Pandora Media (P) Q1 2018 Results - Earnings Call Transcript

Pandora Media, Inc. (NYSE:P) Q1 2018 Earnings Call May 3, 2018 5:00 PM ET

Executives

Derrick Nueman - Pandora Media, Inc.

Roger J. Lynch - Pandora Media, Inc.

Naveen Chopra - Pandora Media, Inc.

Analysts

Anthony DiClemente - Evercore Group LLC

Peter C. Stabler - Wells Fargo Securities LLC

Justin T. Patterson - Raymond James & Associates, Inc.

Rob J. Sanderson - MKM Partners LLC

Maria Ripps - Canaccord Genuity, Inc.

Barton Crockett - B. Riley FBR, Inc.

Richard Greenfield - BTIG LLC

Daniel Salmon - BMO Capital Markets (United States)

Matthew C. Thornton - SunTrust Robinson Humphrey, Inc.

Heath Terry - Goldman Sachs & Co. LLC

Operator

Welcome to Pandora's first quarter 2018 financial results conference all. Opening today's call is Derrick Nueman, Vice President, Pandora. Sir, you may begin your conference.

Derrick Nueman - Pandora Media, Inc.

Good afternoon and welcome to Pandora's first quarter 2018 earnings 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, the benefit to Pandora from the acquisition of AdsWizz 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 once they have concluded. You can find the information I have just described at investor.pandora.com.

On today's call joining me are Roger Lynch, Pandora's President and CEO, and Naveen Chopra, Pandora's CFO.

With that, let me turn over the call to Roger.

Roger J. Lynch - Pandora Media, Inc.

Thanks, Derrick, and thanks, everyone, for joining us.

Let me open by saying that I don't think there has ever been a more exciting time to be doing this job in this industry than right now. I say this for two reasons. First, as I made clear when I joined Pandora, we have a powerful set of competitive advantages: our brand; our scale; our listener engagement; and our data science. As I also made clear, we have work to do to fully leverage those advantages. Key to that work is stabilizing and growing our audience and improving our capabilities in ad-tech.

Our results this quarter show we're making progress. I'm encouraged by a lot of what I see: Improving audience metrics; significant progress developing a more efficient marketing strategy; and the acceleration of our ad-tech roadmap. While we're early in our efforts, I'm proud of how hard everyone here is working towards our goals.

The second reason I'm optimistic about Pandora's future is that, as I said on our last call, we're entering a new era of audio. This opportunity has influenced our strategy and priorities, and it frames almost everything we're doing, including the progress we're making.

Right now, there have never been more ways to deliver audio content. There have never been more kinds of audio content. And that content has never been more personalized, and the market for it has never been bigger.

Music is at the core of what we do. Whether subscription or ad-supported, we connect consumers to the music and the artists they love. Increasingly, the new era of audio means using our technology to drive an engaging consumer experience across all types of audio content. It means ensuring that any content on our platform is easily discovered and socialized, be it a song, a podcast, or a new album. It also means providing brands with an end-to-end toolset that allows them to meaningfully connect with listeners everywhere, regardless of whether they experience Pandora on an iPhone, an Alexa-enabled speaker, or any other device anywhere they are.

Our decision to acquire AdsWizz positions Pandora to be at the center of this expanding and evolving digital audio marketplace. The opportunity is significant, especially with the potential for a good portion of the $28 billion global radio advertising spend to move to digital audio. We intend to lead this market and provide buying and selling solutions across multiple ad formats for multiple publishers worldwide. AdsWizz puts us in the best position to do just that.

As I mentioned, our results this quarter demonstrate that while we're still in the early innings of a long game, we're making headway. Let me share some of the highlights with you.

First, I'd like to highlight our efforts to preserve and grow our audience. Changes in the size of our audience are a function of three key variables, recapturing lapsed listeners, plus acquiring new listeners, offset by churn of existing listeners. Churn was not the reason for last year's decline in audience. In fact, it improved in 2017. Where Pandora faced the challenge was in recapturing lapsed listeners and acquiring new ones.

In December, we brought on a new CMO with a mandate to change this and drive a more analytical approach to marketing. This meant shifting from a branding-focused strategy to one that leans more heavily on performance marketing. To this end, in Q1 we began applying ROI-based tactics to a number of performance marketing tests, many of which show early promise. For example, in March, for the first time in 18 months, we achieved a positive year-over-year comp in the recapture of lapsed listeners.

Although still preliminary, our analysis suggests that our listener lifetime values are a multiple of our acquisition cost. The next step for us is to prove we can scale these results, in which case we could profitably increase our marketing spend.

We're also looking to get more out of partnerships. Historically, Pandora has done an impressive job integrating the Pandora service with a variety of devices. These relationships need to expand to include more marketing and brand promotion elements. We're making progress on this and we'll share new developments as they happen.

Now, let me shift to our products. Our ad-supported tier continues to offer listeners unprecedented functionality and access to the music they love. Premium Access is a new feature that allows our ad-supported and Plus listeners to access our complete on-demand catalog in exchange for viewing a high-value video ad. It is the richest ad-supported, on-demand mobile music experience on the market and has exciting traction with both ad-supported listeners and Plus subscribers. Approximately 13 million of our listeners have tried it.

Further, we've seen increased daily engagement, a higher propensity to upgrade to Premium and a skew towards under-25 listeners. Also, Premium Access was an element of the improved Q1 MAU trajectory. All of this was driven without marketing, and we expect focused marketing support will only increase its success.

Additionally, in the last month, we launched personalized soundtracks. These are playlists automatically compiled for our premium subscribers based on their unique musical tastes, moods, and preferences, using our 75-plus machine learning algorithms and curation.

