earnings

The Pandora earnings story

Friday, November 22, 2013 - 8:25am

"We have made significant progress in disrupting traditional radio in a short time, but we are just getting started." --Brian McAndrews, Pandora CEO

Pandora's business mission is essentially invasive, intending to transform consumer habits by migrating listening from broadcast to Internet. In yesterday's earnings call, details were laid out about how the company has succeeded so far, and some future directions were illuminated.

The financial headlines were these:

  • Record quarterly revenue ($181.6M, +50% year over year)
  • Growth of listening hours (4.18-billion, +17% year over year)
  • Shrinkage of audience month-over-month, but 20% growth year-over-year;
  • Mobile revenue driving earnings growth, exceeding the $100-million benchmark; 
  • Growth of total radio share to 8.06% (a sometimes-disputed number, derived by proprietary calculations), representing an 8% year-over-year increase.

There has been media swirl around the reduction of listeners from September to October (from 72.7M to 70.9M), with analysts and other observers citing a Pandora-demolishing effect of iTunes Radio, which launched on September 18. Pandora CEO Brian McAndrews refuted that interpretation early in his opening remarks of the earnings call.

CEO Scene-setting

McAndrews clearly, but without citing data, laid out a different reality. He claimed that the reduction was indicative of "our most casual and least engaged listeners" taking Apple's new service for a test drive. McAndrews added that Pandora's internal metrics show stabilization and return of the transgressing listeners. (Pandora releases monthly audience metrics in the first week of each month, for the previous month, so the McAndrews Stabilization Hypothesis will be tested in about two weeks.)

Brian McAndrews' prelude to the financials centered around earnings power and product enhancements. On the product side, he noted the recent releases of upgraded iPad and Android apps, both covered in RAIN. We reviewed the 5.0 version of Pandora's mobile experience favorably, both for its elegance and uniformity across platforms. The latter is a premium value in our eyes, as listeners increasingly surround themselves with a diversity of gadgets.

On that point, McAndrews was downright futuristic, referencing The Internet of Things, a tech meme pointing to a ubiquitously connected world of networked personal gadgets, home appliances, the coffee mug sitting on your desk, and just about everything else. In that context McAndrews noted Pandora's recent integration with Google Chromecast -- not exactly a meme-thing, but we get his overall distribution point, especially given Pandora's exceptional connected-car initiatives.

In the context of revenue and product being twin pillars of pandora growth, McAndrews referred to the company's evolution "from scrappy startup to mature company."

Key Financial Equation

Throughout the call, Pandora emphasized earning power as the underlying, catalytic converter of growth. The key data nugget comprises revenue per thousand listening hours (RPM), licensing cost per thousand hours (LPM), and how the two move against each other.

Mike Herring, Pandora CFO, noted that while licensing costs are relatively fixed and stable, rising fractionally year-over-year, RPM has climbed sharply year-over-year from $34 to $43. Like tectonic plates grinding against each other, those two metrics produce a shakedown of content-acquisition cost. (In the longer view, it should be noted, licensing costs are not fixed, either on the statutory side or in the direct-negotiating realm. So this key equation will be closely watched as a new royalty rate period is established next year.)

On the same point, one analyst cited Pandora's cash hoard of nearly a half-billion dollars, thanks partly to a secondary public offering earlier this year, and queried whether the company would spend some capital on direct licenses with music owners. The question is significant because deep-pocketed competitor Apple went down the direct-licensing path from the start with majors and large indie labels. Having those private royalty relationships enables Apple to expand iTunes Radio internationally faster than relying on nation-specific royalty rules. (Pandora currently operates only in the U.S., Australia, and New Zealand.)

Pandora's response was interestingly hedged. Brian McAndrews noted that direct licensing has always been an available option, but conceded that "we are happy with how the public offering went," and the money "puts us in a better position to have the right conversations." Our money (betting money, that is) has Pandora waiting to see how much Apple's negotiated royalties influence the government's royalty framework for the upcoming period.

Advertising Interest

In the earnings call, analyst questions circled around advertising, in two main respects. First, the ad load, and second, the user targeting. The second point pivots around Pandora's new listener identification product that uses registration information, plus listening choices, to place users in broad ethnic or demographic groups for advertisers. The first rollout focused on ID'ing Hispanic users. Pandora noted that as a test, that first implementation was successful, and promised future new segments under development. (No specifics were divulged.)

Pandora disclosed its current ad load: a maximum of three minutes per hour, with 30 seconds being the maximum length per spot. The execs forecast a gradual rise to four minutes per hour, noting that broadcast lived in the 12-16 minute range, and observed that Pandora perceives substantial earning upside without approaching broadcast load. Advertising CPM was described in the $9-$12 range. At the current RPM of $43, Pandora claimed that it was earning 60-70 percent of broadcast RPM, at 20 percent of its ad load. Driving the knife a little deeper, McAndrews mentioned that Pandora provides much better results tracking.

