Analyst: Pandora Will Continue to Benefit from Mobile Momentum
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Pandora (NYSE:P) will report its fiscal Q2:14 (ending July) results after the market close on Thursday, August 22, and hold a conference call at 2:00pm PT (877-355-0067, webcast: http://investor.pandora.com).
Expecting Q2 results in line with our estimates, which are slightly above guidance, as the positive impact of a slew of recent sales initiatives should offset slowing listener hour growth. Our estimates are for revenue of $162 million and EPS of $0.02, vs. consensus of $156 million and $0.02, and guidance of $155 – 160 million and $(0.02) – 0.01. Last week, Pandora announced Q2 listener hours of 3.88 billion, below our estimate of 4.33 billion, likely due to the 40-hour per month mobile listening limit and the company approaching U.S. market saturation.
In our view, the expansion of the sales force at the local level (28 of the top 40 markets last quarter, compared to “more than half” of the top 10 markets a year ago), should benefit growth, since local ads command higher rates than ads at the national level. In addition, integration with Triton (Internet radio measurement) and the STRATA and Mediaocean media buying platforms should increase the appeal and ease of advertising with Pandora.
We expect Pandora to raise FY guidance slightly to reflect improving RPMs (particularly on mobile devices) and a lack of concern about competition ahead of the iTunes Radio launch. FY guidance is for revenue of $615 – 635 million and non-GAAP EPS of $(0.02) – 0.08. Mobile RPMs have improved significantly due as the local ad sales force has been effective, and we expect this positive momentum to continue for the foreseeable future. We do not expect Apple’s iTunes Radio, expected to launch this fall, to have a meaningful impact on Pandora’s listener hours or monetization near-term due to Pandora’s personalized playlists, its ubiquity on smartphones (including on Android, which continues to take share from iOS), and the strength of the Music Genome Project.
Maintaining our NEUTRAL rating and 12-month price target of $19.50. Our price target reflects 30x our FY:15 EPS estimate of $0.65, a multiple that we feel is justified given Pandora’s improving execution and superior growth outlook. We believe our price target is warranted due to stronger monetization and profitability. The company is finally beginning to show operating leverage through stronger control of content costs and SG&A spending.
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Michael Pachter is an analyst at Wedbush Securities.