Pandora Media: In-Depth Earnings Analysis

Pandora’s (NYSE:P) Advertising revenue drove the earnings beat. Revenue was $81 million, compared with our estimate of $75 million, consensus of $74 million, and guidance of $72 – 75 million, due primarily to higher advertising revenue. Non-GAAP EPS was $(0.09) (excluding a $0.03/share impact from stock-based comp), compared with our estimate of $(0.18), consensus of $(0.17), and guidance of $(0.21) – (0.18), due to advertising revenue and cost control (including for sales and marketing).

Substantial growth potential still exists. Last quarter, the company forecast a sequential decline in advertising revenue due to seasonality, and lower profits from higher sales and marketing spending to build out its advertising teams in Q1. We believe the modest sequential decline in advertising revenue reflects Pandora’s growing sales effort and its ability to continue its growth trajectory as planned.

FY:13 guidance raised. The company increased FY:13 guidance for revenue to $420 – 427 million from $410 – 420 million and for non-GAAP EPS to $(0.11) – (0.07) from $(0.16) – (0.11). Pandora provided initial Q2 guidance for revenue of $99 – 101 million and for non-GAAP EPS of $(0.05) – (0.03).

We are increasing our FY:13 estimates for revenue to $430 million from $420 million, and for EPS to $(0.05) from $(0.11) to reflect Q1 results and guidance. We are also increasing our FY:14 estimates for revenue to $575 million from $560 million, and are maintaining our estimate for EPS of $0.50.

Pandora (NYSE:P) continues to gain market share in traditional and Internet radio. Pandora had a 71.7% share of listening on the top 20 US Internet radio services at the end of Q1, an increase over last quarter. In addition, it had a 5.95% share of listening on U.S. radio, up from 3.11% at the same time last year.

The lack of meaningful earnings has negatively impacted valuation. We believe management is correct in focusing on more meaningful earnings growth long-term. However, we believe that investors will lose patience if Pandora does not grow advertising revenue significantly in FY:13. Current guidance implies sequential growth of ≈ $20 million per quarter; Q2 guidance for revenue of $99 – 101 million is in line with this trajectory, which should lift shares in the near-term.

Maintaining our OUTPERFORM rating and 12-month price target of $14, which reflects 14x normalized EPS of $1.00. Given Pandora’s superior growth outlook to its peers, 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.