We're also developing products expected to launch later this year that will help further improve our audience trends. The first is in-app voice capability, which will be an important step in making Pandora as easy to use as the radio.

The second is our effort around podcasts and other non-music audio content. We expect music will continue to represent the majority of our audience, but podcasts represent a real opportunity to grow. There are 73 million people listening to podcasts every month. In the near term, you can expect that we'll begin to add more content to our platform, but our long-term plan is much more ambitious. Make that content far more relevant, discoverable, and shareable than it has ever been with the launch of our Podcast Genome. Further, we think our ability to improve the monetization of non-music content by leveraging the capabilities from AdsWizz will make us an attractive distribution partner for leading content owners.

Last, I previously shared that we needed to improve our advertising technology position, specifically in programmatic, to take advantage of the significant opportunity in digital audio. The acquisition of AdsWizz will be a big step and signals a clear acceleration of our ad-tech capabilities, allowing us to transition from the largest digital audio ad publisher to the largest digital audio ad platform. We believe that combining Pandora's scale and data with AdsWizz technology will allow us to accelerate growth in digital audio advertising.

AdsWizz has customers in 39 countries and offers a full stack of tools and services, ranging from programmatic audio on both the demand and supply sides, to ad serving technology, to ROI measurement, to podcast tools and self-serve capabilities. We highlighted these as important areas of investment in our past two earnings calls, and we're addressing them.

Naveen will provide a more detailed look at the quarter in a moment, but I'll close with this. While there is a lot of work left to do at Pandora, we're now starting to see results that confirm my early conviction that we have a significant opportunity to improve our audience, monetization, and ultimately our profitability.

Continuing to execute and deliver results across all these fronts will unlock the strategic potential of Pandora. And speaking of results, let me hand the call over to Naveen.

Naveen Chopra - Pandora Media, Inc.

Thanks, Roger. We made meaningful progress in Q1 on the audience and monetization fronts and posted solid financial results. Before getting into the details of the quarter and our guidance for Q2, I'd like to share some additional thoughts on the AdsWizz acquisition. Roger spoke about the strategic nature of AdsWizz and the opportunity we have to transform Pandora from a publisher to a platform.

Why does that transformation excite us? Let me share a few relevant stats. To start, there are 160 million people streaming audio weekly, a number that has more than tripled over the last eight years. And despite that growth, digital audio still has room to grow relative to terrestrial radio.

Similarly, voice commerce is projected to grow to be a $40 billion industry by the year 2022, up from $2 billion today. These are exciting tailwinds for digital audio advertising, which itself grew 42% year over year in the first half of 2017. And AdsWizz expands the ways Pandora can participate in this growth.

Our plans for AdsWizz begin with programmatic audio, which is a small ecosystem today because large amounts of supply have not been aggregated in a single marketplace. With AdsWizz, we will be taking Pandora, the world's largest publisher of digital audio advertising supply, and aggregating it with inventory from the world's other leading audio publishers.

As we've seen with comparable marketplaces, this creates powerful network effects. Buyers want to go where the inventory resides and publishers want to be where the demand lives. So how will this create value for Pandora? Well first, the network effects I described mean that when we connect inventory from leading publishers like iHeartMedia, Deezer, the Global Group and, of course, Pandora, with top tier demand side platforms such as The Trade Desk and MediaMath, we expect the aggregated demand to create an even more robust programmatic channel through which to sell Pandora audio inventory. And over time, this translates to RPM growth.

Second, by owning the aggregation platform, Pandora can participate in transactions beyond the limits of our own publisher audience. Case in point, international, although we don't currently have a consumer service outside the United States, we now have a role in the growth of the global audio advertising market, but this won't necessarily show up in RPMs, but can be a meaningful source of high-margin advertising revenue.

And third, we plan to use AdsWizz software to accelerate our ad tech roadmap. This will not only include programmatic functionality, where AdsWizz is already powering our beta, but also augments our efforts on new ad formats, self-serve, sales automation and ROI measurement. In some of these areas, we think our development roadmap can be accelerated by as much as two years. We also believe that continued investment toward this roadmap will benefit other publishers who use the AdsWizz platform.

On the cost side, AdsWizz will bring very strong engineering talent, primarily in Romania, and we plan to expand the size of that team. While in the short-term this means an increase in product development expense, over time we should see benefit from access to more talent than our current development hub in Oakland and at lower costs. So, clearly AdsWizz is a very important strategic opportunity for Pandora. It should boost overall advertising results over time.

Speaking of results, let me move to the specifics of Q1. I'm pleased to note that for the purposes of our comments today, we will exclude Australia, New Zealand and Ticketfly from year-over-year comparisons for revenue, operating expenses, actives and hours.

Q1 total revenue was $319.2 million, growing approximately 12% year over year. This includes a 63% year-over-year increase in subscription revenue and better-than-expected advertising revenue. The upside in Q1 advertising revenue was driven by two factors. First, a higher than normal level of in-quarter bookings, and second, a significant uptick in revenue from non-guaranteed channels such as sponsored listening and CPV video. Both of these dynamics are relatively new and complex to forecast. Overall, ad revenue trends improved versus the fourth quarter of 2017 with a smaller year-over-year decline of 3%. Ad RPM grew 9% year over year to $55.52.

Subscription revenue growth was driven by an increase in our Premium subscriber base and the associated higher ARPUs. We added approximately 140,000 net subscribers, bringing cumulative subscribers to 5.63 million. ARPU increased to $6.30 as strong growth in Premium subscribers, which have a higher monthly ARPU, continue to offset declines in Plus subscribers. As a reminder, we are continuing to develop a variety of capabilities that have the potential to accelerate subscription growth. The upcoming launch of family plans, expanded acquisition marketing, new partnerships and enhanced direct billing options can be meaningful drivers of our future growth in subscriptions and subscription gross margin.

