Pandora Media (P) Q1 2016 Results - Earnings Call Transcript

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Pandora Media, Inc. (NYSE:P) Q1 2016 Earnings Call April 28, 2016 5:00 PM ET


Dominic Paschel - Pandora Media, Inc.

Timothy Westergren - Pandora Media, Inc.

Sara Clemens - Pandora Media, Inc.

Michael S. Herring - Pandora Media, Inc.


Michael Graham - Canaccord Genuity, Inc.

Amy Yong - Macquarie Capital (NYSE:USA), Inc.

Laura Martin - Needham & Co. LLC

Mark Kelley - Citigroup Global Markets, Inc. (Broker)

Bart E. Crockett - FBR Capital Markets & Co.

John P. Egbert - Stifel, Nicolaus & Co., Inc.

Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC

Heath Terry - Goldman Sachs & Co.

Rich R. Tullo - Albert Fried & Co. LLC

Andrew Bruckner - RBC Capital Markets LLC


Welcome to Pandora's First Quarter 2016 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. Opening today's call is Dominic Paschel, Vice President, Pandora.

Dominic Paschel - Pandora Media, Inc.

Awesome, thanks, Kyle. Good afternoon and welcome to Pandora's first quarter 2016 financial results call.

Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations and beliefs, including projected financial results or operating metrics, business strategies, anticipated future products, or services, anticipated market demand, or opportunities and other forward-looking topics. For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the documents we filed with the Securities and Exchange Commission.

Also, during this call, we will discuss non-GAAP measures of our performance. GAAP financial reconciliations and supplemental financial information are provided in the press release filed today with the SEC, and detailed financials are available on our Investor Relations site. Today's call is available via webcast and a replay will be available for two weeks. We will also post the full text of today's prepared remarks and email them out once Mike concludes. You can find all of the information I have just described on the Investor Relations section of

On today's call, we have Tim Westergren, Founder and CEO; Mike Herring, President and CFO; and Sara Clemens, Chief Operating Officer.

With that, let me turn the call over to Tim Westergren, Pandora's Founder and CEO.

Timothy Westergren - Pandora Media, Inc.

Thanks, Dom, and thank you all for being on the call today. Before I turn to the corporate update and the latest quarterly results, I want to offer some perspective on this company that I founded with two friends over 16 years ago. When I was 29 years-old I was keyboardists and a songwriter in a travelling rock band, spending weeks on the road traversing Colorado, Idaho, Washington, Oregon and California on the so called Crescent Moon Tour.

We were one in a sea of bands driving thousands of miles packed in with our equipment, playing in small clubs and doing the best we could with wires and staple guns to get locals to show up. The music was great but like so many other bands, we shared the stage with, we were penniless and struggling to create a sustainable career. I saw so many great bands that never made it past their first self produced album. And I remember like it was yesterday the moment I decided somewhere on a stretch of I-80 in Nevada to hang it up.

Five years later as the dotcom wave swept across the country, I hatched an idea that I thought might fundamentally change the odds for musicians and there was no way I wasn't going to pursue it. The Music Genome product was the first recommendation methodology that offered the promise of a level playing field and a powerful discovery engine if we could get it to scale. Done right, we could for musicians what eBay did for small merchants. It's hard to put into words just how profound and gratifying it is to see this vision taking shape. Barely a day goes by now that I don't hear some anecdote about a working musician somewhere feeling the Pandora effect.

From a Bluegrass Band, selling out a show for the first time, to a String Quartet unexpectedly selling a bunch of CDs, to a defunct band reuniting because of renewed interest in their music. The vision of a thriving music economy is actually coming true. I share this story not to be sentimental, it's because in the 16 years of this business through thick and thin, I have learned the true power of an idea whose time has come.

Pandora survived when almost no one did. And now we are completely changing the way listeners discover and enjoy music and the way artists build sustainable careers. I'm returning to the helm at a very exciting time for the company. Yes, we've had a rough couple of years and there are plenty of doubters, but not inside our four walls. I spent the first few weeks of my tenure out with the teams across the country and I can say unequivocally that we have never been more clear about our mission nor more confident in our ability to achieve it. The team is focused and hard at work on building the next era for Pandora. I know this company and our business environment like the back of my hand, and I attribute much of the external perception to a lack of understanding.

Pandora's strategic position is not obvious to the outside world. You have to look under the hood. The position of our personalization in which we have invested immeasurably for close to two decades is not obvious. How hard is it to deliver a consistently satisfying personalized radio experience over months and years? Just ask any of the dozens of so called Pandora killers that have come and gone. It is a fantastically hard problem. That's why in the face of intense competition, our hours listened to per user is steadily rising.

And this despite a glut of free on-demand services with little or no out load that are creating a dangerous grey market for music. Our recommendation engine is a formidable combination of painstakingly generated ground-truth data, tens of billions of precise listener signals and the large and growing corpus of original algorithms and data science research. And just like the personalization engine, the depth and complexity of our monetization engine is also mostly unseen, its only symptom as a growing core business that makes almost as much revenue per hour as a broadcast radio on one-fifth of the out load.

How do we hit really $50 RPMs in our seasonally weakest quarter? It takes massive and highly efficient national and local sales teams, dovetailing with a sophisticated insight and programmatic selling arm, a highly developed ad-hocs and client services layer, an intricate pricing and yield engines and our end-to-end design and production expertise.

It is an immense and very mature infrastructure that makes that experience possible. These two dimensions, personalization and monetization, are just two major strategic advantages for Pandora that manifest themselves over time. In the coming year their significance will become increasingly apparent.

Finally, let me end my comments before handing it over to Sara and Mike with a high level overview of our strategy. The strategic plan we laid out in February's call is unchanged and we are already making rapid progress on every front toward our goals.

