Jason Helfstein - Oppenheimer

Rob Sanderson - MKM Partners

Matthew Thornton - SunTrust Robinson Humphrey

Diana Kluger - JPMorgan

Anthony DiClemente - Nomura

Ben Swinburne - Morgan Stanley

Andy Hargreaves - Pacific Crest Securities


Welcome to Pandora’s Second Quarter 2015 Financial Results Conference Call. All lines have been placed on mute. There will be a question-and-answer session at the end of the conference. [Operator Instructions]

Opening today’s call is Dominic Paschel, Vice President, Pandora.

Dominic Paschel

Thank you, Nichole. Good afternoon and welcome to Pandora’s second quarter 2015 financial results call for the quarter ended June 30, 2015. 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 risks, uncertainties, and assumptions. Accordingly, actual results could differ materially. For discussion of the risks that could cause our results to differ from today’s discussion, please refer to the documents we file with the Securities and Exchange Commission.

Also I would like to remind you that during the course of this conference call, we would 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 the form 8-K filed earlier this afternoon with the SEC. For your convenience, supplemental information has been included in today’s press release. And detailed financials are available on the Investor Relations site.

Today’s call is available via webcast and a replay will be available for two weeks following the conclusion of the call. We will also post the full text of today prepared remarks once Mike concludes. To access the prepared remarks, press release, supplemental financial information, or the webcast replay, please consult the Investor Relations section of

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

Brian McAndrews

Thanks Dom, and thank you all for being on the call today. I'm looking forward to discussing our strong quarter and the progress we have made across several business initiatives.

Let me begin with the financial highlights. In the second quarter, we saw our monetization engine hit its stride with revenue reaching $285.6 million, a new all-time high, and an increase of 30% year-over-year.

The end of the second quarter also marked a significant revenue milestone for Pandora. We can officially say we have crossed the threshold of $1 billion in revenue for the trailing four quarters. This is a major milestone for the company and something we are incredibly proud of.

From an earnings perspective, our increased revenue drove adjusted EBITDA of $16.3 million and our non-GAAP second quarter net income of $11.6 million or non-GAAP earnings per share of $0.05.

As we dive into the broader metrics of the business, we'll start with audience where we continue to drive multi-dimensional growth. In terms of listeners as of the end of June 2015, traditionally a seasonal low point, monthly active users were 79.4 million an increase of 4% over last June and up slightly from last year.

Our listeners continue to be increasingly engaged as listening hours per active user grew to 22.2 hours this quarter. Total listener hours were 5.3 billion for the quarter, a 5% increase from this time last year.

As noted previously, this is traditionally a seasonally lower point and people are on vacation and away from work and also spending more time in their cars where while we are a leader in streaming radio, we're still in the early days of developing our market share.

It's also important to note that very product improvements have paradoxically had a dampening effect in reported hours. Let me explain. Significant improvements to our new user interface which launched in February and continue to step functions in better play listing have markedly improved our success in our never-ending quest to always play the perfect song to each person at the right time. These positive improvements in the listening experience have resulted in less song skipping, does reducing the number of songs paid for, but not played.

As reminder, Pandora is reported listening hours are based on server-side counts. As the ratio of fully completed songs to hours improve, reported server hours are thus reduced due to these listener improvements. This is actually very positive sign about the long-term health and potential of our business, despite a short-term impact it can have on reported listener hours.

By our estimates Pandora share of all U.S. radio listening is 9.47% as of June 30, up from 8.9% at the same time last year, slightly lower than the first quarter and consistent with our typical seasonal pattern. As measured by comScore, Pandora’s total multiplatform unique visitors in June grew 4% year-over-year to 84.9 million.

In terms of engagement, comScore June Mobile Metrix report ranked Pandora as the number two mobile service in the U.S. in terms of average minutes per user. This is significant. Only Facebook whose metrics now included Messenger, Instagram and WhatsApp properties was higher.

Pandora's engagement metrics were more than double the next closest mobile service and 138% higher than the next largest mobile music service even with our much larger user base. While we continue to grow audience, our monetization efforts have really hit their stride. Total RPMs reached a record high of $53.91 during the quarter, an impressive $10.50 increase year-over-year and $2.37 higher than Q4, traditionally our seasonal peak.

Ad RPMs were up 25% year-over-year to a record $49.94. These record high RPMs are driven primarily by our continued success in local which is driving increased sell through of premium advertising units and increased pricing across video display and audio.

We have built a highly productive local team that is nearly double the size of the 2013 local sales force with a strong presence in 38 markets, managing a record 7,000 accounts. During the second quarter, local ad revenue grew 67% year-over-year and represented a record 26% of total ad revenue.

Our leadership position in the advertising industry extends beyond the strength of our monetization of mobile. As an active participant at Cannes Lions were ad tech was a focus this year, we led many conversations about the power of music for marketers and how technology and artists continue to evolve the shape brand marketing strategies.

Closer to home we launched our new programmatic offering in mid-June ahead of the Q3 schedule and we are very pleased with the early advertiser interest and reaction, which we expect to translate to more meaningful revenue in 2016. This is a nascent category, one we are helping to define and educate marketers on and one with huge potential.

We also continue to lead by bringing brands unique ways to connect with their audiences through music. With our Pandora country event at the CMA Festival, we connected brand such as Kingsford, Velveeta, Folgers and Bud Light with over 900 passionate country music fans of Dustin Lync, Thompson Square and new country Superstar Kelsea Ballerini.

We also created an innovative partnership with Ford F-Series trucks to bring a new kind of experience to country listeners via a custom content station. Station features an exclusive episodic radio program narrated and hosted by songwriter Otis Gibbs that includes custom curated Mixtape, interviews, exclusive performances, and behind the scenes videos. Please try it out if you are country fan, it's fascinating history.

