Pandora Needs Investors Ready For the Long Haul
-- Pandora had a clear message during Tuesday's earnings call for its fiscal fourth quarter and fiscal year ended Jan. 31: We're the future, but the future isn't here just yet. We've got the listeners and we'll get more advertising for each one of them.
Investors weren't interested in the future, however. Pandora's shares dropped 2.7% to $14.27 and were down another 21.9% to $11.14 in after-hours trading. Investors were reacting to a net loss that deepened to $16 million from $1.7 million even as its revenues jumped 99% to $274.3 million.
Pandora CEO Joe Kennedy focused on the many positives during the earnings call. Pandora's listener hours spiked 109% to 8.2 billion in the full year and rose 99% to 2.7 billion in the fourth quarter. Active users at the end of the year stood at 47 million, a 62% increase from the prior year.
For the fiscal year, advertising revenue increased 101% to $240 million and subscription and other revenue increased 86.5% to $34.4 million. For the fiscal fourth quarter, advertising revenue grew 73.7% to $72 million and subscription and other revenue rose 50.5% to $9.3 million. This growth is "evidence purpose-driven mission is working and Pandora is the future of radio," Kennedy said.
But Pandora's costs bear the marks of a company still trying to keep up with its growth. Marketing and sales expenses for the full year grew 150% to $65 million as the company expanded its sales force. As a percent of revenue, marketing and sales expenses for the full year grew to 12.9% from 10.3%. The rate of growth in content acquisition costs also exceeded that revenue, rising to 54.2% of revenue from 50.3% of revenue in the prior year.
High growth in those two areas -- marketing and sales and content acquisition -- were greater than the increase in net loss. Had these expenses grown at the same rate as revenue, marketing and sales would have been $7.2 million lower and content acquisition costs would have been $10.7 million lower. Those two amounts are $17.8 million -- more than $3 million greater than the $14.3 million increase in net loss for the full year.
Fourth-quarter ad spending was weaker than the company's expectations for two reasons, Kennedy explained. First, holiday ad spending came in "a few percent" lower than expected. Also, remnant ad inventory sold through third-party networks in January were lowered than what Pandora had modeled. Remnant ads are typically referred to as last-minute ads the company could not sell itself. January is a slow month in advertising but is a heavy month for listener usage, thus Pandora's use of third parties to move ad inventory.
Kennedy also attempted to assuage any worries that mobile CPMs won't be able to support the company's growth. It's an important topic because mobile's share of usage is 70% and growing. But Kennedy explained the current difference between the revenue-per-impression of the two platforms is a function of mobile advertising market's "nascent state" and the "stratospheric" growth in Pandora mobile usage. "We see no fundamental difference in the long-term monetization potential between the desktop and the mobile devices that now constitute the majority of our usage," he said.
When a company like Pandora builds for the future, revenue is going to lag behind expenses. Growth in the sales team won't pay off immediately. In addition, the growth in users and listening hours, a reason Pandora's sales team must grow, results in immediate growth in content costs. Pandora doesn't pay SoundExchange a share of revenue; it pays royalties on a per-stream basis. The company incurs the costs of greater listening regardless of its ability to sell ads against it.
Pandora's IPO was underscored by the opportunity in disrupting the entrenched radio business. The company had both substantial revenue and growth, but Internet stocks often become darlings because of potential rather than profit. Pandora continues to build on the story, but the story is far from done. Investors looking for a profit will have to wait a little longer: the company expects a net loss between $18.3 million and $26.6 million on revenue of $410 million to $420 million in fiscal 2013.
A2IM Files FCC Request Over Media Ownership Rules
-- The American Association of Independent Media (A2IM) has filed a request with the FCC regarding media ownership rules. The FCC is accepting comments for its quadrennial review of media ownership rules as required by the Telecommunications Act of 1996. Comments were due March 5 and reply comments are due April 3.
A2IM wants the caps to remain in place so that neither AM or FM spectrums are used for underrepresented voices rather than the rebroadcast of programming from what it calls "the already overly-consolidated FM commercial music space." "While the FM band in today's highly-concentrated broadcast marketplace is the primary band as noted above, AM represents one of the few points of entry for new voices in the marketplace. While it is true that the AM footprint is nowhere near as large as its FM counterpart, it is a crucial platform for a diversity of content."
But some powerful lobbies want the current restrictions dropped. The National Association of Broadcasters (NAB) has called on the FCC to relax or repeal current ownership rules so broadcasters can better compete with cable, satellite and Internet-based media outlets. It also wants the FCC to eliminate the radio/television cross-ownership rules. The organization says such changes would promote the FCC's goals of competition, diversity and localism.
The Newspaper Association of America (NAA) has also called for a repeal of cross-ownership rules. "Consumers have more choices among media voices than ever," NAA president/CEO Caroline Little said. "It makes absolutely no sense to keep a rule on the books that has shackled newspapers and broadcasters since 1975."