Moving to the audience part of the equation, total monthly active users were 72.3 million in Q1, down about 4% year over year. This year-over-year trend improved compared to the fourth quarter due to better retention of existing listeners and more effective recapture of lapsed listeners.

We're also encouraged by the improvement in year-over-year ad hour trends. Ad hours were down 11% year on year in Q1. A material improvement relative to year-over-year results we saw in Q3 and Q4. It is our expectation that the improvement in year-over-year trends will continue.

Total content costs represented approximately 68% of revenue in the first quarter. And it's worth noting that content costs, as a percentage of revenue, is typically highest in Q1 due to the seasonality of our advertising business.

Ad LPM was slightly lower relative to Q4 at $36.35 and was in line with our expectations. We assume ad LPMs will continue to fluctuate during the year due to the impact of MG accounting and ongoing changes to our arrangements with content owners.

Q1 licensing cost per subscriber or LPU was $4.65, up from $2.96 last year. These increases are largely driven by the mix shift from Pandora Plus to Premium.

Non-GAAP gross margin was 24% compared to 26% in the year ago quarter. The year-over-year decrease in margin was caused by minimum guarantees for content rights. Absent MGs, gross margins would have been higher by several hundred basis points. We expect gross margins to increase with improvements in audience engagement, ad monetization and right-sizing of minimum guarantees.

First quarter non-GAAP operating expenses, excluding subscription commissions, were basically flat year over year. OpEx was lower than expected due to hiring plans that shifted from Q1 to Q2. Q1 saw a reduction in G&A offset by increases in product development to support our audience growth and ad tech initiatives. And I'd note that these OpEx changes reflect the resource allocation changes we made as part of our January restructuring.

Subscription commissions were up about $8 million year over year due to growth from our Premium product. The combination of better than expected revenue and to a lesser extent continued discipline on OpEx led to an adjusted EBITDA loss in the first quarter of $73.3 million, which was significantly better than our expectations. First quarter 2018 GAAP net loss per share was $0.55. This is based on approximately 253 million weighted average common shares outstanding.

Cash and investments ended the first quarter at $544 million, up from $501 million last quarter. The increase was driven by $17.4 million of operating cash flow and the sale of our Eventbrite note for $34.7 million.

As a reminder, our operating cash flow can fluctuate on a quarterly basis due to the timing of label payments and other working capital. We expect cash to decrease in Q2 due to label prepayments and the cash component of the AdsWizz transaction.

Now let's move to guidance, where I'll start with some high level comments. First, as I highlighted on our last call, our strategic growth initiatives will build over the course of 2018 and beyond. Although we made notable progress this past quarter, we are still in the early stages of our turnaround. Second, we expect AdsWizz to close in mid-May and integration with our owned and operated business will take some time. The operating impact of the AdsWizz deal was incorporated in the commentary we provided around 2018 expectations during our last earnings call.

And third, as I mentioned earlier, an increasing percentage of our advertising bookings are occurring during the quarter. We expect this dynamic, which affects visibility of some ad revenue to become even more pronounced as programmatic audio moves to general availability later this year.

In terms of specifics, we expect Q2 total revenue to be between $360 million to $375 million, the midpoint of which reflects 7% growth versus the year ago period and similar seasonality as prior years. We expect Q2 adjusted EBITDA to be in the range of a loss of $45 million to a loss of $30 million, which at the midpoint represents a roughly $5 million improvement versus the year ago quarter.

As we discussed, we are looking at opportunities to increase marketing spend relative to the Q1 to further improve MAU trends. This decision will impact where we fall in the Q2 adjusted EBITDA range I just described. And our approach will, obviously, be made with a focus on ensuring that any incremental investment has a compelling ROI.

Please note that adjusted EBITDA differs from GAAP net loss and that it excludes forecasted stock-based compensation expense of approximately $28 million, depreciation and amortization expenses of approximately $14 million, restructuring cost of approximately $2 million, other expense of approximately $5 million and provision for income taxes of approximately $400,000 and assumes minimal cash taxes given our net loss position. Basic shares outstanding for the second quarter of 2018 are expected to be approximately 262 million. The increase is due to the expected stock component of the AdsWizz transaction.

I'll wrap up by saying that we're encouraged by the proof points we saw in Q1, still a lot of work to do, but I see progress in our efforts to stabilize and grow our audience and improve monetization, the combination of which will lead to improved revenue growth and profitability.

And with that, I'll turn the call to the operator who will open the line for your questions. Operator?

Question-and-Answer Session

Operator

Your first question is from the line of Anthony DiClemente with Evercore.

Anthony DiClemente - Evercore Group LLC

Thanks very much. Thanks very much for taking the questions. I guess I have two. I have one for Roger and one for Naveen. Roger, you talked in your prepared remarks broadly about partnering, about partnerships. And I was wondering if you could just elaborate a little more on that. And of course, many of us are curious about the potential for you to partner with SiriusXM. So on that front, is there anything you can do collaboratively with Sirius, any update there, any interest in utilizing the SiriusXM content onto the Pandora platform? Is that possible? Can you work together on ad sales, so partnerships really?

And then, Naveen, you gave us, I noticed, gross margins excluding the MGs, but that begs the question. What do you think the impact to the business of the MGs going forward will be? And so any update on where you are with the labels or your forward expectations there would really help us in terms of thinking about the long-term gross margin potential in the model. Thank you.

