Pandora filed for an initial public offering (IPO) of common stock on Friday, lifting the curtain that had hidden the financial details of the leading Internet radio company. Now, because of the disclosure requirements placed on companies seeking an IPO, financial facts like Pandora's revenue, royalty expenses and executive compensation are now available to the public.
Pandora's revenue has grown at an incredible rate. In the nine months ending October 31, 2010, the company had revenue of $90.1 million and a net loss of $0.3 million. That will likely put full-year revenue over $120 million. In all of fiscal 2010 (the 12-month period ending January 31, 2010) the company had revenue of $55.2 million and a net loss of $16.3 million. The year before revenue was just $19.3 million and net loss was $28.2 million.
The company is heavily reliant upon advertising and gets relatively little from paying customers. While Pandora offers paid subscriptions for ad-free listening, it accounts for less than 14% of the company's revenue. Advertising accounted for 86.4% of revenue in the nine month period ending October 31, 2010. At $36 per annual subscription, that comes out to about 454,000 subscribers in the first nine months of fiscal 2010. In other words, less than 1% of Pandora's 71 million registered users (as of October 31, 2010) have opted to pay for the ad-free service. Subscription revenue has improved, however, climbing from 5.6% of total revenue in the 12 month-period ending January 31, 2009.
Royalties take a big - but declining - chunk of Pandora's revenue. The company paid out $45.42 million for content in first three quarters of 2010, or 48% of revenue. As a percent of revenue, content acquisition costs have from 119% in the quarter ended April 30, 2009 to 44% in the quarter ended January 31, 2010. They were 58% of revenue in the quarter ended April 30, 2010 and 48% in the following two quarters.
Royalties paid to the three PROs accounted to 4% of total revenue. BMI gets 1.75% of gross revenue. SESAC gets 0.38% of gross revenue. Pandora terminated its agreement with ASCAP in October 2010 because the company felt the royalty rates are "excessive." A final determination is pending.
Pandora is selling its IPO as a bridge to a successful future. "We have pioneered a new form of radio," the company states in the S-1 filing. The $100 million it hopes to raise will be used to enhance the service, develop innovative ad products, build ad sales and support organization, expand distribution, expand to other territories and expand into non-music content.
To help make its case, Pandora offers numbers that point to its dominance in the market. The service has over 80 million users in the U.S. listening to over 800,000 songs and giving over 8 billion song ratings. Its users have created 1.4 billion stations and average 10 listening hours per month. It had 2.6 billion listener hours in the first nine months of 2010 and has streamed a total of 3.9 billion listener hours in its history.
In addition to the disclosures about operations, the S-1 filing has information about the company's financial activities. For example, in July 2010 an "unaffiliated party" offered to pay $3.138 per share to buy Pandora. The company passed on the offer. At that share price, the company's shares would have a total valuation of over $393 million at the end of January 2010 (with 125.3 million shares outstanding).
But some shares were sold to investors last year. In August 2010, a group of existing investors paid $3.138 per share to acquire over 2.5 million shares from existing employees. When the deal closed in October 2010, founder Tim Westergren got just under $2.2 million and CTO Tom Conrad got just under $1.4 million. In addition, Pandora raised $22.2 million from new and existing investors in May 2010. Included in that group were Walden Venture, entities affiliated with Greylock Partners, Crosslink Capital Fund and entities affiliated with GGV Capital.
We also learn from the SEC filing about the shares owned by various parties. Founder Tim Westergren owns 2.39%, President Joe Kennedy owns 2.71% and CTO Tom Conrad owns 1.48%. In addition, Westergren and Kennedy own options that will give them additional shares by the end of March.
And we learn about executive compensation. Joe Kennedy made $325,000 in fiscal 2011 and earned a $175,000 bonus. He will earn a $400,000 salary in fiscal 2012. CTO Tom Conrad made $205,000 in fiscal 2011 and was given a $200,000 bonus. He will earn $290,000 in salary in fiscal 2012. Westergren is listed as a director and chief strategy officer but his compensation is not listed.