The team that conceived up and will execute this strategy are all here and fired up. We know exactly what we need to do, and we know exactly where we're going. It all starts with our core radio product. Approximately 100 million unique listeners come to Pandora every quarter, they listen to an all-time high average of over 23 hours per month. This represents the third largest logged in user base in the U.S. behind only Facebook and Twitter.

Through their interactions with the service and the ability we have to cross match data with third-party services, we have a highly developed understanding of their music preferences and their socio-graphic profile.

And with the on-boarding of our targeted local concert recommendation, we will add to that a precise longitude and latitude. An audience like this represents a massive marketplace and that is what we are building.

Every move we have made over the past two years, including the acquisitions of Next Big Sound, Ticketfly and Rdio, has been a deliberate strategy to form a centralized marketplace, where listeners and music makers come for all things music. Our heavy investment in artist tools through the artist marketing platform, AMP is designed to establish Pandora as a go to CRM platform for every musician looking to build fan connection and patronage. This is a classic two-sided marketplace, listeners and artists engaging and transacting on one centralized platform, a service that unifies the entire music experience, radio, on-demand, live performance and artist or band connection on every device in every car, in every location, music where and how you want to hear it.

Our foundation is the ad-supported radio product which will do north of $1 billion of revenue this year and generate north of $500 million in margins after content costs. That growing core business generates capital to reinvest in our growth strategies and just as importantly supports a sustained highly addressable audience to upsell into higher ARPU products in the form of short and long-term paid subscription upsells, concert tickets and more. We are a pyramid, not a funnel, a pyramid with a large and sustainable base upon which to build new businesses. We are upselling listeners, not trying to catch them as they fall.

Another critical ingredient of Pandora's future success is our strength as a mobile first company. We are consistently way ahead of the curve on this, going all the way back to 2007 when being an iPhone launch partner sent Pandora's business into the stratosphere overnight.

Not only do we build listener and artist products through a mobile first lens, we've also built one of the most powerful and effective mobile advertising platforms in the world. So as mobile has become the primary way music is accessed, we never had to pivot. We were and are already there. And we know how to build strong businesses around this. This is a lens through which investors should view our strategy, operating priorities and investment plan. We are careful stewards of our capital, but we will not be shy about moves that we view is driving strong leverage into what is well on its way to becoming one of the truly great Internet marketplaces.

It was this kind of confidence and long-term thinking that created such great opportunity for the likes of Amazon and Netflix. Like us, they both quietly built huge underlying strategic advantages and parlayed that into pricing and marketing advantage to extend their businesses and capture adjacent markets. We are following a similar playbook.

Now over to Sara and Mike, two members of the very talented management team that with me are executing this plan for years to come.

Sara Clemens - Pandora Media, Inc.

Thanks Tim. Today I'm going to focus on the investments we are making to expand the scope of our music marketplace to service both artists and fans. Over the past 12 months we more than doubled our product and engineering teams to 568 talented people. As a result we're shipping an accelerating stream of features that are delighting our nearly 18 million monthly listeners.

One of those new features is Browse which provides listeners an intuitive graphical environment in which to discover new music. It is differentiated in the same way as all Pandora content experiences. It is completely personalized to each listener representing their unique music taste. We call this dynamic personalization.

Whatever a listener tells us, our platform immediately responds and adapts in real time. By contrast, our competitors offer mass play-listing which operates much like terrestrial radio. It does not reflect unique taste of individual listeners.

Another excellent example of dynamic personalization is Thumbprint Radio which leverages both our ground-truth data from the Music Genome and more than a decade of listeners "thumb" feedback. Thumbprint is more than a user's greatest hit. It is a playlist that dynamically weaves together thumbed up songs with new music. We are confident listeners will equally love. It adapts and improves as we accrue precise signals from the tens of millions of listeners that visit us each day. Thumbprint is quickly becoming our most popular listener station and showcases our superior ability to deliver real-time personalization at scale and to enable listeners to discover new artists at the same time.

As we accelerate our product innovation, we will bring this dynamic personalization to new offerings. Nowhere will this be more obvious than with our on-demand product, the first wave of which will be available later this year. We are not building a me-too offering. We do not believe that the basic 30 million songs and a search box approach serves customers well. You can count on us to reinvent the on-demand experience in a distinctly Pandora way using our immense trove of preference data and the power of dynamic personalization.

It will be as effortless and intuitive as our radio product and introduce tens of millions of listeners to the joy of a truly interactive music experience. The talent and technology acquired via the Rdio acquisition has been integral to this roadmap, and it has been exciting to see the teams come together to design a truly new offering. We are also using dynamic personalization and data to change the game in live events. Today, 40% of live music tickets across the United States go unsold primarily due to lack of awareness. With our trove of data, we are uniquely positioned to solve that problem.

We have started promoting Ticketfly events enabling listeners to buy tickets to their favorite bands thereby benefiting artists, singers, and promoters. We are bringing tools like mix tapes and interviews to enrich these promotions. And we've only scratched the surface. Together, we and Ticketfly are joint selling, driving Ticketfly's business development pipeline and winning new venues. The latest of these are New York's Bowery Ballroom and Mercury Lounge, two legendary venues that Ticketfly announced this morning are migrating to the Ticketfly live events platform.

That is an excellent segue to our investments on the artist side of the marketplace. You've heard about the success of our artist marketing platform, Pandora AMP, from previous earnings calls, but I'd like to step back and explain how the Pandora AMP components really come together to create an industry changing marketplace. We have built up four key functions that are mutually reinforcing as a powerful flywheel with compelling network effects: identity, promotion, content, and data.

The first is the artist profile, where an artist claims their identity on the platform and manages their brand. Think of this as the storefront, the place where fans can go to understand who the artist is, what their influences are, see their discography, and learn about tour dates. We are investing in a fully featured environment artists can manage directly.