In addition to helping marketers evolve their brand strategies and connect to customers through music, we're rapidly becoming an indispensable partner to Music Makers by helping artist evolve their promotional tactics to better connect to their audiences and grow their revenues.

Through Music Makers initiatives in Q2 alone, we connected artists with more than 5 million listeners with various content programs including featuring new albums on Pandora Premieres with about 40 artists and creating more than 15 Mixtapes for artists including the Rolling Stones, Major Lazer and Mumford & Sons.

We also enable artist to engage with thousands of attendees across numerous live events, including the Sonos Studios and Pandora concert series program featuring Mikky Ekko and Marina & The Diamonds, Noche de Música, Hangout Festival, Coachella, and exclusive live performance in New York City with Warner Bros. multi-platinum artists Josh Groban.

We are now regularly leveraging our unmatched scale and data expertise to drive new and innovative collaborations of artists and their labels. In June, we partnered with Mumford & Sons and Glassnote Records to live stream the bands sold-out show at the Merriweather Post Pavilion in Maryland.

The -- Mumford & Sons live station had more than 1 million station ads, a huge number in a very short number of times. Once again demonstrating the unique power of Pandora connecting artists and their fans at scale regardless of where they are.

You will recall last quarter we partnered with Jack White and his label Third Man Records to similarly successfully live stream his Madison Square Garden concert.

In addition to major artists like Jack White, Mumford & Sons and the Rolling Stones, we are now expanding the same types of promotional collaborations to emerging artists with remarkable success. Early in the year using Pandora’s proprietary data we identified ODESZA as a rapidly rising up-and-coming electronic dance music duo. We sat down with ODESZA’s management team to show them the Pandora data. Impressed by what they saw, ODESZA partnered with Pandora in June to kick off the in return tour with an exclusive announcement and 24 hour ticket presale, in addition to a custom station accumulated by Odessa themselves.

As Harrison Mills of ODESZA said in past company, quote when we are marketing our show for specific regions on Pandora, we know that we’re reaching potential fans because they're choosing to listen to our music. So far it's had a huge impact on our upcoming fall tour. We've been selling out their allocation in minutes, unquote.

And in fact, using our ability to identify and mentioned the bands in targeted geographies we sold out our ticket allotment for the New York tour stop in just 18 minutes. Similarly impressive results happened in Washington D.C., Seattle, Atlanta, Boston and more, resulting in ODESZA increasing our ticket allotment across the board. Thousands of tickets were sold overall and more than 75,000 ODESZA stations were added.

Starting with fans discovering ODESZA on Pandora, and culminating this very successful tour, Pandora amplified the voice of this relatively unknown, but incredibly talented duo by using our platform. Giving them access to reach more fans in multiple markets and sell out their shows. Such a unique platform with this capability at this scale has simply never existed before. This program is a small window and glimpse into what the future of the music industry will look like and the central role, Pandora will play in it.

Further exemplifying our total commitment to connecting music makers and listeners, we announced the acquisition of Next Big Sound during the quarter. Next Big Sound was honored several years ago as one of the ten best digital music startups by Billboard Magazine and more recently CEO, Alex White was named to Billboard's 30 Under 30 executives to watch list.

We are excited to welcome the entire Next Big Sound team to the Pandora family to do great things. Next Big Sound gives Pandora a powerful analytics tool used by tens of thousands of music makers, labels and marketers looking for data and insights about artists and their fans. Next Big Sound's capabilities will meaningfully enhance Pandora's data-driven Artist Marketing Platform which continues to gain momentum.

Similarly Pandora's data which reflects insights from nearly 80 million active monthly users will be added to Next Big Sound's offerings to deliver an unprecedented trove of information to the music industry.

These are just some of the examples from our most recent quarter that demonstrate how Pandora is much more than a great music service. Pandora is a powerful platform with the ability to connect artists and listeners promotionally along with the ability to provide valuable insight and intelligence to the entire music ecosystem.

In addition to helping establish artist strengthen and in many cases re-energize their career, Pandora is uniquely positioned to introduce people to the greatest variety of new music from bands and artists that they never heard off before which can help break new artists and drive revenue opportunities for all.

Pandora as a platform is both a matchmaker and a market maker. As you can see, this is an exciting quarter for Pandora on many fronts. Our continued ability to grow monetization efficiency is opening up new options for the future. We have surpassed $1 billion in revenue in the trailing 12-month period. Total RPMs reached record levels across the board and local advertising reached a record 26% of total ad revenue.

Monetizing free audio listening is a fantastically difficult problem to solve and we are alone in solving it. With each passing month, we're ever more confident about our ability in this area and we intend to take an increasingly aggressive approach to leveraging this distinct competitive advantage.

We continue to expand our music industry relationships and develop creative new partnerships with our Music Makers Group. We're now working actively with all our partners in the music industry on multiple fronts to capitalize on the numerous opportunities in front of all of us.

As we head into the second half of the year, we look for to launching further product innovations and listener enhancements while ramping up our brand marketing campaign that kicks off in September.

With that I'd like to turn the call over to Mike Herring our Chief Financial Officer for more details regarding our financials.

Mike Herring

Thank you, Brian. I'll walk through our second quarter financials and explain in more detail what's driving our results before providing guidance for the third quarter and full year of 2015.

Starting with revenue, we ended the second quarter of 2015 with total revenue of 285.6 million, representing 30% growth from the year ago quarter and was above our guidance range of 280 million to 285 million, an all-time quarterly high for the company.

Advertising revenue increased 30% in the second quarter of 2015 to 230.9 million compared to 177.3 million in revenue in the same quarter last year. Second quarter subscription and other revenue was 54.6 million, an increase of 31% over 41.6 million in the same period in 2014.