Roger J. Lynch - Pandora Media, Inc.

Okay. Hi. Anthony. It's Roger.

Anthony DiClemente - Evercore Group LLC

Hi.

Roger J. Lynch - Pandora Media, Inc.

I think for me the partnerships – let me just start broadly and then I'll answer about SiriusXM. Broadly, I think Pandora, as I mentioned, has done a really good job of getting its app distributed on lots of devices. But one of the things I learned when I was running Sling TV is you need to look at these device partners as not just devices that play your content, but as marketing distribution partners. And that I think is an untapped opportunity for Pandora is to revisit these relationships and look for opportunities to engage with these device partners in marketing relationships. So that's one of the big opportunities that I see. I know in the case of Sling TV, we drove almost half of our activations through partners, and I think there's a big opportunity for Pandora in particular with our subscription business to do something similar.

In the case of SiriusXM, I think there are opportunities there. You can think about them in a lot of different areas, but probably top of list would be as we look to expand our content offer beyond core of just music into (24:42), that would be top of my list as an opportunity to partner with SiriusXM. So nothing new to report on that front, but it is I think an area of opportunity for us. Naveen?

Naveen Chopra - Pandora Media, Inc.

On the question regarding gross margins, to clarify that the margins that we talked about for this quarter do include the impact of the MGs. And so the comments in our prepared remarks were really to just point out and remind people that there is a significant impact to those gross margins from the MGs.

In terms of when does that change and what is the impact likely from a timing perspective, I think there are probably some tailwinds for us as we get into 2019 once we have an opportunity to start trying to right-size some of the MGs. And I don't want to put specific numbers on it, but I do think it could be quite material, as I said, several hundred basis points of improvement.

Anthony DiClemente - Evercore Group LLC

Okay, thank you.

Operator

Your next question comes from Peter Stabler with Wells Fargo Securities.

Peter C. Stabler - Wells Fargo Securities LLC

Thanks very much, a couple if I could. First of all on the advertising side, I'm wondering if you could give us any color on the progress in the quarter in the areas of growth local versus national. And then secondly, the progress you're making on improving the decay rate of ad-supported hours, as you look out over the remainder of the yea, and the comps get a bit easier, do you think there is a chance you could return to ad-supported hour growth by the end of the year? Thank you.

Roger J. Lynch - Pandora Media, Inc.

Okay, it's Roger, Peter. The local business was pretty flat year over year. Where we see an opportunity there I think is in some of the investments that we're making around self-serve, for instance. So there are a lot of small local advertisers that buy a lot of digital advertising on platforms like Google and Facebook, but we don't have an opportunity today in that marketplace because of the systems that we have in place currently. So this is one of the reasons why self-serve tools we've said is an important area of investment for us, something that we think the AdsWizz acquisition helps us to accelerate, and in turn will enable us to start to work with smaller advertisers, some of whom will be local advertisers. So that's certainly I think an upside opportunity for us. And your question about ad hours, user comps going forward...

Naveen Chopra - Pandora Media, Inc.

(27:39).

Roger J. Lynch - Pandora Media, Inc.

Let me hand over to Naveen. Before that, just quickly, we do think we're going to see continued improvement in our trends overall. Naveen?

Naveen Chopra - Pandora Media, Inc.

Which I think is part of the question that you asked there and one of the things will help the trend going forward is the fact that we do have easier comps, but part of what's driving that is the fact that during much of 2017 and 2018, we had a lot of the pent-up demand from our radio service moving into the subscription tier, and that obviously impacted ad hours. I think we expect to have a more balanced source of growth for subscription going forward, so there's less drag on ad hours as well.

Peter C. Stabler - Wells Fargo Securities LLC

Thank you.

Operator

Your next question comes from the line of Justin Patterson with Raymond James.

Justin T. Patterson - Raymond James & Associates, Inc.

Great, thank you very much. On the advertiser side, I would love to hear in more detail how are advertisers and brands are responding to your new products like Premium Access and the investments you're making in programmatic.

And then on the marketing side, I would love to tease out a little bit more just where you saw success this quarter and what are the puts and takes about how you invest in performance for the rest of the year. Thanks.

Roger J. Lynch - Pandora Media, Inc.

Justin, it's Roger. The Premium Access is a product and feature that I think gets across a number of really key strategic areas for us. You hit one of them, which is our advertisers. The reason it's important to our advertisers is, number one, its video inventory, and we generally do a [Technical Difficulty] (29:46-31:50).

Operator

This is the operator, we can hear your line.

Derrick Nueman - Pandora Media, Inc.

Okay, great. Let's resume everything. Thank you.

Roger J. Lynch - Pandora Media, Inc.

Okay, so, I'll try this line. You know I saw that really is one of our big opportunities, but it's not something you can just switch. Number one, you need to bring in a team who knows how to do that particular type of marketing. And that culminated with the hiring of Aimée Lapic, our CMO, who joined at the end of last year. And then obviously she has to in turn built her team. And there are marketing technology investments that we needed to make to really connect that data to the team. So, some of those things started to come together late in the quarter, and we saw really tangible results in March, and that's in part what drove, what I mentioned earlier was the first positive comp in recapture of listeners in year-over-year comp in 18 months.

Operator

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

Rob J. Sanderson - MKM Partners LLC

Thank you, and thanks for saving us Derrick. That was getting a little painful. I'm glad you're back on. Couple of questions. I guess, first is, how important is audience growth in the company's long-term forecast and opportunity. Can you comment on the competitive intensity for new users on one hand, the migration away from radio is still very large, but it also appears competition may be picking up here from pretty large sized players? And then also on the user acquisition funnel, which channels are you finding most fruitful in driving new users, is that app reminders, e-mails, search, social, et cetera. And you mentioned now applying ROI-based tactics for performance marketing. I was curious what's changed and what was maybe happening there before? Thank you.