The second function of the marketplace is promotional tools. These enable artists to market themselves speaking directly to fans on Pandora. This incorporates both traditional tools like e-mail and push notifications and new tools such as featured tracks and audio messages. This quarter, we upped the ante launching AMPcast, our mobile messaging platform. AMPcast allows any artist on Pandora to record and release an audio message targeted to the entire fan base from a mobile phone. We are enabling geo and demo targeting, and messages can be accompanied by linkable calls to action on the screen such as a local ticket sale, a new single, an album release, or any other news they want to tell their fans.

The results from early tests are remarkable. The combination of scale, targeting, and the ability to place messages alongside an artist's music, if a listener hears it, is the magic recipe. G-Eazy was one of our beta artists, and there was a great video on our blog, where he speaks to the power of this service. He used AMPcast for ticket sales and album announcements and AMP download messages, which generated click-through rates of over 10%.

Layered on top of these tools is the third marketplace function, content experiences. This is where we enable artists to step beyond the traditional Pandora radio playlist and provide original content, including mix tapes, pre-releases, concert streaming, interviews, and studio session recordings.

Live streaming has been so popular, we built an entirely new platform capability, which we lit up at South by Southwest. Over four days, we had 39,000 fans visit our Discovery Den in person in Austin. But through live streaming, we extended that audience to over 250,000 with fans listening to their favorite bands and new talent for an average of 40 minutes.

Finally, the fourth function of our marketplace is analytics. Data provides artists with critical intelligence about fans and explains how their efforts on Pandora are performing. Thousands of bands regularly utilize our Artist Insight tool to schedule releases, plan promotions, and build tours.

Mixing sound amplifies our analytics capabilities, and viewing Pandora data with social and contextual information and enabling artists to see how everything they do across digital platforms and traditional media impacts listener engagement and reach. As we evolve the platform, fully integrated campaign tools will enable artists, their managers, and labels to review performance in real time, so they can drive efficiency, reduce risk, and drive deeper engagement every day.

A great example of these tools in action is our recent collaboration with The Lumineers. We designed a mix tape as part of their album launch and designated their song Ophelia as a featured track. We also did artist audio messages for the mix tape and album pre-orders. The results were huge. Ophelia had over 11 million spins over eight weeks, and the band reached over 1 billion spins on Pandora with their music heard by close to 12 million people over 90 days.

We have hundreds of case studies like this, proving again and again the incredible power that comes from connecting artists and fans on Pandora. Through Pandora AMP, we are helping music makers grow, engage, and monetize Pandora's massive audience. And we can do that across both live and recorded music. This increases artist participation, the expansion of listening options, and the discovery of live music. This in turn drives additional fan engagement, which in turn attracts new advertising and sponsorship dollars.

And, of course, all of these activities feed powerful data back into the system to further accelerate the flywheel. It is a marketplace operating with full force, a mutually reinforcing ecosystem of listeners, music makers, and advertisers, powered by data and creating benefits for everyone in the industry.

As you'll see, we've had a very strong start to the new era. With that, I'll turn the call over to Mike to discuss our financial results.

Michael S. Herring - Pandora Media, Inc.

Thank you, Sara. Last quarter, we laid out a five-year plan to scale our platform to approximately $4 billion-plus in revenue, including greater than $1 billion in new services and $300 million in live events. And the strategy and these targets remain squarely in our sights. During this time, we expect the core Internet radio business to grow to more than $2 billion in revenue. I am excited about our early progress. We have the right strategy in place and the right team to realize our vision.

Following the CRB ruling at the end of last year, we have certainty around our cost and clarity on how to execute against our plan. We also have confidence in how to allocate capital in order to most efficiently take advantage of the many business opportunities that Pandora is uniquely positioned to capture given our expertise in monetization, our massive scale, and our proprietary data set. While the CRB decision increased the royalty rates we pay for sound recordings going forward, our ability to drive significant gross profits persist.

We have a clear path to increase RPMs and thus gross margins in the future as first quarter total RPMs demonstrate. With LPMs now fixed at approximately $32 adjusted for inflation under the current licensing terms, future growth in RPMs will directly drive incremental contribution margins. Thus we have clear path to a 60% gross margin and a 20% operating margin by 2020 in our core radio business. The uniquely competitive advantage of our financial model is simple. The scale of the core business funds the development hub and provides the customer pool for new businesses.

Now, I will take you through the first quarter results. Starting with revenue, we ended the first quarter of 2016 with revenue of $297.3 million, an increase of 29% compared to $230.8 million in revenue for the same quarter last year. Excluding contributions from ticketing services, revenue was $275 million, an increase of 19% over the year ago quarter.

Advertising revenue increased 23% in the first quarter of 2016 to $220.3 million compared to $178.7 million in revenue in the same quarter last year. And exceeded our expectation due to stronger than expected momentum in overall demand and strength in local markets. Local revenue accounted for 28% of advertising revenue in Q1. First quarter subscription and other revenue was $54.7 million, an increase of 5% over $52 million in the same period in 2015. Our end of period paid subscribers increased approximately 150,000 to 3.9 million, an increase of approximately 4% year-over-year.

Ticketing revenue in the first quarter was $22.3 million as we completed our first full quarter operating the Ticketfly business. First quarter gross ticket value excluding box office sales was more than $170 million, growing approximately 20% year-over-year. We transacted approximately 3.8 million tickets, excluding box office sales in the quarter, which were purchased by approximately 1.6 million unique ticket buyers for approximately 35,000 live events, a remarkable growth of approximately 30%, 25% and 30% year-over-year respectively. We are off to a good start.

Consolidated adjusted EBITDA for the first quarter was a loss of $57.4 million compared to a loss of $20.9 million in the same quarter last year. These results were better than expected due to the revenue over performance in the period. Adjusted EBITDA excludes $38.7 million in expense from stock-based compensation, $13.3 million of depreciation and amortization expense, approximately $5.3 million in other expense and approximately $400,000 in provision for income taxes.