Measurement Morass

One questioner asked about getting Pandora into the broadcast traffic measurement matrix, in the post-Arbitron world of Nielsen Audio. Doing so would unlock the controversial share-of-listening statistic. Pandora's response seemed wistful, and perhaps a touch caustic: "Clearly we would like this, Nielsen would like it. We are dependent on them."

Despite revenue and usage spikes, stock suffers after Pandora narrows Q3 earnings guidance

Friday, August 23, 2013 - 2:25pm

Webcaster Pandora reported record earnings yesterday for its second quarter, $162 million (up 58% from a year ago). Executives say the growth was driven by mobile -- its total mobile revenue went up 92% year-over-year to $116.0 million. Pandora -- says eMarketer -- is now behind only Google and Facebook as the third largest generator of mobile ad revenue. Total ad revenue was $128.5 million, a 44% increase. And local sales quadrupled in 2Q over last year.

Over the last quarter, listeners tuned in for 3.88 billion hours, giving Pandora a 7.08% share of all radio listening in the U.S. The service now has 71.2 million regular users.

"Pandora has quickly become the largest radio station in nearly every major market in America," CFO Mike Herring told analysts on the earnings call.

Positive earnings and usage growth were apparently overshadowed by Pandora's widened second-quarter loss, and the webcaster's narrowed guidance for third-quarter earnings. Pandora stock fell in after-hours trading.

Read Pandora's press release here, and excellent coverage from Tom Taylor Now here.

RAB: Radio's digital revenues grew last quarter, and in 2012 overall

Tuesday, February 19, 2013 - 12:20pm

Radio's digital revenue was part of the good news the Radio Advertising Bureau had for broadcasters on Friday.

The RAB's earnings report shows radio's Q4 2012 was up 4% (highest over the past eight quarters), and full-year spending rose for the third consecutive year. Digital revenue for radio was up 11% ($206 million) in the fourth quarter, and 8% in 2012 overall ($767 million). According to the RAB figures, digital now accounts for about 4.7% of radio's revenue.

RAB president & CEO Erica Farber will keynote RAIN Summit West April 7 in Las Vegas.

The RAB earnings press release is here.

Despite growing revenue more than 50% year-over-year, Pandora posts a loss in Q2

Thursday, August 30, 2012 - 12:05pm

Pandora earningsPandora's revenue and active user count both grew around 50% year-over-year in Q2 of fiscal 2013, while its mobile revenue nearly doubled. But that still wasn't enough to offset growing royalty costs, which amounted to nearly 60% of the company's revenue this quarter. To combat those high costs, Pandora has stepped up lobbying efforts for more manageable rates and is striving to -- as CEO Joe Kennedy said -- "disrupt the $16 billion radio advertising market."

The webcaster's revenue for Q2 of FY13 (the three months that ended July 31) reached $101.3 million -- up 51% year-over-year. Its mobile revenue in particular grew 86% year-over-year, reaching $59.2 million. "This quarter demonstrated that our mobile monetization strategies are working," said Kennedy.

Mobile represents around 58% of Pandora's total revenue, which accounting for 75% of usage. But Kennedy says they're "narrowing that gap... That ultimately is the key to getting the content acquisition costs down," he told Billboard (here).

Pandora accumulated 3.3 billion listener hours during the quarter, a growth of 80% year-over-year. The webcaster now has 54.9 million active users (up 48%). That growth in listening means higher royalty payments.

Pandora mobileDuring Q2 FY13, Pandora paid $60.5 million -- or just under 60% of its revenue -- in royalties to the music industry. That's up 79% year-ovear-year. Royalties have accounted for 63.9% of Pandora's revenue during the first half of the fiscal year, reports the New York Times.

All told, Pandora posted a net loss of $5.4 million for the quarter. That's the "sixth quarterly loss in two years," writes NYT, which also points out Pandora lost $3.2 million during this period last year. The problem, as always, are those royalty costs. Pandora is attacking the issue on two fronts.

First, the company "has already begun lobbying in Washington over its rates" in anticipation of new royalty rate proceedings, set to begin in 2014.

Second, "Pandora has been building up local advertising sales teams around the country, and also pushing to be included in ad networks that would put its service into direct competition with terrestrial radio stations," reports NYT (here).

"Salespeople are being deployed all over the country to compete with radio for advertising dollars," writes Radio Ink (here). "In 2011 Pandora had 427 people on the payroll. That number has increased to 589 employees with the bulk of the new hires (79%) in sales."

You can find Pandora's press release here.

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