Roger J. Lynch - Pandora Media, Inc.

Yeah. Sure. Rob, audience growth is – it is important for us and I also think it's an opportunity for us. It really – to me, we think that the decline that Pandora saw last year is reversible. We think it's reversible for a number of reasons. Number one, there's just growth – underlying growth in the overall category, and you highlighted one particular area, which is the shift from radio. When you think about all the listening that occurs on radio today that is listening that occurs with advertising as the monetization, it's not subscription. So, although, our subscription business continues to grow nicely, it grew 63% this quarter, I really, really like the fact that we have a balanced model between advertising subscription because I think a big part of the opportunity for growth will happen through our ad supported business, and we know that the margins are better in our ad supported business too. So, on the user acquisition side, it's really about doing a lot of test and learn.

So, when you do performance marketing, the best way to do it is you start with a hypothesis and you test that hypothesis and you then test many, many of those hypotheses. And when you find something that's working well, you put more money into it quickly, and then when you find something it's not working you kill it very quickly. And so, doing that at scale takes some capabilities, it takes teams, it takes technology, it's not something you can just flip a switch and all of a sudden do it if you haven't built that capability before. Pandora had not built that capability before. Even though it had all of the assets to do it, I think that extreme scale with our data and data science capabilities for whatever it chose not to develop those capabilities before.

So that was one of the – what I saw as a big opportunity coming in is to quickly pull together a team, start to build the technology that connects that data to a marketing team who can then start running A/B tests against and it's across lots of different things, its digital, mobile, social that we run tests against. And as we find those tests work, we then increase spend. And overall as I mentioned in the prepared remarks and Naveen also said, we think there will be opportunity to spend more in marketing profitably to accelerate our growth.

Rob J. Sanderson - MKM Partners LLC

Thanks, Roger. And on competitive intensity?

Roger J. Lynch - Pandora Media, Inc.

Well, it's one of the reasons I'm really pleased that we have this three tier model. So, if you think about where the real competitive intensity is, it is in what we recall our Premium subscription. And despite that we're seeing nice growth in that because we do have advantages in that, most notably our scale with our ad-supported business.

We also have our Plus subscription business, which is somewhat unique subscription service. And then our real core competitive advantage in our ad-supported, which is where I think a lot of opportunity remains and is much less competitive. It's also the reason why – one of the main reasons why we bought AdsWizz was because we see that big shift that will happen from the $28 billion from terrestrial radio globally that's going to end up as digital audio, and it will be monetized principally we think through advertising. And so, we're well-positioned both with our own publishing, owned and operated business at Pandora, but also now with the audio ad platform of AdsWizz that was just acquired.

Rob J. Sanderson - MKM Partners LLC

Great, thank you very much.

Roger J. Lynch - Pandora Media, Inc.

Thank you.

Operator

Your next question comes from Maria Ripps with Canaccord Genuity.

Maria Ripps - Canaccord Genuity, Inc.

Thanks for taking my questions. First, just wanted to follow-up on the Q1 ad strength. Do you see momentum from this sponsored listening continuing here in Q2? And any reasons to think that some of that was one time? And could you share any color around the economics of those ad units? And secondly, could you talk broadly about any progress you've made so far with podcast? What are some key milestones as you're building it out and how do you think about content exclusivity when it comes to podcast? Thank you.

Naveen Chopra - Pandora Media, Inc.

Hey Maria, its Naveen. I'll take that first couple of those, and then I'll let Roger comment on podcast. So with respect to the strength we saw in Q1, you heard us highlight some of the drivers of that, namely higher in-quarter bookings than we have typically seen, and then higher revenue coming from non-guaranteed, which is primarily made up of newer products that we've introduced over the last few quarters. And so when we think about trying to understand is that kind of a trend going forward or is it one time, to be candid, we don't yet know. We obviously are excited and encouraged by the fact that these new products that we think are highly differentiated and sell at very high values for us are gaining traction in the marketplace, but it's still relatively early. And so, we're not in a position to necessarily bank on them performing exactly the same way they did in Q1.

With respect to the economics of those ad units, they continue to be very attractive for us. Whether it's done in the form of Premium Access or sponsored listening, these are – as Roger highlighted earlier, they're rewards-based mechanisms, they're sold on a cost-per-view basis. So, they monetize really well and they actually have higher margins for the time that people are granted listening – ad-free listening than our traditional audio ads.

Roger J. Lynch - Pandora Media, Inc.

Okay. Maria, on podcasts, we are going to start with acquiring more content that you'll see throughout the year some modest increases in the content. But the real effort is sort of happening beneath the surface, which is the development of what we call the Podcast Genome. And the reason we're doing that is because we think that although podcasts are growing as a category, we think there is some things that really inhibit their growth. And one is discoverability, the other is monetization. And those are the two core strengths of Pandora. And by the way, AdsWizz too on the monetization side for podcasts. So, it's why we're investing in an offering through podcasts that will be different than what has been – that what is in the market today.

It's also I think required for our brand. Our brand – our consumers really means discoverability. It means ease and simplicity. And our listeners expect a different experience from Pandora than they would get from just seeing a list of content that they would just choose from. So it's a big effort for us this year. A lot of stuff going on behind the scenes. You'll see a little bit throughout the year with additional titles launching, but the real – our ambitions are really well beyond that. And that's something it will take some time this year for the development.