First quarter 2016 GAAP net loss per share was $0.51. Non-GAAP basic and diluted net loss per share was $0.20, which excludes approximately $38.7 million in stock-based compensation expense, approximately $5.1 million in amortization of intangibles, approximately $1.2 million in amortization of non-recoupable ticketing contract advances, and includes an income tax benefit of approximately $24.9 million, attributable to the income tax effects of the non-GAAP net operating loss before income taxes. GAAP and non-GAAP basic and diluted EPS were based on 226.7 million weighted average shares outstanding.

Content costs represented 58% of total revenue in Q1, an expected but nevertheless significant increase from the fourth quarter and year-over-year as a result of hours growth, the increase in rates due to the CRB ruling in December 2015 and direct publishing deals signed at the end of last year. As we have previously emphasized, our ability to leverage these costs is dependent on our ability to increase RPMs in excess of our LPMs. Q1 2016 total RPMs reached a record first quarter high of $49.84, increasing by $6.31 or 14% compared to the year ago period.

For the quarter, total LPMs increased by $7.28 or 31% compared to the same quarter last year. While in 2016, we will see LPMs grow faster than RPMs, this is unique to this year due to the step-up in royalty rates. Going forward for the next four years, LPMs will only grow at a rate equal to the CPI index, while RPMs will grow based on our ability to continue to improve the monetization of our service. This dynamic is what gives us so much confidence in our financial model to expand future margins.

I do want to call out one change. Going forward, we will no longer speak to mobile versus web RPMs as mobile traffic has become so dominant on Pandora's platform, representing approximately 85% of Pandora's inventory that the distinction is no longer important internally and thus neither is it externally. We have previously emphasized these metrics in order to demonstrate potential monetization expansion as mobile markets matured. But as we entered 2016, we're fully committed as a predominantly mobile platform and are focusing internally on overall performance metrics rather than platform-specific metrics.

During the first quarter, non-GAAP gross margins were 31.4% compared to 38.9% in the year ago quarter, primarily as the result of cost associated with content as discussed previously. Turning to operating expenses, we increased head count 40% year-over-year to 2,269 employees at the end of the first quarter of calendar year 2016 from 1,624 employees in the same period last year. Note that we more than doubled the number of employees involved in product development; primarily due to the addition of engineers related to the Rdio acquisition from 275 to 568 positioning Pandora for accelerated innovation going forward.

For the first quarter of 2016, non-GAAP sales and marketing expense was $101.1 million or 34% of revenue compared to $72.9 million or 32% of revenue in the first quarter of 2015 as we continue to ramp our sales team to 491 quarter-bearing sales reps at the end of Q1, 154 of which are focused on local markets, and increased our brand and direct marketing activities. Included in sales and marketing expense in the first quarter are commissions on subscriptions that we paid Google and Apple totaling $11.2 million and $16.2 million in brand, direct response and SEM activity.

Non-GAAP product development expense was $25.5 million for the first quarter, or 9% of revenue, an increase of 126% compared to $11.3 million in the first quarter of 2015, driven by significant organic investment in engineering resources and the acquisition of Next Big Sound and Ticketfly and the employees from Rdio in 2015. As we have said previously, we believe product development is an investment in innovation to drive revenue 13 months to 36 months out and thus we remain committed to increasing our spending in this critical area. Non-GAAP G&A expense was $31.1 million or 10% of revenue, compared to $30.5 million in the same quarter last year or 13% of revenue a year ago.

Turning to the balance sheet, Pandora ended the first quarter with $382.5 million in cash and investments compared to $416.9 million at the end of the prior quarter. Cash used by operating activities was $13.1 million for the first quarter compared to $27 million of cash generated by operating activities in the year-ago quarter. Capital expenditures were $14.4 million in the first quarter, primarily driven by office build-outs and internal-use software costs were $7.2 million in the first quarter driven by capitalization and engineering costs associated with the development of new subscription services.

Now, I'll wrap up with some thoughts regarding our guidance for the calendar year 2016 and the second quarter. Starting with the calendar year 2016, we estimate total revenues in the range of $1.41 billion to $1.43 billion or year-over-year growth at the mid-point of approximately 22%. We expect the calendar year 2016 adjusted EBITDA loss to be in the range of $70 million to $50 million.

Adjusted EBITDA excludes forecasted stock-based compensation expense of approximately $152 million and forecasted depreciation and amortization expense of approximately $62 million and a provision of income taxes of approximately $2 million and assumes minimal cash taxes given our net loss position for the year. Basic shares outstanding for the calendar year 2016 are expected to be approximately 231 million. We are also forecasting a non-GAAP effective tax rate between 30% and 35% cumulatively for each quarter and for the year.

For the second quarter of 2016, we expect total revenues in the range of $345 million to $355 million, achieving year-over-year growth at the mid-point of 23%. With content costs approximately flat quarter over quarter, we expect the sequential quarterly revenue growth to flow directly to gross profit and materially to the bottom line. Thus adjusted EBITDA for the quarter will improve sequentially to a range of a loss of $30 million to a loss of $20 million for the second quarter.

Adjusted EBITDA excludes forecasted stock-based compensation of approximately $37 million and forecasted depreciation and amortization expense of approximately $15 million. And a provision for income taxes of approximately $500,000 and assumes minimal cash taxes given our net loss position for the second quarter. Basic shares outstanding for the second quarter of 2016 are expected to be approximately 230 million.

In summary, Pandora is successfully operating its core business and progressing well across our new initiatives as we build a powerful music marketplace. We continue to be focused on the following: operating the core business to generate significant cash flow; bringing new products to market that have compelling competitive differentiation; demonstrating the power of Pandora's scale and data to drive live events demand; and building and maintaining the scale necessary to execute on the opportunity. As Sara said, we believe these factors are coming together to create that music marketplace operating with full force.

