Pandora CFO Mike Herring on Q1 Earnings, Wall Street's Reaction, Price Increase

Mike Herring, chief financial officer, Pandora

Minutes after Pandora announced a 69% jump in first-quarter revenue and narrower losses Thursday afternoon, its stock price sank more than 8%.

This fact does not seem to faze Mike Herring, Pandora's Chief Financial Officer. Herring, who's been on the job at the Oakland, Calif., Internet radio company for a little more than a year, is used to this reaction from the stock market, which is often based on expectations around profitability.

Investors want growth on two fronts -- audience and profit. While Pandora consistently delivers on audience growth, profitability has been more challenging. 

Pandora has more than 75 million active listeners, nearly a quarter of the U.S. population. Those customers listened to 4.8 billion hours in the first three months of this year, up 12% over a year earlier. The Internet radio service is also continuing to nibble away at tradional broadcast radio time. In March, Pandora accounted for 9.1% of all forms of U.S. radio listening, which, for now, is dominated by terrestrial radio.

But Pandora struggles to generate a profit from its growing audience. Over the past nine quarters, it has posted profits in only two. Part of Pandora's battle is its cost to license music. The company paid out 60.6% of its revenue in 2012 for licenses. In 2013, that figure improved only somewhat to 53.8% of revenue going toward paying music royalties. In the most recent first quarter, Pandora paid $108.3 million in royalties, or about 55.7% of its revenue.

In an interview with Billboard, Herring talks about Wall Street reactions, how his company plans to keep up its growth and the potential impact of its upcoming prices increase for its PandoraOne ad-free service, which will go up in May by a dollar a month to $4.99. Here's an edited transcript of the conversation.

Billboard: Your revenue grew, your losses narrowed and you're forecasting a profit for the year. Why did your stock go down?
Mike Herring: For us, that seems to be the status quo for our stock. Revenue was much stronger than we expected. That helped us lower our losses. We actually raised guidance for the year pretty significantly.

Do you think investors may be focused on profitability?
There has been some noise around when our earnings would turn the corner. But we’re still investing heavily. We're in it for the long term. That said, our RPMs [revenue per 1,000 impressions] are way up. Ad revenue is way up. And we crossed $100 million on mobile advertising in what is typically our slowest quarter.

PandoraOne has 3.3 million subscribers who generate about a quarter of the company's revenue. What's been the impact of your announcement to raise the price for that service?
The pricing changes haven’t kicked in, yet, so we haven’t seen any impact, yet. Generally speaking, the reaction has been pretty muted. 

Does each PandoraOne listener generate more or less revenue than a free listener that generates income for you through advertising?
It’s a lot more expensive to serve a PandoraOne listener because we pay a higher pure play royalty rate for the songs they listen to. So even though the ARPU [average revenue per user] is higher for PandoraOne, the margins are comparable to the ad-supported business.

Are they comparable under the old $3.99 a month rate, or the new $4.99 a month rate?
The margins are comparable at the new rate.

Nearly one in four people in the U.S. listened to Pandora in March. That's a pretty high penetration rate. How long can you continue to grow your audience size? At what point will you top out and growth begins to slow? 
We do have 75-plus million users consuming 4.8 billion hours of music in the first quarter. And, yes, we are focused on driving additional listeners. But our bigger opportunity is driving engagement with features such as our playlisting functionality. Each of our active users listens to 21.9 hours of content a month. That's higher than Facebook, Netflix or Twitter. We're also focused on making Pandora available on multiple platforms by integrating our service with cars and consuner electronic devices. Those efforts may not yield new listeners, but they will yield additional hours. As we drive hours, that increases the opportunity for monetization. Our primary growth will come from engagement.