Operator

Your next question comes from Barton Crockett with B. Riley FBR.

Barton Crockett - B. Riley FBR, Inc.

Okay. Great, thanks for taking the question and thanks for fixing the sound quality. I guess, Roger, I was wondering if I could get your perspective on what is driving the consumer pattern that we see right now in this business, which is one very large growth in subscriptions, people like Spotify, Apple, Amazon in the millions versus you guys a fraction of a million kind of growth sequentially, why is there that big disparity between what they are doing and what you're doing. How should we feel confident that you can continue to grow given the disparity that we see there? And then on the ad based listening side, I think we've all thought that listening in radio would migrate to the Internet platforms, but it seems like the migration has been very slow. And I'm just wondering why you think that is and why it picks up the pace there?

Roger J. Lynch - Pandora Media, Inc.

Yeah. Barton I think the – Pandora was late to get into the on-demand subscription business, only launched just over 12 months ago. So that clearly has had an impact on the business. As I've mentioned before, when you look at the reasons people have stopped listening to Pandora four out of the five top reasons are all answered with having an on-demand product whether its subscription or what we now launched in our ad-supported product. So to me at a high-level I would say, why the disparity is execution. It's about execution. And I think we have the opportunity to really improve our execution materially. We now have the products. We have an on-demand product. We now have Premium Access, which is the most expansive ad-supported on-demand capability that exists in the marketplace. And so now it's about executing against the opportunity that will I think start to minimize the disparity that you see between the historical performance of Pandora and some of its competitors.

I think on the issue of migration from radio, a lot of radio consumption, most radio consumption happens in an automobile, and roughly 80% of that is music. So you might think okay, we have music, so we should be able to get 80% of that consumption, but I don't believe that's the way consumers work. I think for us to really capture a material portion of the radio market, we've got to do two things.

One is we have to make Pandora as easy to use in an automobile as your FM radio. If you think about when you get in your car how simple it is to push the on button and be listening. We need to make Pandora that simple. And there are things we're doing, including voice-activating our apps that will help us do that, but we're not there yet. That remains a big opportunity to improve that experience in the automobile.

Secondly, we need to expand the content offering. Just because you have music that covers 80% of listening doesn't mean you will gain 80% of listening, because we know people from our own behaviors will jump back and forth between news or some talk radio and music. And if you're asking them to actually change platforms to do that, that becomes friction. And little bits of friction that may seem small are amplified significantly in terms of user behavior. And so as we start to offer more content, spoken word content, I think that will enable us to then go start taking materially more share away from radio. So two things, making it as easy to use as the radio and extend the content offer down to our core music.

Barton Crockett - B. Riley FBR, Inc.

Okay, that's great. I really appreciate it.

Roger J. Lynch - Pandora Media, Inc.

Thanks, Barton.

Operator

Your next question comes from Rich Greenfield with BTIG.

Richard Greenfield - BTIG LLC

Hi, thanks for taking the questions. I've got two actually. One, I just wanted to follow up on the last question because, Roger, I think that is a critical issue when you think about getting into the car making it easier. To that end, it sounds like Spotify is working hard on hardware. They've hired a whole team of hardware engineers. And it sounds like they're building something to make it easier essentially to just hit a button and be able to use Spotify in the car. I'm wondering. Do you think just given how slow cars move and how hard it is to penetrate the car, is some form of overlay hardware the only way to really penetrate the car? And then I've got a follow-up.

Roger J. Lynch - Pandora Media, Inc.

Okay. Hi, Rich. I don't think that a new hardware device is necessary to take significant share from radio in the car. There's already plenty of cars that have the ability to connect either through Bluetooth or an aux cable or they have an embedded Pandora app in the system that they have in their car today, that we can take material share without having to go through the expense and complexity of building a hardware device specifically for the car.

Richard Greenfield - BTIG LLC

From the standpoint of Premium Access, when I talk to music labels, they all seem to phrase it as this is a test they're doing with Pandora, where they want to see how it actually drives uptake of subscription. And I think when you talk about it, the hardest thing of getting someone to go from free to subscription is giving them a taste of what subscription is. And so the labels seem to look at it as they want to see before allowing Premium Access long term. They want to understand what the conversion ratio is because obviously they certainly like the economics to them of subscription more than they do of advertising. I'm just wondering. I know it's still very early, so I know they fully aren't huge takeaways yet, but just where do you think you are in terms of like how long do you have to prove out the conversion ratio of Premium Access?

Roger J. Lynch - Pandora Media, Inc.

We're already seeing that. We know that that's one of the key reasons that the labels have granted us these rights, and we're already seeing that, and we're seeing it in particular with younger listeners. So they're the ones that over-index the most in usage of Premium Access. And their propensity once they've used Premium Access to subscribe to our Premium service is much higher. So I think from the standpoint of what the labels want to see, we're already seeing that happening with the use of Premium Access.

Richard Greenfield - BTIG LLC

And do you think if that is as successful as you think, do you think over time there's a far greater weighting of your company towards subscription than advertising, just in terms of users or time spent, and you can actually change the cost base on the ad side?

Roger J. Lynch - Pandora Media, Inc.

I think that certainly our subscription business is growing. It grew 63% this quarter, so it's growing much faster than our ad business. I would expect that to continue to be the case for some time, but we have already quite a large ad business. I do think there remains a material opportunity to grow our ad business over time, but that requires us to make some of the investments I talked about, expanding our content, continuing to expand our marketing efforts and our applications so that they become as easy to use in the car as your radio.

So I would expect subscription to continue to gain as a percent of our total revenue, but it doesn't mean that I don't see material opportunities for our ad business, and I also like very much the margins in the ad business.