Our end of period paid subscribers increased approximately 130,000 to 3.91 million, an increase of approximately 15% year-over-year.

For the quarter, adjusted EBITDA was 16.3 million, a 29% improvement year-over-year from Q2 2014 and substantially better than our provided guidance range of 8 million to 13 million. Adjusted EBITDA excludes $27.5 million in expense from stock-based compensation, 5 million of depreciation and amortization expense, approximately 115,000 in provision for income taxes and approximately 256,000 in other income.

EBITDA is a combination of revenue strength and a careful rollout of our investments and marketing expense. We are focused on elaborate spending that drives a positive ROI and as monetization continues to improve will expand our investments accordingly.

As I mentioned in our Q1 call, this year we will begin adjusting our non-GAAP income by considering the income tax effects of our non-GAAP adjustments. Prior to 2015 our non-GAAP tax rate was minimal.

As expected in the second quarter 2015 our non-GAAP effective tax rate was in material due to our non-GAAP net loss position. We are currently forecasting a non-GAAP tax rate of approximately 1% to 7% for the third quarter and approximately 30% to 35% for the full year 2015 to be used when calculating non-GAAP net income and non-GAAP EPS.

Despite this we do not expect to pay significant cash income taxes for the foreseeable future due to our net operating loss position. Second quarter 2015 GAAP basic and diluted loss per share was $0.08. Basic and diluted non-GAAP earnings-per-share was $0.05 which included approximately 27.5 million in stock-based compensation expense and proximately 183,000 in amortization of intangibles.

GAAP basic and diluted and non-GAAP basic EPS were based on 211.7 million weighted average shares outstanding. Non-GAAP diluted EPS is based on 221.3 diluted shares outstanding. We continue to leverage our content cost which represented 46% of total revenue in Q2, an improvements of approximately 500 basis points over Q2 2014, based on total revenue. As we have previously emphasized, our ability to leverage these costs is dependent on our ability to increase RPM in excess of our LPM.

Q2 2015 total RPMs reached a record high $53.91, growing by $10.50 or 24% compared to the year ago period and increased 5% or $2.37 compared to Q4 2014, our previous record quarter. For the second quarter, total LPM increased only 11% year-over-year to $24.57, lagging RPM growth by 13 percentage points as compared to 11 percentage points in Q1.

Total web RPM and total mobile RPM for the second quarter were $73.48 and $50.63 respectively. Web advertising RPM reached $74.35 and mobile advertising RPM reached $46.15. This quarter adjustments to our playlist technology to improve listener experience and reduce skipping resulted in fewer recorded listening hours as well as a decreasing corresponding content cost.

Year-over-year increases in RPM were driven by higher direct sell-through rates along with an increase in premium pricing, driven by momentum in local sales. Year-to-date 2015 local advertising revenue was at an all-time high of 26% of advertising revenues with a 151 local salespeople now in market, up from 109 a year ago.

As demonstration of our massive scale, Pandora is proud to say we are now on track to have paid more than $1.5 billion in total royalties by the end of this month. We're happy to contribute to the artist economy in a meaningful way.

During the second quarter non-GAAP gross margin expanded approximately 500 basis points from 43% in the year ago quarter to 48% and as we have said previously, we expect this trend to continue in the second half of the year as we progress towards our gross margin target of 60% of revenue.

Turning to operating expenses, we increased headcount 34% year-over-year to 1,746 employees in second quarter of calendar year 2015 from 1,305 employees in the same period last year. This increase is primarily the result of new addition to our sales team as we added over 100 salespeople year-over-year and ended the quarter with 443 quota-bearing sales reps.

For the second quarter of 2015, non-GAAP sales and marketing expense was 80.7 million or 28% of revenue compared to $56.3 million or 26% of revenue in the second quarter of 2014 as we continue to ramp our sales team in our brand and direct marketing activities.

Included in sales and marketing expense are commissions on subscriptions that we pay Google and Apple totaling 10.7 million and 10.2 million in brand direct response and SEM activities.

We spent less than we had initially targeted and expect the bulk of marketing spend for 2015 to come in the second half of the year when our sales and marketing spend will be more cost effective and as listening hours increase, our ability to monetize the additional hours is at its peak.

Non-GAAP product development expense was 13.4 million for the second quarter or 5% of revenue, an increase of 55% compared to 8.7 million in the second quarter of 2014. We often say product development is an investment to drive revenue 13 to 36 months out. And thus we are committed to increasing our spending in this critical area.

Non-GAAP G&A expense was 31.2 million or 11% of revenue, an increase of 53% compared to 20.5 million in the second of 2014.

Turning to the balance sheet, Pandora ended the second quarter with 461.5 million in cash and investments compared to 481.3 million at the end of the prior quarter. Cash used by operating activities was 9.9 million for the second quarter compared to cash used in operating activities of 7.1 in the year ago quarter. Capital expenditures were 12 million in the second quarter.

I'll wrap up with some thoughts regarding our guidance for the calendar year 2015 and the third quarter of 2015. Starting with the full-year 2015, we estimate total revenues in the range of 1.175 billion to 1.185 billion or year-over-year growth at the midpoint of approximately 30%, up 5 million on the top end and 15 million on the bottom line from the prior range of 1.16 billion to 1.18 billion given on our Q1 earnings call.

Continued momentum in advertising sales and confidence in our sales strategies it has allowed us to increase expectations for the year. We expect calendar year 2015 adjusted EBITDA to be in the range of 75 million to 85 million unchanged from the prior range.

Adjusted EBITDA excludes forecasted in stock based compensation expense of approximately 112 million and forecasted depreciation and amortization expense of approximately 22 million and assumes minimal provision for income taxes given our net ops position for 2015.

