Pandora Q2 Losses Widen to $76 Million; Analysts Calm Ahead of On-Demand Service
Pandora weathered a $76.3 million Q2 loss Friday -- wider than the year-ago net loss of $16.1 million -- as analysts took Thursday results largely in stride ahead of the company’s upcoming on-demand offering. After the Thursday earnings call, Cowen and Co. called Pandora’s Q2 results “soft” amid the on-demand buildout but maintained a “market perform” rating, noting launch of the on-demand service is contingent on securing direct deals with the three major music labels.
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In a June report, Cowen said the Pandora on-demand offering could disrupt the competitive dynamics of the U.S. streaming music business. Cowen survey indicated 70 percent of Pandora One subscribers and 20 percent of its ad-supported users said they would sign up for Pandora’s on-demand service. The survey showed a subscription overlap among music services that Cowen doesn’t expect to continue long-term. Spotify had a 4.1 million subscriber base in the U.S., followed by Pandora with 2.2 million and Apple Music with 2 million, but 1.2 million of those users paid for all three services, it said. “Over time, we expect consumers to mostly migrate to one platform given absence of exclusive content.”
Wedbush Securities said it expects Pandora losses to continue into early next year due to investments in the upcoming service and international market expansion, in an investor note Friday. Analyst Michael Pachter believes the company can convert 2 million Pandora One subscribers to on-demand, attract 1-2 million new U.S. on-demand subscribers outright and sign up 1-2 million international on-demand subscribers in 2017, assuming the service is competitive and launches on time. Pachter repeated the Wedbush “outperform” rating, citing the on-demand rollout, international expansion and expanding margin that are “keeping us positive.”
On the earnings call, CEO Tim Westergren offered few new details on the service that’s still scheduled for late 2016. He said the on-demand service will “reinvent the category” and is “unique” by its ability to leverage the preference data the music streamer logs from the “100 million listeners” it serves every three months. Pandora will be able to “approach the listener experience in a completely different way" by being intuitive and easy to use, said Westergren. The company expects the on-demand service to drive the high-end part of the subscription market, and also “bring in a big part of the market that is not currently paying,” he said.
Chief Financial Officer Michael Herring said Pandora continues to have “constructive conversations” with the three major labels and independent music labels and is optimistic “win-win” deals can be negotiated. “We believe we have the necessary assets to create a profitable on-demand business,” he said, naming its core radio streaming business, large audience and volumes of listening data.
Pandora streams more hours of music to mobile users than Google's YouTube streams video in the U.S., said Westergren, and it’s second only to Facebook in total user engagement hours. All-time highs for Pandora in the quarter: average listener hours of 24 per month and total hour growth of 7 percent year over year to 5.7 billion, he said. Total users remained flat, but Westergren expects the number of hours and users to grow as Pandora launches new products and more people migrate to streaming radio and music services from other sources.
On the recently announced partnership to offer Pandora for free within the Uber app (see 1606280007), Westergren said in three weeks more than 50,000 Uber drivers have used the music product via the Uber integration, and average daily listening is over 2.5 hours per user. Uber is still in the process of rolling out the integration, he said.
CE and car listening are areas of strong growth for Pandora, said Herring. They comprise about 10 percent of total listening hours and are growing quickly as consumers use Pandora in more places, he said. The company's current goal isn’t necessarily about increasing users as much as getting listeners “to use Pandora more,” said Herring. He envisioned Pandora becoming a “music habit” that listeners go to when they're driving and then when they come home “flipping on their Sonos box” or a Roku player, he said. “It's adding these multiple touch points in the day that helps us build engagement.” It also helps build loyalty, boost retention and increase the user base for ad revenues, he said.
Consolidated revenue in Q2 rose 20 percent to $343 million, said Pandora after regular U.S. markets closed Thursday. Friday, shares closed up 2 percent to $12.27.