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

Question-and-Answer Session


[Operator Instruction] Your first question comes from the line of Michael Graham. Your line is open.

Michael Graham - Canaccord Genuity, Inc.

Congrats, guys, on a successful quarter. Tim, your comment that Pandora has 100 million active listeners on a three-month basis is interesting. Any comment on the way the company approached listener growth historically and what changes we might see with you back at the helm, and, in particular, we've noticed a pickup in television advertising recently with a brand message that seems a little more holistic than just radio. Just wondering if you have any comment on the strategy there? Thanks.

Timothy Westergren - Pandora Media, Inc.

Yeah, sure. Let me kind of take it at a 30,000 foot level, so when you think about growth, getting 100 million people to come every three months, the first move we can make there is to make them come monthly, and that's about making Pandora more of a habit every day. And that's driven by finding more interesting and compelling ways for someone to use Pandora. Big piece of that is CE and auto. We have invested a lot in those categories. We're also innovating on the product with new features and new programs coming into it, so that's the first piece, turning those quarterly visitors into monthly and, of course, more daily users.

The second piece is – the second catalyst comes later this year with new products. So, we've signaled what we're planning to do in terms of offering expanded capability, and if you think about the difference between sort of a monthly versus a quarterly listener, often that's really comes down to somebody who listens to Pandora, hears a song they love, but they can't rewind it, so they go somewhere else. And we can't satisfy their entire music appetite. And as we expand to, we keep those people on Pandora. Our ambition is to be the home, as we said, for all of your music appetite.

And then, additionally, we're going to bring live ticketing to this. So that I think is going to be really compelling not only for musicians but also for listeners where we become not just a place you come to listen and consume music, but a place you come for information and targeted information for relevant concerts. So, that's kind of a broader growth strategy.

With respect to television advertising, yes, we're going to be louder this year. We have a bunch of sort of goals there. One, we want to build our general brand presence, and when we get to our scale, I think it's a natural evolution of our maturity to be louder, and there are other voices in this space. We need to step up and compete with that and build and sustain our current audience in preparation for what's coming later this year. So we spend very efficiently with marketing, but we certainly are adding an additional branding component, and our campaign from last year showed us there is definitely leverage to be had there. So we're excited to see how it does, and we're keeping a close eye on it.


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

Amy Yong - Macquarie Capital (USA), Inc.

Thanks. I wanted to drill in a little bit on the subscription business and any progress you've made on Rdio? And I guess specifically, when should we expect something to hit the market and just overall thoughts on pricing and how it might be different than some of the services out there? And lastly, how does that impact your $1.3 billion outlook into 2020? Thanks.

Timothy Westergren - Pandora Media, Inc.

Yes. Sure, so our ambition is to have that before the end of the year. And just sort of to I think restate what we think is the particular differentiation we bring there: one, we have 100 million people every three months about which we know a lot. People listen on Pandora over 23 hours a month. They're giving us an immense amount of precise listener signals. We're going to use that information to essentially upsell them in sort of a contextually relevant way into these new higher ARPU offerings. So we have this built-in user base that is essentially free to market, not entirely free but good as free, and that we can approach really strategically I think. In terms of pricing, I'll hand it over to Mike, but I think we have the opportunity to do something really powerful for the business, which is to get everybody to listen to music on the right part of the ARPU curve.

Michael S. Herring - Pandora Media, Inc.

Yes, exactly, Tim. I think his point is going to drive our pricing strategy there, which is we don't think there's one price that's going to work for everybody. We think there's a spectrum of pricing and offerings that we would like to bring to market and have a portfolio of products that optimizes the opportunity and, frankly, gives the products that people want and are willing to pay for across the spectrum of offerings. So we're not ready to announce what that pricing is going to look like now, but it is our intention to have multiple levels over time and in multiple different product offerings.

Timothy Westergren - Pandora Media, Inc.

When you think, that's a unique value proposition Pandora offers to the music industry. There's nobody on the planet that has this size audience with this level of information, and the vast majority of Pandora listeners have not subscribed to anything. So it's a great opportunity for everyone.

Amy Yong - Macquarie Capital (USA), Inc.

Perfect, thank you.


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

Laura Martin - Needham & Co. LLC

Hey there. So, Mike, for you, last quarter Brian talked about a profit number or contribution number I think of about $250 million, and today in Tim's prepared remarks, we're talking about $500 million. So I assume one's like a gross margin, and one's like an EBITDA margin. I guess I'm just wondering pick either same-store number, and I'm sort of interested in what's going on, whether those are going up or down.

Sara, for you, on the last day of the quarter that you're announcing today, Apple went into another 90 days free, I believe, and the last time that happened, which was the September quarter last year, we had real listening degradation at Pandora, which hurt our numbers for the three. So I'm interested in whether you're seeing in the current quarter any kind of listener decline because of Apple's free period? They seem less loud this time, so maybe it's not having an effect. I'm not sure.

And then, Tim, for you, we're spending a ton of money here on this on-demand service, and I think we're really looking to you to sign up Warner, Sony, and Universal, and my understanding is we can't launch an on-demand service until we have all three. So I'd be interested in your sort of update on what's going on with the record label negotiations. Thanks.

Michael S. Herring - Pandora Media, Inc.

Laura, thanks for your question. I guess, we'll follow in the...

Timothy Westergren - Pandora Media, Inc.

In the order.

Michael S. Herring - Pandora Media, Inc. that you asked them. You're talking about a difference between a gross margin for the product and a contribution margin after the direct cost associated with it. And the reason we talked about it in that context in the year-end call was to give an idea that the core business is generating that $250 million, $275 million worth of contribution margin that we're reinvesting back into the business this year, the healthy margins that we're able to generate off that because of how well we're monetizing the free service. And Sara?