Diluted shares outstanding for the full-year 2015 are expected to be an approximately 221 million. Although, we outperformed our EBITDA expectations in the second quarter we are not raising our target for the year. The continued momentum in advertising sales and audience engagement our indicators that we are poised to maintain and extend our leadership in mobile music streaming and ad supported radio. Such an opportunity demands investment today to meet our long-term objectives, and thus we believe that increased investments are appropriate for the second half of 2015.

For the third quarter of 2015 we expect total revenues in the range of 310 million to 350 million, crossing the 300 million quarterly revenue milestone for the first time and achieving year-over-year growth at the midpoint of 30%.

Adjusted EBITDA is expected to be in the range of 25 million to 30 million for the third quarter. Adjusted EBITDA excludes forecasted stock-based compensation expense of approximately 30 million and forecasted depreciation and amortization expense of approximately 6 million and assumes minimal provision for income taxes given our net loss position for the second quarter.

Diluted shares outstanding for the third quarter of 2015 are expected to be approximately 222 million. We expect to ramp up marketing investments in the third quarter to leverage improvements in monetization.

In summary, we had a very strong first half of the year. As a result we plan to continue to invest in our business to fuel long-term growth. We are monetizing at an increased rate with RPMs and revenue reaching all-time highs, while investing in our strategies to expand and strengthen our relationships with music makers, listeners and advertisers.

As reminder, on Tuesday of this week the month-long trial portion of the Copyright Royalty Board's rate-setting proceeding concluded with closing argument. We presented a comprehensive case with experts and witnesses and are confident in the positions laid forth in our filings and trial presentations to the CRB Judges.

We discussed the additive promotional value of Pandora and demonstrated that we are a non-interactive service. We'll now wait until to hear the CRB determination but are already planning for a range of scenarios and are confident in Pandora's ability to deliver long-term growth no matter what the outcome the Court decides.

We do believe that there will be an economically rational outcome and we think our Business Affairs Team for their tireless and thorough work during this process as anyone who observed had noticed.

And with that we're ready to take some questions. Operator?

Question-and-Answer Session


[Operator Instructions]

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

Michael Graham

Hi, thank you very much and congrats on a good revenue performance. I wanted to ask about listeners. First is there any way to quantify the skipping impact on listener hours, even if just roughly?

Second, can you comment on whether you're seeing any early impact from Apple Music? And third, just wondering how you're thinking about the longer term listener growth outlook you laid out at the Analyst Day 100 million listener, sort of, goal, just wondering does anything have to change from now over the next few years for you to hit that goal? Thank you very much.

Brian McAndrews

Hey Michael. I would say to hit the first one we're not quantifying exactly what the skipping impact was on listener hours. We are saying as we said in my remarks that it definitely did have an impact. Again we see it as a positive long-term thing, but it does help explain some of the -- in addition to seasonality, the growth that happened from -- and into Q2.

In terms of the Apple Music, in Q2, of course, Apple Music launched at the end of June, so there was no impact in terms of going forward, you know we feel really good about our trajectory competitive and position. I think it's really obviously very early days and with any big launch like this and the noise and things happening in the marketplace, there could be some listeners who experiment with the service and there could be some short-term impact, but we don't –we aren’t seeing any meaningful listener impact at this time and we don't expect any long-term meaningful impact either.

Finally on your 100 million goal, we continue to believe that is the goal and we – and that is our goal and we can -- we think that's achievable in the timeframe we have spoken about and we believe it is achievable in terms of the kinds of investments we are going to be making – continuing to make in our playlist technology, brand marketing spend that we will continue to do and are actually ramping up in Q3 and Q4 of this year and doing a multichannel brand campaign.

And also just to continue growth as we continue to outcompete traditional radio and take advantage of the trends in the wind at our back over time in terms of what is happening with the move to consumer electronic devices in cars. So we continue to believe that goal is completely achievable.


Your next question comes from the line of Peter Stabler from Wells Fargo Securities. Your line is open.

Peter Stabler

Thanks for taking the question. On the programmatic, Mike could you give us a sense of what kind of CPM lift you think you could see from the introduction of the platform? Our impression is that the Mobile display CPM that you have been seeing now are very, very low. You talked about having in excess of supply.

We’ve talked to buyers who talk about getting a lot of that impression -- those impressions for very low prices. So you’ve spoken about CPMs in the past, kind of the Delta between going from, let's say, national to local. Wondering if you could offer similar color on the mobile display side and going to programmatic. And then one second -- one on the programmatic side, do you have a self-serve platform there or is there a timeline for having a self-serve platform for this mobile display? Thanks very much.

Mike Herring

Thanks for the questions Peter. So we are very excited about the programmatic efforts and the launches that occurred in beta and soon to be in full general availability and rolled out across our advertising customer base. I would say couple of things.

The idea behind our approach is really to apply programmatic buying platforms to mobile display. Like you say, we have a lot of supply there that's traditionally been not sold direct at a high-volume, in part, because the demand is still developing, in part, because publishers like Pandora are still figuring out how to do display advertising effectively in the mobile environment.

So there has been opportunities, because we don't -- haven't had an efficient way to target and effectively by an option, buy that advertising from customers through an auction environment. The programmatic environment allows that to happen and what we believe is that with our premium direct sell-through rates won't be affected.

It doesn't raise the top end of the CPM that we are able to sell when it's done in a very targeted direct manner, what it does do though is it brings up the bottom end of the range. So the lowest prices that have been available historically for mobile advertising were as a publisher able to raise that up, because we are able to address specific targeting needs through our programmatic environment and that will eat away at the percentage that are sold through more generic exchanges out there. So, if the range and CPMs for mobile display are from $1 to $5 today, when we'll see that dollar bottom end of that range come up and increase maybe 50% to 100%, closer to $1.50, $2, it may not sound like a huge deal, but when you apply that over many billions of impressions a quarter, that's a meaningful movement in the floor effect of CPMs can move the needle from the revenue perspective.

