Pandora Investors Worry About Future After Earnings

Pandora

“2013 marked notable growth from user metrics to financial achievements,” Pandora (NYSE:P) CEO Brian McAndrews said in the company’s fourth-quarter and full-year earnings press release. “We remain intensely focused on advancing Pandora’s mission to reinvent radio.” While it is true that Pandora has accelerated its market position in the United States, with its Internet streaming service accounting for nearly 8 percent of all radio listening hours, the company only collects 2.5 percent of radio advertising dollars.

So while analyst expectations for fourth-quarter earnings and revenue were high ahead of the Wednesday earnings report release, the company is likely to face tough questions during its post-earnings conference call as to why it has not leveraged what is the service’s most lucrative asset: its user data. Pandora will also be pressed to explain how it can use the user data it has collected to generate revenue outside of traditional advertising and sponsorship models.

Analysts polled by Thomson Reuters expect Pandora to earn 8 cents per share on $133 million in revenue — a slight improvement from the 6 cents per share on a revenue of $125.1 million reported in the year-ago quarter. Contributing to this newfound strength is the company’s recent integration into leading radio ad-buying platforms and its launch of an in-car advertising platform with companies like Ford (NYSE:F), BP (NYSE:BP), and Yum Brand’s (NYSE:YUM) Taco Bell.

Pandora itself said that the company’s strong financial performance was driven by increased user engagement and better monetization of its radio service. A “proprietary sampling of Pandora Radio listening hours in January,” conducted by Canaccord Genuity, similarly indicated that Pandora had better monetized its platform, with analyst Michael Graham noting in a recent report acquired by USA Today that the firm found “a modest increase in advertising load both for audio and display.”

McAndrews framed Pandora’s fourth-quarter and 2013 as whole as a moment of notable growth for the streaming music provider. Indeed, fourth-quarter revenue was nearly in line with Wall Street’s expectations, while bottom-line results beat estimates. In fact, the final quarter of 2013 saw Pandora report its biggest profit since becoming a public company. Net income soared to $23 million and profit rose to 8.6 million, or 4 cents per share, in the final three months of the year. Meanwhile, the company generated $200.8 million in revenue for the same period, a 51 percent year-over-year increase.

Despite the strength of those results, investors, who bid shares of Pandora 212.93 percent higher in the past 12 months, reacted negatively to the company’s earnings guidance for the first quarter, which predicted a wider loss than expected.

For the full year, the streaming service said earnings per share is expected to fall between 13 cents and 17 cents, below the 19 cents per share expected by Wall Street analysts. From their closing price of $85.83, shares dropped as much as 8.46 percent in after-hours trading. This drop suggests that even though Pandora is sometimes profitable and has a growing user base, its growth has fallen below the pace investors used to price its shares in their projections.

Competition in Internet radio is growing: Google (NASDAQ:GOOG) has All Access, a service allowing users to listen to millions of songs without a cap, create custom radio, and skip songs as often as desired; Apple (NASDAQ:AAPL) has the recently launched iTunes Radio; and startup Spotify has carved out its own niche. A greater-than-expected first-quarter loss does not suggest to investors that Pandora is successfully growing amid increasing competition.

However, it is true that the company has more than 76 million active users, a metric that makes it the most popular streaming service in the world. Those users listened to a total of 4.54 billion hours of audio in fourth-quarter 2013, a small increase of 16 percent from the year-ago quarter. Advertising revenue came in at $162 million, a 39 percent year-over-year increase. The problem is that the costs to grow Pandora’s audience is increasing.

“It’s clearly [sic] that they are spending more to acquire customers and sell ads,” Wedbush Securities analyst Michael Pachter told Reuters. “I think they are intent on growing.” But for Pandora, there are are other growth pathways to consider beyond raw listener increases. If the company can grow its number of paid subscribers, it could better monetize its entire user base, which would boost its average revenue per user metric. That would make the company’s financial performance less tethered to raw listener growth.

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