Analyst: Pandora Exceeds Modest Q1 Guidance

Source: Pandora

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Pandora (NYSE:P) delivered first-quarter revenue and earnings per share that exceeded its modest guidance. Non-GAAP revenue was $180 million, versus our estimate of $176 million, the consensus estimate of $175 million, and guidance of $170 million-$176 million. Non-GAAP EPS was 13 cents, versus our estimate of 12 cents, the consensus estimate of 14 cents, and guidance of 16 cents to 14 cents. The EPS beat was driven by better-than-expected advertising revenue in March as the and team ramped into 2014.

Pandora continues to show signs of operating leverage. Once again, revenue per thousand listener hours (RPMs) continued to grow at a faster rate than licensing per thousand listener hours (LPMs). We note that total RPMs increased by roughly 37 percent year-over-year, due in part to an increase in local advertising, while LPMs increased by 12 percent. The operating leverage is also apparent in content acquisition costs, which decreased to 56 percent of revenue in Q1:14 from 75 percent in the prior year.

Management increased FY:14 guidance, showing that it is willing to pass on quarterly EPS beats to investors, as opposed to investing them back into the business to grow market share. Q1 revenue exceeded guidance by $10 million at the low end, and EPS beat by 1 cent at the high end. Management increased non-GAAP FY:14 guidance for revenue to $880 million-$900 million from $870 million-$890 million, and for EPS to 14 cents-18 cents from 13 cents-17 cents. In the past, management was typically content to maintain FY guidance after a beat. Instead, it sent a signal to investors that EPS growth is a key goal as the business scales.

Q2 guidance was slightly below expectations, due in part to the shift to calendar-quarter reporting, with growth weighted toward the back half of the year. Initial Q2:14 non-GAAP guidance is for revenue of $213 million-$218 million and EPS of 0 cents-3 cents, below consensus expectations of $219 million and 5 cents. We believe that a minority of Pandora’s investor base has become disillusioned with the slow pace of EPS growth, reflected in a small selloff in Pandora shares after the market close as of the time of writing.

Maintaining our OUTPERFORM rating and 12-month price target of $35. We assign a 15x multiple to our future $7 operating profit per user per year estimate, arriving at a value per user of $100. With 75.3 million users, cash and investments of $446 million, and a share count of 200 million, we arrive at a $35 price target.

Michael Pachter is an analyst at Wedbush Securities. 

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