Second question around self-serve. This initial piece can -- self-serve in the context that technology -- the demand side platforms can plug-in to -- and be able to automatically bid on advertising through our programmatic platforms. But not in the context of advertisers directly go into a self-serve platform that's on our roadmap, but it's not something that we're moving quickly to. It's mostly run serving customers through agency partners that have platforms that integrate with our private exchanges.

Peter Stabler

Thanks Mike.

Mike Herring

Yeah, thank you.


Your next question comes from the line of Amy Yong from Macquarie Capital. Your line is open.

Amy Yong

Thank you very much. I actually wanted to drill in a little bit on the monetization efforts and trajectory of the RPM growth. You mentioned bulking up sales and marketing efforts and can you give us a better sense of what the growth could be for the back half and the potential acceleration we might see?

And I guess longer term given the results this quarter, how quickly do you think you can close a gap to terrestrial radio and get to that $60, $70 goal? Thank you.

Mike Herring

So, this is great question. We’ve see material growth in our RPMs over the last 2.5 years as we scaled our sales team up and really moved aggressively to capture radio budgets that previously haven’t been addressed by digital solutions like Pandora and that’s where our investments in local sales teams and in the technological infrastructure to deliver very targeted local advertising, that's what we have been focused on.

We see – we think we will continue to see that grow in terms of RPMs the impact from that investment is both through sell-through rates, at 443 salespeople we have a lot of feet on the street selling advertising, 151 of them local. So driving sell-through rate into the inventory that's available and also improving that effective CPM that we are seeing particularly in the audio side of the business.

As we are selling more advertising, we see that effective CPM rise. Those investments drive both those things. The goal or the target generally traditional radio maybe $73, $75, RPMs, it's a psychological as a target and just that we want -- we believe that we will easily be able to monetize over the long-term at rates equivalent to – at much smaller audio ad loads because of the targeting we can do, because of the alternate forms of advertising; not just video and display, but also native advertising like branded stations and sponsored listening and some of the creative and very high return for the advertiser campaigns we can do because we are connected platform and because we have the data underlying the infrastructure here. So there is a psychological piece to that, but we also believe that we can exceed those over the long-term.

From a timeline, we are already -- our web business today this quarter had RPMs higher than terrestrial radio. So mobile is about -- the efforts we are making in programmatic and about native advertising in helping to solve long with other mobile publishers out there, the monetization challenge in a mobile environment, it's also an opportunity. And so I think we're closing in on that pretty quickly, and that will become less of a goal and more of a signpost along the sides as we continue to build the business.


Your next question comes from the line of Heath Terry from Goldman Sachs. Your line is open.

Heath Terry

Great, thanks. Can you give us a sense what you are seeing in your efforts to drive incremental usage growth, whether its users or whether it's hours. I mean, obviously we can see the numbers. Just sort of curious if, as you have focused on this, if you have a sense of how much of the listener hour number we are seeing is a function of your promotional efforts versus just sort of where the number would naturally be given where the business is.

Mike Herring

So that's a good question. We have a pretty good sense of how -- what return we are getting on our spend. We said about $10 million in Q2, a lot of that is driving re-engagements, reaching out to users that we look for patterns where they are using Pandora.

We think generally speaking now the industry is growing significantly. The addition of new participants in the connected music streaming industry is a sign of the opportunity and increasingly more and more music listening of Americans is going to migrate to that. And I think we'll continue to see growth and engagement and also continue to see growth and engagement of a variety of other opportunities out there, and that -- the spend that we're making is about continuing to build our loyal customers and then reengage and bring customers or listeners who have loved Pandora historically and make sure we keep them engaged with us throughout slow periods like the summer and despite the other distractions that are out there.

It's hard to say exactly how much is related to promotional efforts versus whether we'd come otherwise, because a lot of those promotional efforts are targeted at people who are using Pandora already and is getting them to use it more often.

And so drawing that line is fuzzy, but as we get more aggressively get to driving to 100 million users on a monthly basis where -- well into that on a quarterly basis, but a monthly basis, I think that's -- it's going to be -- it's going to take effort and some marketing spend in order to maintain that engagement and we're committed to do that.


The next question comes from the line of Rich Tullo from Albert Fried & Co. Your line is open.

Brian McAndrews


Rich Tullo

Can you hear me?

Brian McAndrews

Yeah Rich, we can hear you. How you doing?

Rich Tullo

Okay. Thanks for take my question. Nice quarter. May be a tortured question in two parts, the programmatic ad platform, when did it go into beta and is the lift from the second quarter to the third quarter in revenue attributed to programmatic? And the second part of my question is, as the landscape of terrestrial and satellite radio is changing, now as Apple is rolling out new sports and talk on its platform they suggest will Pandora use some of her cash to bolt the subscription service with exclusive drive time content?

Brian McAndrews

Hey Rich, this is Brian. I'd say on the first part of your question, programmatic launched in mid-June and so - didn't have a major impact on the Q2 results. Again as we said prior that, you know we are very pleased with the early result. We have some great clients like Google! and Kellogg and others participating and we are very excited about the opportunity. But it’s early in terms of overall results we saw there.

In terms of the actual data, if that was the word used I am sure if [indiscernible] or the actual launch. Our Beta started a margin IOS and April on Android. In terms of Apple and other forms of content, we launched comedy of course in 2011 and we are open to those types of things we believe the big opportunity, for us and for our listeners is the music.

