Analyst: Pandora’s April Audience Metrics Are Solid

Source: Pandora

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

Before the market open on Tuesday, Pandora (NYSE:P) released solid audience metrics for the month of April. Listener hours were 1.7 billion, down sequentially from 1.71 billion last month, but up from 1.31 billion last year. Our model forecasts 5.05 billion listener hours for the June quarter, up roughly 5 percent sequentially, so the company appears to be tracking roughly in line after one month. Listener hours per day increased to roughly 56.7 million in April from roughly 55.2 million in March, explaining the slight sequential decline and reflecting a run rate above our forecast for the quarter.

Share of total U.S. radio listening increased to 9.28 percent in April from 9.11 percent last month and 7.33 percent last year. Active listeners increased to 76 million from 75.3 million last month and 70.1 million last year. We note that April 2013 metrics were impacted by the monthly cap on free mobile listener hours per month in place at the time. We expect listener hour strength over the next several months as in-car integration increases. We also expect revenue per thousand listener hours (RPMs) to trend up, as increased opportunities for local ads and improving measurement techniques increase Pandora’s appeal among advertisers.

In March, Pandora stated that it will no longer disclose key audience metrics on a monthly basis, after having done so for two years. The final monthly release will be next month, for the May 2014 metrics, although quarterly disclosures will continue. According to the company, the monthly metrics were provided to help advertisers make informed buying decisions. As Pandora believes advertisers can now make accurate side-by-side comparisons between the company and a variety of competitors through different measurement tools, it no longer believes that there is a business reason to provide monthly metrics.

Pandora continued to show signs of operating leverage in Q1:14. Once again, RPMs continued to grow at a faster rate than licensing per thousand listener hours (LPMs). We note total RPMs increased by roughly 37 percent y-o-y, 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.

Pandora shares have not fully rebounded since reporting quarterly results after the market close on April 24. We believe a contributor to the selloff was initial Q2:14 guidance, which was slightly below revenue and EPS expectations. Q2:14 guidance indicated that growth would once again be weighted toward the back half of the year, forcing investors to continue to wait for meaningful EPS growth. We believe that a minority of Pandora’s investor base has become disillusioned with the slow pace of EPS growth.

Maintaining our OUTPERFORM rating and 12-month price target of $35. Because we see Pandora users continuing to grow, we think it is appropriate to value the company based on its year-end 2013 number of users. We assign a 15x multiple to our $7 operating profit per user per year and arrive at a value per user of $100. At $100 per user, 75.3 million users at year-end, cash and investments of $446 million, and a share count of 200 million, we arrive at our $35 price target, reflecting continued strong user growth. Pandora operates an advertising based model, and in the past year has seen increases in both the frequency of ads delivered and in overall ad rates. As listener hours grow, we expect Pandora’s revenues to grow at an even faster rate. We are maintaining our $35 price target and think that the risk-reward ratio favors an OUTPERFORM rating.

Risks to the attainment of our price target include increasing competition from larger and more established companies, changes to the royalty rates paid for streaming music and other content, the implementation of data caps by Internet service providers, and the proliferation of native music/radio applications for computers, mobile devices, and other connected devices.

Michael Pachter is an analyst at Wedbush Securities.

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