Sara Clemens - Pandora Media, Inc.

Yes, so in terms of the consequence of the ongoing free trials that we're seeing in the market, we've been operating in this environment now for well over 12 months. You heard Tim in his comments talk about the glut of free on-demand services with limited ad load that created this gray market, which effectively provides people with the opportunity to use on-demand with no commercial compensation. We're continuing to see ours increase. I think that's a demonstration of the strength of the unique personalization that Pandora provides, and that's why we remain very confident that our on-demand product will be differentiated.

Timothy Westergren - Pandora Media, Inc.

And just a second, I think it's pretty notable that in this context, our listener hours per listener just keeps going up. I think that's really important to understand in the face of hundreds of millions of dollars of marketing and a lot of free offerings, I think that's something to be – that should instill confidence in us and those watching us.

And, Laura, in terms of the music industry, you're absolutely right, that's on top of my list of priorities. It's a role I know very well. I was there as a professional long time ago. So it's an industry I can speak to and I think in the first week I was with the heads of all three majors and I will be continuing to do that and I think it's very confidence inspiring for them to have a musician at the helm of the company who I think does genuinely have their interest at heart and understands how the industry works.

That said this isn't like a charm offensive. This is finding what we think is an appropriate and mutually beneficial business arrangement between Pandora and the industry that's ultimately how these deals get done and there's no doubt that there is a Venn diagram there. We have something to offer labels and vice versa. And now we have very, very open, cordial dialogs with all the companies. So we're going to work hard with them to find a good solution, but I'm confident and I'll be investing a lot of my time in that. These are incidentally – I was a former working musician trying to be in the offices of folks I tried to get their attention when I was a musician, but I couldn't.


Your next question comes from the line of Mark Kelley. Your line is open.

Mark Kelley - Citigroup Global Markets, Inc. (Broker)

Hey, thanks for taking the question. I was wondering if you can talk a little bit more about programmatic, especially on the mobile side, now that you've had almost a year of having your mobile inventory available programmatically. Any insight you can give in terms of how RPMs have been affected and maybe what the percent of your ad load is? Thank you.

Michael S. Herring - Pandora Media, Inc.

Yes. So it's been launched for about a year, but really in general availability for six to nine months or so since late summer last year. And it's had really a very positive effect on mobile display environment in particular in terms of bringing new pools of demand and that's allowed the sell-through rate of our mobile display to increase significantly off of a relatively small base, but it's starting to contribute meaningfully to RPM. That takes the pressure off of things like audio ad load and such, of course, and it allows us to continue to grow our RPMs over time. The beauty of that is that there's a ready-made market for it and it's something that we get to participate now and it opens up new pools of revenue for Pandora to tap. So that's been really strong.

We still have a lot of inventory left to sell there. We've been rolling out into those markets on a graduated basis and we expect that to continue to be a nice way to bring up this bottom-end of our mobile display pricing range. So if you think about historically the bottom-end of that range was dealt with remnant inventory. We're eliminating those remnant pools and replacing them with programmatic. That allows the range to tighten and the overall effective CPM of mobile display to increase significantly and keeping that pricing up is significant advantage both from an advertising quality perspective as well as a relative monetization perspective.


Your next question comes from the line of Barton Crockett. Your line is open.

Bart E. Crockett - FBR Capital Markets & Co.

Okay, great. Thanks for taking the question. I wanted to just understand a couple more things about the state of talks with the labels and the launching of on-demand, because it's clearly a hot button question right now for you guys. When you're talking to the labels, what is the major source of tension right now? Is it pricing or is it the rights? What is taking time here to get this done? Why don't we already have it?

And then when we look at your guidance for the year on revenues, I know you're spending to build on-demand. Do we have any revenues in there for that, or are we really assuming that that comes in next year? Thanks.

Timothy Westergren - Pandora Media, Inc.

So I think that there are two dimensions in terms of the talks with labels: one, is kind of features and functionality and what's the right product and how does that intersect with the market demand and that's a big part of our conversation frankly. We are putting forward a proposition about how we think it's best to bring the full value from these 100 million people on Pandora that will ultimately be a bigger number. So what does the on-demand product look like and how does that dovetail and support other options, so that's one piece.

And the second, of course, is economics, what do the numbers look like, and that's just a traditional negotiation around those elements, but I do think that the wind's at our back in terms of how the consumer is evolving and the industry itself, which I think they're beginning to realize that radio products like this are indeed sources of more engagement, there are ways to educate people about on-demand. So a lot of people don't understand what a true great on-demand service could do for them. Pandora is uniquely positioned to be that source of education. And I think we're making progress there. And we'll take a little while, but ultimately I think we're really just confident that we have a real value to offer them. It's distinct and that no one else can. And the other question on revenue, Mike, I think not much on that this year.

Michael S. Herring - Pandora Media, Inc.

So, yes, very little if any of our subscription revenue assumptions for this year are related to new products. Assuming we bring them in towards the end of the year or at the end of the year, and the way subscription businesses work is it's not a big spike immediately. They're obviously, deferred. You launch with various trials, as Apple has done, for example. So our revenue guidance here does not assume we get these deals done and we bring new products to market.

The only thing I would add to Tim's assessment of those discussions is this isn't a vacuum. The music labels are negotiating with many other services all at the same time and trying to sort out the future of streaming generally and what types of features and functionality fall into different buckets.

So it's as much about the industry trying to decide what its future is as it is how Pandora is going to play a role in that and it's great opportunity for us to shape that future, but that means that there's lots of education going on, there's lots of basic understanding to be had on both sides of the table in order to get to the right win-win solution.

Timothy Westergren - Pandora Media, Inc.