And so, we continue to look at other opportunities and over time if we feel that make sense we are very open to it. But we have great customer satisfaction and we continue to grow and we feel like the formula we have works incredibly well in music and that's really where the focus should be at this time you know our attention and investment.


Your next question comes from the line of John Egbert from Stifel. Your line is open.

John Egbert

Thanks for taking the question. Local revenue was pretty strong with no deceleration versus last quarter and wasn't exactly an easy year-over-year comparison. Can you talk about what was driving that strength? Was there a rolling through of productivity of existing salespeople? Some of the newer salespeople joining on and whether not that came from more established markets, like in the top ten or maybe the emerging markets in the back half of the top 40? Thanks.

Mike Herring

So, yes, it was very strong quarter from a local team and honestly they’ve been racking up the series of strong quarters. Their productivity continues to improve year-over-year for two reasons.

One is Pandora is becoming a much more known quantity in local markets. And when you are originally penetrating these markets, you are very much in a [indiscernible] sell, you are teaching them the benefits, that your overcoming the thud around measurement from Triton. And once people understand that is MRC certified and in all 270 plus DMAs and they can see those metrics side-by-side and then they do their best buys and they realize the ROI is real and demonstrable and they can calculate it using actual metrics.

That land and expand approach starts to build momentum. So that kind of momentum then translates not just to the existing salespeople who develops their accounts last year, but the new people who we brought on this year, becoming more productive sooner and I think we definitely saw that. The new people we hired in Q1 this year contributing earlier and contributing in Q2 as they hit their stride sooner.

And we’re definitely -- although we did add salespeople really across the Board in the 38 markets that we are on the ground and feet on the street, the markets that really see the biggest percentage growth are coming out of the markets that are really in their second or third year where we're going from two to five people or from five to eight people and they are really starting to take our market share within those -- within each of those markets.

So, really markets like 10 to 30 in terms of ranking. But I wouldn't say across the Board, the local marketing is really catching it's key to be able to provide metrics to guarantee in audience to show a demonstrable ROI and getting a lot of repeat buyers, getting to 7,000 accounts in the quarter, that's materially up from a prior quarters and that's 7,000 local accounts buying on Pandora and the more we build that, the more we turn those into month in and month out customers the better we can plan and the better we can have confidence in our revenue stream.


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

James Marsh

Two quick questions here. One was just hoping you guys could give us a quick update on the connected car, number of activations, maybe could talk what the relative demographics within the car maybe relative ad rates, just some color on the connected car.

And then secondly there is a report out recently talking a bit about mobile fraud and how it could be $1 billion plus. Just was wondering what you guys think about how that impacts the mobile ad industry broadly? And then more specifically how it might impact Pandora relative to other mobile peers in the space.

Mike Herring

Great. So the connected car is still very much a big part of our future opportunity and how we are going to grow, you know particularly hours over the next few years. It's still a nascent one, here. We do sell advertising now into the cars. We don't have a lot of demographic information to share, but we think we're very low single-digit in terms of actual integration, in terms of percentage of hours and keep in mind we have several million active integrations going, but that's only one small percentage and even those users listening. So when we’re talking about across and 80 million user inventory of listeners, it still a relatively small, but growing part of our business.

In terms of mobile fraud, and why do you ask that question? It speaks to the heart of what makes our programmatic opportunity in mobile so outstanding. So one of the problems with mobile advertising in particular is you don't know who the ad is getting served to. There's a lot of unknown around that. You don't know what viewability is out there.

When we talk about mobile display in a private exchange where you know that advertising is delivered in a safe environment, which is Pandora, you know you're being delivered to the audience you intended to because we can target specifically to the audience that is desired by the advertiser and that can be programmatically thought and fold and delivered.

So and we can guarantee you that advertising will actually be viewable, it's actually seen by the person who is listening to Pandora because it's done on an action using interaction with the service.

So those combinations make it actually extremely valuable. It's an advantage for Pandora. The things that are causing those problems are lot of those Incs. That's all stuff that the industry went through with the web environment, 15 years ago. Mobile environment is going to go through those same things. As an industry we will solve those things. The beauty about -- in our case is that a lot of those things are solved initially just because we are keeping it in a private exchange and within Pandora's environment today, and so it's a safe, effective way for advertisers to spend mobile display dollars with confidence.


Your next question comes from line of Jason Helfstein from Oppenheimer. Your line is open.

Jason Helfstein

Thanks. Few questions. Nice quarter. The first question, if my math is right, it does look like there was slowdown in the number of hours sold. So maybe just talk about pricing versus sell-through and kind of how you -- relative to your expectations this quarter.

Secondly just given the positive results on EBITDA this year or this quarter, and the fact that you are not taking up EBITDA for the year suggests more investment in the back half and we did see, kind of, a deceleration marketing in the quarter, the 28% -- I'm sorry, 28% of revenues and 32% and so should we just assume that that increased investment mostly goes in marketing? And then ultimately, I guess, should that give us kind of greater confidence on the engagement in the back half? If you choose to spend that money in marketing. Thanks.

Brian McAndrews

Yes, great questions Jason. Thank you. Yeah, no, I wouldn't say it was a slowdown in our store especially if you're talking about advertising and audio advertising specifically. There's -- audio advertising is growing faster than digital. So, it's nearly 70% of our advertising revenue now comes from audio sold advertising.

So, the number of sold ads per hour is really at an all-time high north of three ads per hour today. You combine that with effective CPMs that are also at record levels pretty much across all our advertising sources, that's resulting, I think every measure of RPM this quarter was a record for the company.

And that you don't do that with one going up in the other going down. Every one of them is moving steadily in the right direction. Our pricing in yield team here which we have been building over the last year and a half does an outstanding job of balancing our rate card and our inventory levels with -- where our sales capacity is and bringing those all up in a steady fashion so that it optimizes opportunity for revenue alongside listener experience.

