Investors pushed the panic button on Pandora Media Inc.'s shares on Tuesday immediately after the Internet radio company released a disappointing fourth-quarter financial forecast that triggered a 21% slide in its stock price.
The Oakland, Calif., company projected a loss of 6 cents to 9 cents a share on revenue of $120 million to $123 million its fourth quarter ending in January. Analysts polled by Thomson Financial had expected Pandora to earn 2 cents a share on $130.3 million in revenue that quarter.
The company's stock plunged as much as $2 to $7.45 after the earnings announcement. It had closed earlier at $9.45, up 49 cents.
Joe Kennedy, Pandora's chief executive, told Billboard.biz after the results were released that concerns about the overall U.S. economy had caused advertisers to pull back spending for January. Pandora gets the bulk of its revenue, nearly 89% in the third quarter, from advertising.
"It is important to understand that out fiscal quarter includes November, December and January," he said. "What we've seen is that advertiser caution has grown with respect to macroeconomic concerns, in particular with the 'fiscal cliff' being discussed for January. As a result we have to be more cautious in our guidance to account for the uncertainty."
The "fiscal cliff," of course, refers to a set of tax breaks, for both individuals and corporations, that are set to expire at the end of this month unless federal lawmakers can reach an agreement on extending the tax cuts into 2013 or beyond.
The forecast highlights Pandora's precarious financial position as it tries to balance licensing costs that devour between 50% and 60% of its revenue with advertising spending that fluctuate to reflect a fragile economy.
To address the licensing costs, Pandora is waging a campaign to persuade Congress to change the way its royaltie s will be calculated when its agreement with labels and artists comes up for renewal in 2014. The proposal has met fierce opposition from artists and music labels. Lawmakers are expected to address the issue in earnest next year.
Meanwhile, the company is focusing on its mobile strategy.
"We've made progress on mobile monetization, which is a focus for investors," Kennedy said. "Even at the reduced guidance level, we still expect to see progress in mobile monetization."
Kennedy said Pandora expects advertising revenue from mobile channels to grow faster than the growth of mobile listening hours. If this happens, it will be a crucial step for Pandora, which is obligated to pay royalties for every song played on its streaming service.
In the third quarter ended Oct. 31, its users listened to 3.56 billion hours of music, up 67% from a year earlier. Its licensing costs likewise grew 74% to $65.7 million in the same time period.
For the third quarter, Pandora earned $2.1 million in net income, or 1 cent a share, on $120 million in revenue. A year earlier, it reported a $638,000 profit on $75 million in sales. Pandora slightly beat the mean estimates of analysts who had expected the company to earn $1.97 million in net income on $117 million in revenue.