And it's where I think it matters that we are fundamentally a music company and now run by a musician. They want allies, they want folks who are looking out for their long-term interest and they have that in Pandora.


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

John P. Egbert - Stifel, Nicolaus & Co., Inc.

Thanks. For the sake of easing us into the new reporting methodology, is there any way we could get the desktop versus mobile splits for advertising and overall RPMs just one last time? And then it sounds like there was a noticeable acceleration in local ad revenue from 4Q levels. Was there anything specific driving that this quarter? Thanks.

Michael S. Herring - Pandora Media, Inc.

The acceleration from an perspective is really as much about the mix between local and national and the more annuity level of local rate. The annuity traits of the local ad revenue and how that flows that's changing that dynamic a little bit.

In terms of relative RPM, because we're largely selling all of our inventory together, those RPMs are coming very close. So they're really not very far apart in Q1. It's one of the reasons why we didn't want to caught up is why one is higher and why one is growing faster than the other. Even in the last few quarters machinations around a dollar X direction or dollar Y direction. And what we wanted to do is focus on what the overall monetization of business is, because that's how we're running it internally.

So I mean it wouldn't be far off if you just assumes that plus or minus 5% of our total RPM is web RPM versus a mobile RPM or plus or minus 10% for our transitional model. But I don't think it's useful for us to continue providing those metrics because it puts a focus on an angle, a view of the business that isn't instructive as to how we're running it.


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

Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC

Thank you. Maybe you guys could just spend a minute talking about how we should think about the long-term – the five-year plan and margins across the business, given the potential for the labels to look at their relationship with Pandora and think about comprehensive economics.

In other words, I think you've assumed the CRB rates are the rates for the next five years. But I'm imagining there's some potential that that's not true. So is there a way for us to think about the give and take between the functionality you're looking for, the on-demand rights you're looking and whether the labels look to use those negotiations to change the CRB structure that just got finally settled after a long process?

Timothy Westergren - Pandora Media, Inc.

Let me just give a headline there and then hand it to Mike who is leading the charge on the negotiation side. I think one thing to understand is we come to this with a healthy profitable business that's growing, that has lots of upside and lots of opportunity. And our ambition is to expand that and to leverage that.

So we have flexibility in how we think about these businesses, because it's not our be all and end all for us. We can sign deals that make sense. That's a great benefit of our position currently. So a deal will have to make sense for both sides. But, Mike, you can talk about it.

Michael S. Herring - Pandora Media, Inc.

Yes. So that's exactly the right point is that what we've been – the conversations we've been having for the last two years is that for the overall marketplace to be successful, everyone has to have a way to win and the right margins have to be developed. And in order to do that, there have to be the right incentives to invest, bring things to market, upsell and cross-sell people across different products within a portfolio, et cetera. So it's a broader conversation than here's a dollar and this is zero-sum argument over who is going to get that last penny. And that's how this discussion has changed over the years.

So the way you characterize the discussion is no longer true. We're optimistic that in general as an industry we can find a balance of rate structures that allow for growth of the overall industry and everyone to do well. In the absence of that, we are using CRB rates and staying within the boundaries of that and expanding into other businesses, and we're going to do really well. Pandora will do well regardless. The reality is we will do better and the music industry will do dramatically better if we work together to find rate structures that allow businesses like Pandora to drive it. And I think everyone is getting onboard with that concept, and so we won't end up with some kind of predatory negotiation tactics.

Timothy Westergren - Pandora Media, Inc.

One more thing to add I think, the backdrop to this too is there's a ton of activity for us directly with labels. So managers, artists, you've been building a lot of credibility and demonstrating value and Sara has been in-charge of that. So you can talk about how it's impacting the conversation as well and what we bring to the table there.

Sara Clemens - Pandora Media, Inc.

Yes, I think to the conversation we were just having around the marketplace, we've been very focused over the last 18 months on bringing these music maker tools to the industry. We've over 6,000 artists using the Artist Marketing Platform now. We've had over 1,000 artists post Artist Audio Messages and 200 million impressions have gone out to our listeners.

And what we're seeing now is that there has been a real shift of attitude in the industry towards them really wanting to work with Pandora to use these digital marketing tools and an appreciation of the power they can have in terms of enabling artist to actually engage with fans. And that's I think really created a different tone to our relationship with the industry from where it was 18 months ago. And so obviously the economics still need to work for everybody, but we do feel that the music maker portfolio has materially aided the conversation.


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

Heath Terry - Goldman Sachs & Co.

Great, thanks. Just a couple of questions, one on the announcement today about the addition of the two venues in New York to the Ticketfly platform. Can you give us a sense who you displaced in those partnerships, and what it was that drove Ticketfly as the choice there, whether it was economics or functionality or anything else you can kind of point to?

And then just – and I really this is probably a tough question to answer, but as you get deeper into these negotiations, as you said before, you guys have a good business in radio that has the potential to become a much better business given the structure of CRB rates over the life of that deal. Given that the on-demand model is still one that I think has a lot of questions in terms of profitability, given the structure and the costs associated with that, is there a scenario or where would be the level at which you say, you know what, we're just going to stick to what we have? We've got a great business here, and we don't feel like we need to run the risk of giving up the artists that we have on the platform or giving up the functionality that we have on the platform in order to try and go after a much bigger business that at least so far doesn't seem to have attractive economics at the level that we've seen?

Sara Clemens - Pandora Media, Inc.

Yes, thanks, Heath. So I'll take the first question regarding Ticketfly. So the Bowery Ballroom and Mercury Lounge have been with Ticketmaster for 18 years. So there, too, we displaced in terms of the current ticketing provider. Ticketfly has been working to secure the Bowery and Mercury for some time as a new customer. And we really feel that the combination of the Ticketfly live events platform and the promotional power of Pandora was the winning combination.