When you talk about EBITDA as we look to the back half of the year, those dollars are definitely going to be spent and marketing. We're still -- even though revenue is growing significantly moving to Q3, EBITDA also a stepping up significantly, but we're reinvesting a bigger portion back into marketing dollars in the back half of the year with revenue and monetization the pathway they been on.

It's easy to justify ROI for additional markings spend so that's where we will be focused. I think it's the right time for a variety of reasons as we look long-term and to how we want to build the business, how we want to get to 100 million users, how we want the business to be exiting this year as we get rates from the CRB we set for the next five years. So there's lots of motivations to make sure we have tuned the business to the right level and so we're been working on marketing scale spend 10 million last quarter, really we refining it so that we can step on the gas and double up again in Q3.

And so as the driving engagement yes, we're looking to drive more hours of existing, users, we will be looking to bring back users that have taken a break from Pandora for whatever reason and to drive new users – we have campaigns that address all three. Because we have touched so many Americans, our brand recognition in the United States is shockingly high. Most of that’s good to be about driving more usage and more frequent users with existing users and bringing back users who have taken a break and we want to bring them back into listening to Pandora.


Your next question comes from the line of Rob Sanderson from MKM Partners. Your line is open.

Robert Sanderson

Yes thanks. Most of mine have been answered already but a question on the artist promotion side. Clearly you are creating a lot of value here. Question is really how you think about monetization both [indiscernible] whether you see a transaction oriented business, subscriptions maybe for analytics or content cost release potentially. Both the format and then what is the likely timeframe that this could become material to the overall business? Thank you.

Brian McAndrews

Rob, I think at this point it is not a near-term objective of ours. We’re building out -- this teambuilding capability, we think we are uniquely situated for a lot of the reasons I talked about in my prepared remarks to address this and really create incredible value for the industry. Certainly we do believe from a cost standpoint, it is part of our strategy to make ourselves indispensable to music makers and so definitely paid dividends in our ability to create win/win scenarios with partners in the industry as we continue our path towards doing direct deals. So we certainly see that potential.

And I think the value we created in that area is very clear. I think the value to be created in this scenario overall as we help both new and more established artists continue to grow their business and profits creates a lot of value and I think just the question will be how that value accrue to different parties overtime will be determined over time. But our job and our objective is to make sure we are playing a key and frankly irreplaceable role in that process and then we are comfortable and confident that we will get our share of that value.


Your next question comes from line of Matthew Thornton from SunTrust. Your line is open.

Matthew Thornton

Yeah. Hey, good afternoon guys. A couple of questions if I could on the monetization side. You talk a lot about the mobile display private exchange was extremely helpful. Just wondering if you started to think about or plan for the move to digital audio programmatic or whether it's still too early?

And then a second part to that, have you started to let the add load lift at all in a select markets or demographics? And then just finally just wondering if you could give us any color or update on kind of the current split between display versus audio. Thank you.

Brian McAndrews

Sure. All good questions. So in terms of audio programmatic, our efforts to sell direct premium in, in that area are yielding really not just great results from a revenue perspective, but also great results from a customer satisfaction and repeat usage. and the demand for audio programmatic is not very high especially among broadcast buyers today. They are very used to transacting directly the way it's been done for a long time. I think we will move them eventually and there is opportunity to expand the market, especially down market overtime through programmatic buying in audio and we will lead that path.

We're developing lots of product road maps to address that, but in the short-term, there is very little incremental opportunity for bringing programmatic. I know there is a lot being talked about that, and I think that might be more applicable to companies that don't have the advertising infrastructure that Pandora has to deliver -- not just sell, but deliver on the results and so it's something we are absolutely going to be leading on over the next few years, but not something that is being demanded by customers today in a way that Pandora feels that we should respond.

In terms of ad loads, we have been slowly increasing ad loads in certain parts of the business. We're up to as many as seven ads now in certain demos, certain geos, and across mobile and web.

So, we -- six maximum for long-term probably a year and a half. By now we push that up to seven, but we obviously we monitor that really closely and as we're over three -- average of three spots in our -- in sold, it's sold audio ads. That's up from below, because I don't think it's ever been over three until this quarter. So, as we do that we sort of consider bringing that maximum ad load up.

What was the third question I'm sorry? The display. It's a little more than two thirds audio, one third display. In terms of percentages of advertising revenue and that one third display is between both its kind of traditional display as well as video advertising.


Your next question comes from the line of Douglas Anmuth from JPMorgan. Your line is open.

Diana Kluger

This is Diana Kluger on for Doug. Just want to ask a little bit on the RPM, if you can comment on, is it more of the mix shift towards local that’s driving it or like for like pricing across the same ad units or both?

Mike Herring

Yes, the answer is both. It's definitely mix shift to local. Local now 26% of advertising revenue, that is up materially and we have been slowly -- we have been moving that up quarter after quarter for some time now. And the pricing leverage that we get from that is significant, but we are also have been gradually being -- pricing up across our product families and so even the programmatic efforts on mobile display are focused on bringing that effective CPM up in that area as well. So it's a combination of both.


Your next question comes from the line of Anthony DiClemente from Nomura. Your line is open.

Anthony DiClemente

Thanks for taking my questions. Mike you mentioned on the CRB process on being through or having concluded the arguments and you mentioned you planning for a range of scenarios, I wonder, is it possible that the range of outcomes the standard deviation of different outcomes is perhaps tightening here as time goes by in your opinion? And just wondering if you could comment on that. Thanks.

