Pandora Media Analyst Earnings Preview: Facebook Integration and Mobile

Pandora Media (NYSE:P) will report its fiscal Q3:12 (ending October) results after market close on Tuesday, November 22, and hold a conference call at 2:00pm PT (877-355-0067, webcast: http://investor.pandora.com).

Expecting Q3 results slightly above our estimates for revenue of $71 million and non-GAAP EPS of $(0.01), in-line with consensus, and compared to guidance for revenue of $69.5 – 72.5 million and EPS of $(0.02) to breakeven. We believe that increased advertising revenue from the September removal of the 40 hour per month free listening limit and increasing integration in cars and CE devices will more than offset any downside from the loss of $1/month overage fees.

We expect Pandora to maintain FY:12 guidance for revenue of $270 – 275 million and non-GAAP EPS of $(0.07) – (0.05). We believe management will provide a conservative outlook due to an abundance of new online music services.

We believe that Facebook integration for other music services will not have a meaningful impact on Pandora financial results. In our view, Pandora continues to provide a unique listening experience (discovery versus selection of music) and value proposition (completely free in return for limited advertising) that differentiates the company from its more expensive on-demand peers.

We believe that solid revenue growth, combined with effective cost control, will lead to a profitable year by FY:13. Although revenue growth should subside somewhat in FY:13 due to a difficult comp and saturation of its core PC market, we concede that rapid revenue growth so far has increased forecasting difficulty. SG&A growth is expected to moderate as the business matures.

Pandora is well-positioned to benefit from the rapid growth of mobile advertising due to its popularity on mobile devices. Pandora listener hours on mobile devices accounted for 50.5% and ≈ 70% of total listener hours for FY:11 and the three months ended July, 31, 2011, respectively, up from 4.6% for FY:09.

Maintaining our OUTPERFORM rating and 12-month price target of $14, which reflects 14x normalized EPS of $1.00. Pandora’s peers have an average CY:12 P/E multiple of 14x. Given Pandora’s better growth outlook, we are assigning a 17x multiple to CY:14 EPS of $1.00, discounted back to CY:12 at a 10% discount rate.

Michael Pachter is an analyst at Wedbush Morgan.