Pandora Shares Plummet on Sour Fourth-Quarter Forecast
Pandora Shares Plummet on Sour Fourth-Quarter Forecast

Pandora Media pleased investors by beating estimates for its fiscal first quarter revenue and increasing its guidance for the fiscal year. Revenue grew 58% to $80.8 million, easily beating the company's guidance of $72 million to $75 million. Shares of Pandora were up 15.7% in after-hours trading.

Nearly all metrics showed big improvements over the same period last year. Listener hours in the quarter rose 92% to 3.09 billion. Active users grew 53% to 51.9 million in the trailing 30 days. "We showed excellent progress across every part of the business and are continuing to redefine radio," CEO Joe Kennedy told Billboard.biz before the earnings call.

Business Matters: Pandora Needs Investors Ready For the Long Haul

Investors love when a technology company talks about disruption, and Kennedy mentioned the word frequently in his earnings call introductory statement. Pandora wants to "disrupt the $17 billion market for radio advertising," he said, by offering "dramatically better advertising solutions" than its broadcast peers.

One could argue Pandora already has the scale necessary to disrupt the market. It claims just under a 6% share of all radio listening and expects to be the biggest station in most U.S. markets by the end of the year. It has the third-party audio measurements required by ad buyers: Triton started measuring Pandora's listening activity just last week. And it may soon have those measurements integrated into the systems used by radio ad buyers: "We hope to have in place by the end of the year," said Kennedy.

Disruption will certainly require better monetization of its mobile listening. Kennedy told analysts that mobile listening still accounts for about 70% percent of all listening. Mobile revenue is still catching up. "Fifty-five percent of our ad revenue, roughly, was from mobile," Kennedy told Billboard.biz.

Ultimately, disruption will be measured not by market share but by revenue and profits taken from legacy competitors. More advertising should come once Pandora's sales team is more settled. Kennedy said the company's advertising sales team grew 79% year-over-year with local and national ad sales reps hired away from its broadcast peers.

A better ad sales team could help moderate fluctuations, too. The company's content acquisition costs, as a percent of revenue, jumped to 69.1% in the quarter, up 12 percentage points from 57% in the prior-year period and up about ten points from 59.2% in the previous quarter. Kennedy said the key to that increase is to understand the seasonal nature of Pandora's business.

"Q1 is a time when we often see very strong consumer adoption continue off the great adoption we typically see in the holidays [due to ownership of] lots of new devices, new phones, etc.," Kennedy said. "That tends to continue into Q1. The flipside is Q1 is the weakest quarter in terms of consumer advertising." Webcasting royalty rates increased at the beginning of the calendar year and were a factor as well, but Kennedy said the growth in content costs was "overwhelmingly driven" by the increase in listening hours, not the increase in royalty rates.

The company also increased its guidance for the fiscal year on Wednesday. Revenue is now expected to be between $420 million and $427 million, up from $410 million to $420 million.

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