Mike Herring

I think it's always been relatively tight in our opinion. The opinions of people outside of Pandora and everyone is entitled to them, there is an old saying about that somewhere. But we've always felt that is the range -- the logical range, if the judges follow the -- what their instructions are under the law, is a relatively tight out. And I think if you have been following it, if you've seen some of the closing arguments even this week it feels like they are tightening around the way Pandora has been talking about for some time.

But let's caution that anything can happen. There's a lot of testimony that’s occurred behind closed doors that I am not privy to, that nobody on this call is. And nobody at SoundExchange is either. It's just between the lawyers and the Judges. So there could be other evidence that it is going in different direction. But our position has always been a tight range of outcomes and the reasonable outcomes and we still continue to believe that that will be the result.


Your next question comes from line of Ben Swinburne from Morgan Stanley. Your line is open.

Ben Swinburne

Thank you, I have two questions. Mike can you come back to the add load point and also pricing, when you look at that -- particularly that 28% mobile ad RPM growth is obviously a lot of growth on both those. Do you think the listener -- the ad load increases are having an impact on listening hours? Because I think it sounded like from Brian's comment that hour slowed even if you adjust for the measurement piece.

And then on pricing, any sort of view on how your audio pricing compares at the local level versus the market? My senses you are generating nice premiums, but I didn't know if you felt like you were running into any sort of headwind there on pricing.

Mike Herring

The impact on question is an interesting one. There's definitely a correlation between increased ad load and hours. We watch that very carefully and calibrated accordingly. Keep in mind there is an obvious one. Every time you play a 32nd ad, that's a 30 seconds of music we don't play. Does that make sense?

So, as ad load grows we actually play less music on a per hour basis to begin with. So, there is a strange headwind that just comes from advertising more. How material that is, is not gigantically material or anything but when you have those in with everything else related to the playlist improvements related to summer, seasonality, it tends to bring the hours kind of end where they are.

We feel really 5.3 billion hours is still equivalent to the highest number of hours we ever had in the quarter. Our engagement continues to improve we feel very strong about our audience metrics.

And we also believe that there is room to grow that advertising. We have always felt that it doesn't mean that what we will do is we will optimize for revenue efficiency. How do we optimize for RPM total revenue that doesn't mean serve as many ads as you possibly can.

And then other part is how we're pricing it local versus the market. We tend to really price at the high-end of the market if you look at it purely on a per point basis even above that in certain cases, because we can target very specifically and deliver exactly the user that the advertiser is looking for.

And because of that we're not wasting a bunch of advertising serving to non-targeted user and we can resell that to our effective dollars sold per hour can be significantly higher than terrestrial radio. It would appear that from a pricing perspective mostly because we don't have wasted impressions. But even at a CPM basis or converted to a cost reporting basis, we are not a cheap alternative we are just the most effective.

Brian McAndrews

And I would just add then on the listener hours we were up 5% from last year and flat from Q1. So any impact that the skipping the rejection and skipping ahead would have meant, we would be up even higher and of course up from Q1. So it's not a question of how much we are not growing, just how much more we would have grown.

And also on the advertising we just remind you that we in beta testing with our sponsored listening offering which we are really excited about and the clients we have been working with are really excited about and this is -- gives people an opportunity when they launch a station to engage with the 30 second video ad as an example and in return gets an hour of ad free listening which is just a complete win/win. The advertisers love it because they get this guaranteed engagement and they get the Halo effect, loving what they have done for them and the listeners of course benefit. So as we look at ad load and you know are careful and testing and very careful about how we manage that we also believe there are creative ways like sponsored listening, like branded stations, the creative ways for us to do advertising not involved adding ad load, in fact involve reducing ad load.


Your last question comes from the line of Andy Hargreaves from Pacific Crest. Your line is open.

Andy Hargreaves

Thanks. Just worrying if given you remember integrated the ad buying platforms quite a while. Is your sense that a lot more of the spend is coming from radio budgets as appose to sort digital or some other bucket? And then just on -- little bit of a follow-up, is the listening that you're getting from auto recognized in that, it's still relatively early. Is it matching your expectations and its seeming like it's entirely incremental?

Brian McAndrews

On the -- I will answer the auto one piece. I think we -- we feel very good about our progress working with the auto companies, we have 190 models now, we estimate 45% of cars this year, new cars that we're integrated into. The other question about activations, we have 12,000 activations up from 10,000 -- 12 million I am sorry, up from 10 million last quarter. So we are seeing steady progress.

Having said that, it is still early in the technology game and the integration could vary across autos. So in some cases we are in a connected car with Volvo where the car is full connected and the car itself is wireless and we see better engagement there than we see with cars where you are still using your phone and the phone is the brains in the cars the control.

So I think there is lot of variation across auto and so we estimate, as we said before, our overall share this quarter was 9.5%. We think our share of listing in cars is closer to 2%. So there's a lot of upside there and it's one of the reasons we feel very bullish about the 100 million goal and feel very bullish. But there is something that even despite our lead there, is just going to take some time for technology to work itself out for people to figure out how to use it for the best listener experiences, to overcome the weaker ones et cetera. And then I will let Mike take the other question.

Mike Herring

So the answer -- the short answer is that broadcast budget -- that the growth rate depending on Pandora is definitely higher than digital budget. Part of that could be attributed to the integration with Mediaocean and STRATA. Part of that also is that sale strategy has been geographically address those by -- higher the salespeople, go-to-market strategy and the response has been -- it's been very positive. And so we've done the right thing to address that market and we're out there selling aggressively with a strong ROI story and it's been responsive also. I think that's probably as much as important driving the growth of the broadcast dollars spend on Pandora than anything else.

Dominic Paschel

Great, thank you. We appreciate everyone spending the time to join us for today's call. Nichole can you go back to Odessa? If you guys like the station, you can find it on Twitter and LinkedIn and Pandora accounts. Thank you.

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