Analyst: Pandora’s Listener Limit Elimination to Spur More Revenue

Pandora

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

Despite a Q2 EPS beat and bullish FY top-line guidance, Pandora narrowed its FY EPS guidance range. It increased FY:14 guidance for revenue to $640 –655 million from $615 – 635 million, but narrowed the EPS guidance range to $0.00 – 0.05 from $(0.02) – 0.08. Despite the substantial top-line guidance increase, Pandora tightened the EPS range due to its plans to invest aggressively for growth.

Pandora (NYSE:P) has significantly improved monetization, particularly on mobile. Over the past year, total RPM increased to $41.73 from $31.09, on traditional computers to $57.75 from $55.19, and on mobile to $37.59 from $23.81. The improved monetization led to a significant increase to FY top-line guidance, and allowed Pandora to eliminate the 40 hour per month free mobile listening cap. Importantly, total RPM based on non-GAAP revenue increased 34 percent y-o-y, over double the 15 percent growth in the licensing rate, highlighting the company’s operating leverage. The RPM increase is primarily attributable to local ad sales growth.

Pandora plans to augment the impact of improving RPMs on top-line growth by introducing back-to-back ads, and appears to be increasing ad loads, as well. Back-to-back ads provide a better listening experience through longer uninterrupted stretches of music, while increasing the advertising inventory. The rollout of back-to-back ads began last week. Pandora also expects that the numbers of ads played to listeners per hour may potentially increase from a maximum of 3.5 – 4 audio ads totaling under two minutes per hour to five ads per hour, with the option of increasing the ad level to 2.5 or 3.0 minutes per hour.

We expect the elimination of the mobile listener hour cap to spur additional revenue growth and market share gains. Now that the company is more effectively monetizing listener hours above the 40 hour limit, it follows that revenue growth should more closely mirror the expected increase in hours. Better listener hours should also lead to more impressive market share.

Maintaining our NEUTRAL rating and increasing our 12-month price target to $22.50 from $19.50. Our price target reflects 50x our FY:15 EPS estimate of $0.45, a multiple that we feel is justified given Pandora’s likely accelerated growth as a result of its shift to local ads and increasing number of minutes. 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.