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Pandora Misses on Q3 Earnings, Beats Rev

Zacks Equity Research

Pandora Inc. (P) broke even in the third quarter of fiscal 2014, missing the Zacks Consensus Estimate of a penny. Earnings declined from 2 cents reported in the year-ago quarter.

Quarter Details

Revenues jumped 50.3% year over year to $180.4 million, which beat the Zacks Consensus Estimate of $176.0 million.

The year-over-year growth was driven by higher advertising revenues (80.0% of revenues), which increased 35.8% from the year-ago quarter to $144.3 million. Subscription service and other revenues (20.0% of revenues) surged 162.1% year over year to $36.0 million.

Improving monetization as evident from a 23.8% year-over-year jump in total advertising revenue per thousand listener hours (ad RPMs) aided results in the quarter.

Mobile advertising revenues soared 58.0% year over year to $104.9 million in the quarter. Ad RPM from mobile and other connected devices increased 40.7% from the year-ago quarter.

Pandora reported total listener hours of 4.18 billion, up 17.0% on a year-over-year basis. We believe that the rise in listener hours may have resulted from Pandora’s change of policy related to listening limits.

In September, the company cancelled the listening limit (40 hours per month) that it had imposed on free users. As a result, October listener hours nearly matched 1.49 billion reported in March, prior to the setting up of the ban. Listener hours also improved from 1.36 billion reported in September.

Active users increased 20.0% from the year-ago quarter to 70.9 million. However, the number of active listeners in October declined from 72.7 million in Sep 2013. We believe that the slowdown resulted from the launch of Apple’s (AAPL) iRadio service.

Pandora’s share of the total U.S. radio listening market in October was 8.06%, up from 6.61% in the year-ago month and 7.8% in Sep 2013. However, as more and more people try iTunes Radio, we believe that Pandora will lose some market share going forward.

During the quarter, the company launched Pandora 5.0 for iPad. The company also launched a new app for Google's (GOOG) Android tablet platform. Pandora also became available on Google Chromecast during the quarter.

Content acquisition costs jumped 32.4% from the year-ago quarter to $87.0 million. However, as a percentage of revenues content acquisition cost decreased 660 basis points (bps) on a year-over-year basis to 48.2%.

Operating expenses (including stock based compensation) as a percentage of revenues increased to 45.7% compared with 36.5% in the year-ago quarter.

The significant year-over-year increase was primarily due to higher sales & marketing (up 570 bps), product development (up 130 bps) and general and administrative expenses (up 220 bps) in the quarter.

Pandora reported operating loss of $1.5 million compared to a profit of $2.2 million reported in the year-ago quarter, primarily due to higher operating expenses.

Net loss (including stock based compensation) was $0.3 million compared to net income of $2.1 million in the year-ago quarter.

Pandora exited third quarter of fiscal 2014 with total cash and cash equivalents (including short-term investments) of $447.8 million. Cash flow from operating activities was $4.1 million. The company raised $379.1 million in a follow-on-equity offering in Sep 2013.


Pandora’s conversion to a calendar based fiscal year will be completed on Dec 31, 2013. As per the company, the next earnings results will cover a two month transition period ending Dec 31, 2013.

Although Pandora does not expect to report financial results for the three and twelve months ending Dec 31, 2013, it still provided guidance.

For the fourth quarter (ending Jan 31, 2014), revenues are expected to be in the range of $185.0 million to $190.0 million, while earnings are expected to be in the range of 2-4 cents per share.

For fiscal 2014 (ending Jan 31, 2014), revenues are expected to be in the range of $657.0 million to $662.0 million, while earnings are expected to be in the range of 3-5 cents per share.

For the two month transition period (ending Dec 31, 2013), revenues are expected to be in the range of $132.0 million to $136.0 million, while earnings are expected to be in the range of 5-7 cents per share.

Our Take  

Pandora reported mixed third quarter results. Improving monetization and strong mobile growth are positive signs. Pandora raised additional capital from its stock offering in September, which it expects to use for domestic and international expansion as well as for strategic acquisitions. This is expected to boost the top-line going forward.

However, rising costs related to licensing will remain a headwind in the near term. Moreover, higher operating expenses are expected to hurt profitability in the near term. Further, Pandora’s active listener base continues to decline on a month-over-month basis, which remains a major concern going forward. Further, Pandora is expected to face signficant compaetiton from Google and Facebook (FB) in the mobile advertising market.

Nevertheless, we believe that Pandora’s popular service, driven by its effective discovery engine and well established infrastructure, places it well to compete against the likes of Apple, Spotify, and Sirius XM.  

Currently, Pandora has a Zacks Rank #3 (Hold).

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