Pandora Less Attractive as M&A Target After News of KKR Funding, Analysts Say
Pandora’s $150 million in capital funding by private equity firm KKR gives the streaming music company more time and resources to execute its expansion strategy, and “likely kills the notion of a near-term sale,” Dougherty and Co. analyst Steven Frankel wrote investors Tuesday, after Pandora’s Q1 earnings call Monday. Shareholders “will need to be patient as the company scales up its subscriber base and tries to drive the business to profitability,” Frankel said.
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BTIG analyst Brandon Ross wrote that rumored suitors Liberty Global and SiriusXM (SIRI) likely were aware of “imminent private equity investment” but chose not to make a compelling enough offer before KKR's deal. “There is still a month before the investment closes, meaning more time for SIRI to make an offer,” said Ross, calling that unlikely. BTIG remains “skeptical” of Pandora’s future as a stand-alone entity due to high marketing costs for its just-launched Premium offering, as competition in the subscription music streaming space becomes “more challenging by the day.”
Pandora’s shares closed down 4.4 percent to $9.94 Tuesday after the earnings report, showing a Q1 revenue drop to $220.3 million from $223.3 million in Q1 2016. Its loss from operations widened to $125 million from $109 million as the company launched its Premium service. The company revised its full-year revenue guidance to $1.5 billion to $1.65 billion from $1.5 billion to $1.7 billion.
Chief Financial Officer Naveen Chopra said growth for the year will be “heavily loaded” toward the second half, citing issues with third-party billing integrations that hindered the ramp of Premium to general availability. Due to a longer-than-expected rollout, most Premium users will remain in trial mode during Q2, meaning subscription revenue won’t be realized “significantly” until Q3 and Q4, Chopra said.
Of the about 1.3 million trials Pandora signed up in the past seven weeks, more than 500,000 were Premium trial starts, said CEO Tim Westergren. The rest were Pandora’s middle-tier offering, Pandora Plus.
Pandora announced upcoming changes to its board, with an independent committee, led by Oak View Group CEO Timothy Leiweke, to identify and appoint new directors to provide “additional expertise and leadership,” it said. Westergren highlighted the addition of Richard Sarnoff, KKR head of media and communications-private equity investing in the Americas and a managing director, to the board for his broad base of experience in the music industry.
Noting an “encouraging start” with a half million trial starts for Premium, cash from KKR and board changes, Macquarie Capital analyst Amy Yong wrote Pandora “is ready for the next stage.” Pandora’s financials missed the mark slightly, Yong said, but “we are encouraged to see metrics turn around” with 4.71 million paying subscribers, up from 3.93 million in Q1 2016. Macquarie expects Premium to penetrate about 10 percent of Pandora’s 110 million users by 2020, reaching 11 million subscriptions.
Pandora Premium is available only on mobile devices and certain Google Chromecast built-in devices because most Pandora users listen to the service that way, and mobile is the best way to drive conversion through the built-in payment mechanism, said Westergren. Web access to Premium will follow in the summer and Premium will roll out to other CE devices through the fall, he said.
The number of active Pandora listeners dropped in Q1 to 76.7 million, vs. 79.4 million in the year-ago quarter. Westergren said off-platform marketing was skewed to Pandora’s subscription offerings, which led to fewer added listeners to the free, ad-supported service. Some 80 percent of Premium trial customers were existing users, he said. Acquiring Premium customers already in the Pandora system remains the most cost-effective way to get customers, said Chopra in Q&A, but the company is still “turning the knobs and dials” on the different mechanisms used to add paid subscribers.
Auto and consumer electronics are Pandora’s fastest-growing listening and monetization segments, with 26 percent growth in listening hours in Q1 and 37 percent growth in ad revenue per user, it said.