Richard Greenfield - BTIG LLC

Thank you very much.

Roger J. Lynch - Pandora Media, Inc.

Thanks, Rich.

Operator

Your next question comes from Dan Salmon with BMO Capital Markets.

Daniel Salmon - BMO Capital Markets (United States)

Hey, good afternoon, everyone. Roger, you talked a little bit about self-serve earlier, and I was going back and forth between calls, so you may have covered some of this already. But typically when a self-service platform launches, there's a certain cadence that follows it of product development, where on top of the self-service platform itself, we usually see an API developed to start automating on the platform. From there, you'll often see a partner program established who are certified with that API. And then beyond that, we may get some more sophisticated targeting tools like bringing in first-party data from advertisers to target more. Is there any reason for investors to think that you have a dramatically different or materially different path in mind for the self-service platform? And then I've just got one more after that.

Roger J. Lynch - Pandora Media, Inc.

Sure. I think when it came to self-serve, we identified that right after I joined as one of the areas we had to solve because it remained – it wasn't a headwind to the business like not having programmatic, but it was an opportunity because there's a whole revenue pool that was untapped by Pandora because the advertisers were too small for us to economically service them. So I saw that as an upside of opening up a class of advertisers that we otherwise wouldn't be able to work.

So the acquisition of AdsWizz helps solve one of those issues because they do have a self-serve platform. So we're in the process right now of evaluating what it would take to incorporate that into our own systems. And based on where we get on the level of maturity that that product is and how it's used with advertisers today and how it would work with our own systems, that will tell us how quickly we can roll it out. It's too early to give any final answer to that, but we do think there is an opportunity to use technology and capabilities they've already built to incorporate it directly into Pandora.

Daniel Salmon - BMO Capital Markets (United States)

Okay, and then just one quick follow-up on AdsWizz. Since you've closed the deal or even announced it, I'm curious to hear what the dialogue has been with some of your, quite frankly, straight competitors that use that platform for ad monetization as well. Co-opetition is a pretty common feature in the online ad space. Do you think you can maintain those relationships, or should we have some expectation that maybe some of that falls away over time?

Roger J. Lynch - Pandora Media, Inc.

When we did our analysis of the valuation of the company, we frankly assumed that a good portion of customers would leave. We obviously hoped that they wouldn't. But from a valuation standpoint, we assumed that there would be a loss of some set of the customers that they have.

I do think there is precedent for this. I know in my own case in the last company I ran, there was a company called FreeWheel that we used for dynamic ad insertion, and they were bought by one of our big competitors Comcast, and we all everyone in the industry sort of threw up their arms and screamed that they were going to switch. And you know what, I don't know that anybody did. We didn't switch. It just became a non-issue after a few months principally because the FreeWheel management team was left to run their business and Comcast didn't interfere with it, and they protected our data and they've remained a good partner, and that's exactly what we intend to do with AdsWizz.

So I can't tell you that we'll be able to keep all of the customers that AdsWizz has. I'm sure we'll lose some of them. But I think there is benefit in those publishers staying with AdsWizz because they have the largest platform. And now as we start to put our inventory in with AdsWizz, they have by far the largest amount of digital audio inventory to monetize. And so when you're creating marketplace, the buyers will want to be where the inventory is and AdsWizz will have that inventory.

Daniel Salmon - BMO Capital Markets (United States)

Great, thanks, Roger.

Operator

Your next question comes from the line of Matthew Thornton with SunTrust.

Matthew C. Thornton - SunTrust Robinson Humphrey, Inc.

Hey, good afternoon, guys. Thanks for taking the questions. A couple if I could. I guess, Roger, high level, when you think about ad-load versus CPM going forward, do you feel like with Premium Access and soon AdsWizz coming on and then self-serve, do you feel like you've got pretty runway to just focus on the CPM side of equation without necessarily having to bring up ad-load in aggregate, maybe tactically, but not in aggregate. So I'm just curious number one, if you could see that runway there and any color there would be helpful?

And then secondly on Premium Access, any color you can give us on just how that ramped in the quarter just the linearity of uptake in engagement, and when you think you might start putting some advertising dollars behind that whether that's in 2Q?

And then finally just two housekeeping items, the family plans you still thinking by I think your prior language was by midyear or by summer or something to that effect. Is that still the right timeline, any color there will be helpful? Thanks, guys.

Roger J. Lynch - Pandora Media, Inc.

Okay. Sure, Matt. So the way we think about ad-load versus CPM as you're probably aware, Pandora experimented with increasing ad-load, little over a year ago, and the results were not that positive, because they drove down MAUs fairly materially, and the company didn't really monetize that extra inventory very well because they had to be sold in the remnant market, which is a bad trade we've learned. So the opportunity, I think for us going forward is to do some targeted ad-load improvements.

When I say targeted it really goes back to using the data and the data science capabilities that we have to increase ad-load without increasing perceived ad-load. And so what I mean by that is, you may be more willing to have higher ads when you're driving your car to work in the morning than you are when you're sitting at home at night. And so using data to really improve that targeting just like we do with how we played the music for you, for ad business, I think creates some opportunity to increase on the margin ad-load. But the bigger opportunity probably comes from CPM in a number of areas.

One is, Pandora has been able to over a long period of time improve RPM, some of that has come from CPM and new ad units like the one sponsored listening that comes with our Premium Access, where it's a cost per view, are very, very high CPM ad units for us. So certainly, and the great thing about is it's something that consumers really want. So you'll see us take more efforts to really grow that in ad units like that that we think will generate much higher CPM and ultimately RPM for us.

