Pandora Has Record Revenues in Q3, Mobile Advertising, Royalties Improve

Gains in mobile advertising helped Pandora achieve record revenue in the quarter ended Oct. 31. The company had revenue of $181.6 million in the quarter, a 50.3% improvement over the prior-year period. Net loss was $1.7 million, or $0.01 per share. Analysts surveyed by FactSet expected positive earnings per share of $0.06. Pandora's EPS was $0.01 in year ago.
 
Shares of Pandora were down 1.8% in after-hours trading after rising 4.4% to $29.68 on Thursday. The current share price gives Pandora a market capitalization of $5.7 billion. Its shares are up 223% year-to-date and 313% in the last 12 months.
 
Thursday's earnings release included two indications Pandora's business model is on the right track. First, mobile advertising improved 58% to $104.9 million. Like Facebook and Twitter, Pandora's success depends on its ability to monetize use of its mobile apps. Its advertising RPMs, or revenue per thousand listening hours, on mobile devices have grown to $36.00 in the last quarter from $25.59 a year earlier.
 
The other sign was a lower royalty burden, as a percent of revenue, from payments to artists and rights holders through SoundExchange. Royalties of $87 million accounted for 48.2% of revenue, the lowest mark since the company went public in 2011 and the first time under 50%. Royalties' 32.4% year-over-year growth rate was lower than other expense categories and was also lower than the 50.3% increase in revenue. 
 
The improvement in royalties was "purely driven by our ability to monetize the business," CFO Mike Herring tells Billboard. With Pandora's royalty costs fixed at around $21 per 1,000 hours -- it pays fixed statutory royalties rather than a percent-of-revenue royalty -- the company focuses on how to drive revenue per 1,000 hours. "This year in particular we turned a corner to monetize, and monetize mobile hours specifically," says Herring.
 
The costs of ramping up the sales staff and infrastructure were a drag on earnings. Growth in sales and marketing expense grew 89.3% to $50.6 million from $26.7 million a year earlier. That far exceeded the 50.3% growth in revenue and the 54.3% growth in total expenses.
 
Although the company is focused on, and depends on, advertising, Pandora has been able to grow subscription revenue over the last few quarters. In the most recent quarter, subscription revenue accounted for 20% of revenue, up from 18.3% and 16.2% in the previous two quarters. Those gains have come from simplifying the subscription process. Herring says in-app purchasing was a "significant" driver in subscription growth. Internal advertising has also helped by making listeners aware of subscription opportunities.
 
Pandora's guidance for the year ending Jan. 31, 2014 is revenue between $657 million to $662 million and non-GAAP, diluted earnings per share between $0.03 and $0.05. To align with the fiscal years of advertising clients, Pandora will change its fiscal year end to December 31st from January 31st.

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