Pandora's (P) Q3 Loss Lower than Expected, Sales View Cut

Pandora Media, Inc. P shares fell nearly 5% in aftermarket trading, following the company’s third-quarter 2016 results wherein it performed better than expected on the bottom line but missed the estimates for the top line. The company also slashed its outlook for the year. For 2016, revenues are now expected in a range of $1.354 billion to $1.366 billion compared with $1.385 billion to $1.405 billion expected earlier.

Adjusted loss per share (including stock-based compensation but excluding one-time items) of 19 cents per share compared favorably with the Zacks Consensus Estimate of a loss of 21 cents. Revenues of $351.9 million fell short of the Zacks Consensus Estimate of $366.4 million though it grew 13% year over year.

Quarter Details

Revenue growth in the quarter was driven by higher advertising revenues (77.8% of total revenues), which increased 7% from the year-ago quarter to $273.7 million. Subscription service and other revenues (15.9%) inched up 1% year over year to $56.1 million. Revenues from ticketing services (6.3%) grew 25% to $22.1 million.

Total listener hours, however, grew 5% on a year-over-year basis to 5.40 billion but number of active listeners fell to 77.9 million, from 78.1 million in the prior-year quarter.

Total revenue per thousand listener hours (RPM) was $61.09 in the quarter, up nearly 1% from the year-ago quarter.

Pandora’s adjusted EBITDA loss was $6.6 million as against a profit of $31.5 million in the same quarter last year. The current figure excludes $32.8 million in expense from stock-based compensation.

Balance Sheet & Cash Flow

Pandora exited the quarter with $264 million in cash and investments down from $311.3 million at the end of the last quarter. However, cash used in operating activities was $120.5 million in the quarter as against $11.9 million cash generated in the prior-year quarter.

PANDORA MEDIA Price, Consensus and EPS Surprise

PANDORA MEDIA Price, Consensus and EPS Surprise | PANDORA MEDIA Quote

Outlook

Pandora provided outlook for the fourth quarter and updated the same for full year 2016.

For the fourth quarter of 2016, revenues are expected in a range of $362 million to $374 million. The company expects adjusted EBITDA loss (exclusive of stock-based compensation expense of about $35 million, depreciation and amortization expense of $18 million, provision for income taxes of $0.4 million and other expenses) to be in a band of a loss of $39 million to $51 million.

For 2016, adjusted EBITDA loss (excluding stock-based compensation expense of $139 million, depreciation and amortization expense of $62 million, provision for income taxes of $0.3 million and other expenses) is forecast to be in a range of $128 million to $140 million compared with $50 million to $70 million.

Our Take

Pandora has undertaken several strategic initiatives to overhaul its operations to provide all of “radio, on-demand and live music” on its own platform. In Sep 2016, the company announced Pandora Plus. Plus is a “one-of-a-kind, ad-free radio experience” available for $4.99 per month. The new service allows “more skips, replays and an ingenious solution for offline listening that elegantly handles issues with lost connectivity and cellular data usage.”

Also, as part of its strategy, Pandora acquired companies like Next Big Sound, Rdio and Ticketfly. In addition, it is cutting label deals to reduce dependence on CRB rates and better manage its content costs. It recently struck licensing deals with Sony Music, Warner Brothers, a unit of Time Warner TWX and Universal Music Group.

There is no denying that Pandora holds a prime position in the online radio market. But even then the company has been struggling to make profits. Rising costs related to licensing, footprint expansion and higher operating expenses will continue to be a drag on profitability.

Also, competition is intense. The digital music streaming industry is expected to grow rapidly over the next few years, and hence all the players including Pandora, Apple AAPL, Spotify, and Amazon AMZN are striving to fortify their presence in the industry.

Currently, Pandora carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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