In Premium Access, coming back to that, the ramp and linearity that we saw in that is, you know, we launched that on December 19, which meant a smaller percentage of our mobile users could use it on that day. And then over time we ramped that up so that more can use it. And then over time people start to upgrade their apps and it starts to penetrate the overall user base and then people become aware of it. So what we saw was consistent week after week growth in the use of Premium Access that happened through the quarter. And we expect that will continue as listeners become more aware of it and also there's still much that we can do to increase access to it.

So, today, we have certain doorways where you get presented with a Premium Access session. There are more doorways that we have the ability to open up and then also to start marketing more for Premium Access and by the way using artist to help promote. So I think there's a lot to be done in that. You'll see us doing some of that this quarter. On family plan, we expect to have a family plan out this quarter. So that's a high priority for the company and by the next time we talk that should be in the market.

Operator

Our last question at this time comes from Heath Terry with Goldman Sachs.

Heath Terry - Goldman Sachs & Co. LLC

Great, thank you. I'm wondering if you can give us a sense, you know, with your new CMO getting started, where are your priorities going to be in terms of marketing focus? Is it going to be on Premium, is it going to be on the ad-supported business, are you going to try and do, try and do both, how should it and within the ad supported business will it be to drive listener growth, hours, engagement sort of where is the tip of the spear going to be in terms of your new marketing strategy?

Roger J. Lynch - Pandora Media, Inc.

Yeah. Really I could summarize that the marketing strategy is to drive net present value for the business. So, the way I think about that and the way Aimée, our CMO thinks about that is return on promotional investment. So, we're going to invest marketing dollars to drive some action from a listener maybe to become a subscriber or to become a new listener or to listen more. And each one of those actions that we take, we want to be able to measure on a return on investment basis. And the things that show the highest return on investment, we're going to do more of them, we'll spend more against; the ones that show the least, we'll do less of.

And so the answer to that real question is our listeners will tell us the answer to that question by how they react to the marketing and the test that we do. And a lot of what you do when you're doing performance-based marketing like this is you test a lot of different actions and you learn from those and you spend accordingly. So, I would expect – sorry, let me just answer a little bit more on that.

In terms of driving activity, it's not – if we think about an ad-supported listener, obviously, they're not all the same. So, we look at ad-supported listeners and try to find the characteristics of the ones that have the highest value to us within our listener base and our database, then we create look alike models for those people and then we try to find other people who look like that and market to them. So, it's also not just that we think about ad support is one broad cohort and subscribers is one broad cohort, within those segments there are different cohorts that have different value. And so we try to target them based on whatever triggers and information that we can such that we'll get a return on the investment that we're making for our marketing.

Heath Terry - Goldman Sachs & Co. LLC

Okay. Great. And then, I guess, just one other sort of follow-up question, I think you've talked about this a little bit. But to the extent that you guys are focusing on monetization in the ad-supported product and we, obviously, saw revenue growth significantly outpace listener hour growth this quarter, how strong a sense do you have on the – of the tradeoff between listener hour growth and ad load within that product? And how are you sort of prioritizing or where are you willing to set the pivot for that trade-off?

Roger J. Lynch - Pandora Media, Inc.

Yeah. I mean the answer to that question is really similar to the answer of last question, which is it's all based on net present value calculation. So we know that we could improve listener trends faster if we dial back ad-load. We know that we could increase revenue in the short-term faster if we dialed up our ad load, but each of those actions might drive down value for the business. So we always look at this in terms of how do we drive long-term value in the business. And that means getting the ad-load right, it means getting the ad-load right per listener, per time a day, per device that they're on, again use all of that data to make the best decision on how to increase or decrease ad load at that time. And I think that will help us optimize not only the number of listeners we have but the ad-load that we have per listener.

Heath Terry - Goldman Sachs & Co. LLC

Great.

Roger J. Lynch - Pandora Media, Inc.

Okay.

Heath Terry - Goldman Sachs & Co. LLC

Thank you, Roger, I really appreciate you taking the time.

Roger J. Lynch - Pandora Media, Inc.

Yeah. Thank you.

Roger J. Lynch - Pandora Media, Inc.

Operator, that's all the time that we have, but what I'm going to do is just – maybe just summarize. I think we had a strong quarter, given the trajectory that Pandora had last year. We, obviously, exceeded expectations for revenue and adjusted EBITDA in principle because we saw strength building later in the quarter. A lot of that was driven by an increase in non-guaranteed channels like what is, as an example, the ad units created for Premium Access. We did see an improvement in our audience metrics, the trajectory, although still negative, was much less negative than the quarter before. The sequential drop that always happens seasonal was much less than it was a year ago and that's all encouraging. We're also encouraged by the use of Premium Access and the benefit it has for our listeners and ultimately for our business.

Lots that we're doing on the product side like our personalized playlists, I think there's a huge amount of upside for us on the marketing side. I think we are only scratching the surface of what we're going to be able to do on that. As Naveen alluded, that may enable us to actually spend more than we currently have been spending in a very profitable way. And also we're quite excited about the AdsWizz opportunity for our business not just for our Pandora business, but as a platform.

So look, I'm confident that the trajectory that we're on, we're going to be able to continue to improve throughout this year and that we have the right plan and that we're in a really, really exciting industry with underlying growth in usage, underlying growth in music, and other audio formats, and, obviously, the big $28 billion global radio market that is ripe for a transition to digital, and we're positioned well as both a publisher and a platform for that.

So, thank you very much, that's the end.

Operator

That concludes Pandora's first quarter 2018 financial results conference call. We will return you to El Paso (1:04:54).