Pandora Is Seeing Fruits of Labor

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

Pandora (NYSE:P) reported better-than-expected Q1 results. Revenue was $129 million compared to our $130 million estimate, consensus of $124 million, and guidance of $120 – 125 million. EPS was $(0.10) compared with our estimate of $(0.08), consensus of $(0.10), and guidance of $(0.13) – (0.10).

The company increased FY:14 guidance. Guidance for revenue was raised to $615 – 635 million from $600 – 620 million, and for non-GAAP EPS to $(0.02) – 0.08 from $(0.05) – 0.05.

The mobile listening hour cap positively impacted subscriptions. Mobile listeners who exceed the 40-hour cap are given the option of paying $0.99 for unlimited listening for the remainder of the month or joining Pandora One, which costs $36 annually for unlimited listening. In Q1, many of these listeners opted for a Pandora One subscription, and as a result, total subscriptions exceeded expectations. Pandora added over 700,000 subscribers in the quarter, more than in all of FY:13, ending with 2.5 million subscribers, almost half on mobile.

The company is benefiting from a number of steps taken in recent years. Pandora has salespeople in 28 of the top 40 local markets, and uses Triton Digital to provide data on its audience size and national and local reach. In March, it announced that it had integrated with STRATA and Mediaocean’s Donovan and Mediabank stewardship systems, allowing advertisers to compare Pandora’s audience data (through Triton) with that of broadcast radio stations. Finally, earlier this month, Pandora announced a new e-business advertising technology solution that integrates with STRATA and Mediaocean.

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Apple (NASDAQ:AAPL) has yet to introduce a competing service. We downgraded Pandora shares in January due to continuing uncertainty about competition. Apple has as yet to introduce a competing streaming service, and we believe negotiations with the large music publishers are far from completion. Pandora shares have traded up significantly, likely due to this longer-than-expected delay; we think it is unlikely that Apple will introduce such a service at its WWDC conference next month.

Maintaining our NEUTRAL rating, but increasing our 12-month price target to $19.50 from $15. Our revised 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.

Michael Pachter is an analyst at Wedbush Securities.

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