Pandora Q1 Sales Up 29%; Company Still Eyes 2016 On-Demand Offering
On his first earnings call since his return to the helm at Pandora, CEO/Founder Tim Westergren envisioned a thriving music economy “actually coming true,” with the company surviving “when almost no one did.” The company’s strategic position, based on personalization, “is not obvious to the outside world,” he said. “You have to look under the hood.”
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Pandora remains on track to launch an on-demand music business by year end (see 1602120033), said Westergren. He cited the 100 million listeners Pandora logs every three months “about which we know a lot.” Executives wouldn’t put a tag on the projected subscription fee. Chief Financial Officer Michael Herring said there isn’t one price that will work for everyone, and the company is eyeing a “spectrum of pricing” based on what customers are willing to pay. It plans to have multiple pricing levels over time, he said. Most Pandora listeners “haven’t subscribed to anything,” said Westergren, which offers “opportunity for everyone.”
Citing the many “unknowns” about the cost of building an on-demand business and “the costs to get there,” Dougherty & Co. analyst Steven Frankel said in an investor note that growth in expense “is likely to outstrip revenue growth” for Pandora near- and mid-term, with the firm maintaining a neutral rating. Frankel was “encouraged” by management's comments that they would roll out the on-demand product only if they could come to reasonable terms with the music labels, “which we took to mean that the company isn't looking to build an offering that they can't reasonably ramp to profitability.”
Herring said the economics of subscription music streaming services haven’t worked on a stand-alone basis because customer acquisition costs are too high. He said Pandora’s customer acquisition costs are “vastly lower” because the company can make money off the 80 million people who listen to Pandora “as a contribution margin.”
Pandora’s $297.3 million in Q1 revenue, up 29 percent from the year-ago quarter, slightly beat Canaccord Genuity estimates and “should help set a more stable foundation” after a “rough-and-tumble Q4,” said analyst Michael Graham. He predicted little stock movement until later in the year when more is known about licensing for the on-demand product. Canaccord was bullish on Pandora’s listener hour growth (4 percent from 3 percent), the growth in listener hours per month to 22.9 from 22 and advertising revenue increases to $45 RPM (revenue per thousand impressions) from $38 a year ago. Pandora reported a one-month rolling listener base of 79.4 million vs. the three-month rolling listener base of 100 million, with Graham calling the 20 million “latent listeners” an attractive target for re-engagement.
Macquarie, meanwhile, raised revenue estimates 1 percent for 2016 and 2 percent for 2017 and said Pandora’s path to $4 billion revenue by 2020 “now appears achievable,” with $2.4 billion revenue from the core Internet radio service, $1.3 billion from subscription revenue across a spectrum of services leveraging Rdio and core radio users and $300 million from live events sponsorships. Macquarie also projected Ticketfly revenue to reach $93 million in 2018. It estimates Pandora’s listener hour and active user growth will be flat going forward “as we remain cognizant of Apple Music and Tidal.”
Pandora raised full-year revenue guidance to $1.41 billion-$1.43 billion, from prior guidance of $1.4 billion to $1.42 billion. “Little if any” of Pandora’s subscription revenue forecasts are coming from the upcoming on-demand service, said Herring, noting subscription services don’t create an immediate spike because they launch with trials. Total listener hours grew 4 percent to 5.52 billion for Q1 2016 vs. 5.3 billion in the year-ago quarter, said Pandora. It reported 79.4 million active listeners for the period, up from 79.2 million.
Shares closed up Friday 5 percent to $9.93.