That's the ability for these venues to both use what is the market leading software in terms of management of the venues, promotion of their events to fans, and then amplifying that out across Pandora by being able to do things like create audio messages, create branded stations to really drive additional winner. So it's definitely that combination of the technology of the Ticketfly platform and the promotional power of Pandora. I'll hand over to Tim on the negotiations question.

Timothy Westergren - Pandora Media, Inc.

Yes, so you kind of said it yourself, which is if you've got a great core business, at what point do you decide not to go and expand? That's essentially the luxury of choice that we have. We have a great business with lots of opportunities, and we don't have to do these things. So that's the kind of perspective we come into these negotiations with, but again, we think there's a great Venn diagram of interest between what we can offer and what the labels want. And we're in a unique place to extract value that other people can't. So that's the tenor of the conversation.

Michael S. Herring - Pandora Media, Inc.

That's a good point that Tim makes there is that the economics of subscription businesses today aren't working on a standalone basis because the customer acquisition costs are too insane. When you work as a funnel and you have to fill that funnel with increasingly more expensive customers, your next million customers always cost more than the million you just acquired, that lifetime value of the customer approach becomes thinner and thinner and thinner, and it's harder to make money. The beauty of Pandora is under the same economic structure for those subscriptions, we don't need a better economic structure. Under that same economic structure, it becomes an upsell, cross-sell onto our foundation, the pyramid analogy that Tim used in his opening remarks.

Our customer acquisition costs are vastly lower because they're essentially negative in the context that we actually make money off of the 80 million people listening to our radio product as a contribution margin, profitable business on a standalone business. We can layer higher ARPU, lower gross margin products on top of that, but on a unit economics basis, more profitable and in a broader sense completing the music experience in a single environment. That allows us to we believe over the long-term grow the total users to a much bigger pie because we're providing all aspects of your music listening needs under a single umbrella, whether it's listening to a specific song you're asking for or the lean-back radio experience that is the vast majority of your listening preference.

So there's both the strategic angle to bringing that listening experience, in terms of rounding out the music experience and providing a complete product portfolio, and we also in incremental unit economics argument that with low enough customer acquisition cost, it has a positive impact to the overall financial model.


Your next question comes from the line of Rich Tullo. Your line is open.

Rich R. Tullo - Albert Fried & Co. LLC

Hey, thank you very much, guys, for answering my question. Congratulations on a super terrific quarter. Sara, I think you're doing a great job. And now, for my questions.

My first question is as we look at Ticketfly, how many venues did they add as compared to this time last year? And a follow-up to that is should we be thinking about AMP monetizing primarily through Ticketfly and not through Pandora's ad revenue, and then I have a question on mobile ads?

Sara Clemens - Pandora Media, Inc.

Okay. So in terms of Ticketfly venues, so they currently have 1,260 clients. They're growing across their business at about 30% year-on-year, and so we're continuing to see very strong growth from them, and we expect that to continue over the course of the next few years.

When you talk about monetizing the Artist Marketing Platform, we think about the value of the Artist Marketing Platform in a range of different ways. The first is in augmenting our relationship with the music industry as we discuss direct deals with them, and indeed we are actually including these features in the discussions around direct deals.

The second is that we are effectively able to monetize these features through the revenue that we earn on Ticketfly, and so when we use promotional features to increase the sell-through rate of tickets from Ticketfly, migrate people who are currently buying from box office to online, or increase the fee structure through improved negotiation leverage, all of those effectively create a monetization mechanism.

There is, however, also advertising and sponsorship revenue opportunity for us in the live event space. That is a addressable market of multibillions. We are currently beginning to work with our sales and advertising team and Ticketfly to assess how we can start bringing some of the sponsorship and advertising dollars in the market to the mid-market of the music Ticketfly services, and we think there is a material opportunity there. The mobile ads question...

Timothy Westergren - Pandora Media, Inc.

I'm just going to underline one thing Sara said too that, Rich, going back to the workplace concept, our fundamental pedagogy is let's find ways to make it easier, more attractive for listeners and musicians to hang out on Pandora doing what they need to do, listeners consuming music, getting information on shows, artists communicating with their fans, building audiences, et cetera. Make it the place you want to go to because we have a myriad ways to monetize that.

We have this monster monetization instrument we spent 10 years developing. It knows how to make money from these things. So it feeds into the flywheel and it allows us to offer – AMP is free for artists right now. You can get average working fans staying 200 days on the road across the country and you can now from your mobile phone without cost send out targeted audio messages to every listener that likes your music on the platform.

That was just not available, it's never been available before and that's a scale. It is phenomenally valuable product for artist. What that translates into is artists spend more time on Pandora communicating with their fans. That means fans go to Pandora, because that's what they hear from their artists. So it's a flywheel. We need to squeeze the flywheel.

Dominic Paschel - Pandora Media, Inc.

We realize we're not going to be able to get to everyone's question today and we'll rotate it in future calls. Kyle, can we take our last question please?


Your last question comes from line of Mark Mahaney. Your line is open.

Andrew Bruckner - RBC Capital Markets LLC

Hi, guys, this is Andrew on for Mark and just quickly can you help walk us through how we should think about the seasonality for the Ticketfly business and how growth should go through for the year for that company? And then how material are individual venues such as Mercury and Bowery Ballroom to the overall model? Thank you.

Sara Clemens - Pandora Media, Inc.

So in terms of seasonality, the front half of the year is stronger from a revenue perspective across the live event business. That's where lot of tickets particularly for the summer season are sold, and so you will see the first half be stronger than the second half. With regards to materiality, there's 1,260 clients. There are certainly some larger clients in Ticketfly portfolio that represent a greater range of revenue, so we feel very comfortable that it is a diversified portfolio.

Dominic Paschel - Pandora Media, Inc.

Great. Kyle, with that we're going to end today's call. Can you please take us back to the Pandora BottleRock Station? Thank you.

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