Pandora Revenue Growth Overshadowed by Questions About Apple Music's Impact
Free Apple Music trials coincided with Pandora's third quarter. Listener growth slowed to a crawl even though revenue showed strong growth.
Are Americans just flirting with Apple Music or are they in a committed, long-term relationship with the new subscription service? That's the main question surrounding the third-quarter earnings of Pandora, the Internet radio company with nearly a 10 percent share of U.S. radio listening but little listener growth.
Pandora announced Thursday its unique listeners and listener hours had annual growth of 2.1 percent and 3.0 percent, respectively, even though revenue grew 30 percent year over year. Total revenue grew 30 percent year over year to $311.6 million with mobile revenue accounting for $255.2 million, up 36 percent over the prior-year period.
Operating loss and net loss were both $85.9 million but excluding two one-time charges to content acquisition costs (see below) were just $2.5 million, slightly worse than $2.0 million in the third quarter of 2014.
The revenue gains occurred because the average Pandora listener is increasingly valuable. Total RPMs, or revenue per 1,000 impressions, grew 26 percent year over year to $60.52 while advertising RPMs grew 28 percent to $56.84.
Yet competition from Apple Music and Apple's Beats 1 radio service appeared to have contributed to the existing slowdown in the number of people listening and time spent listening. Pandora had 78.1 million listeners and 5.14 billion listener hours in the third quarter. Both numbers represented low single-digit growth.
CEO Brian McAndrews downplayed concerns about the slowdown. During the earnings call, McAndrews said Pandora expected short-term impact from free trials of Apple Music and saw a "muted" impact that was "consistent" with what Pandora experienced with launch of iTunes Radio in 2013. When asked if Apple Music cannibalized or helped grow the streaming marketplace, McAndrews said, "The industry continues to grow. Every one in the industry continues to grow."
Even so, analysts seemed more concerned with the listener slowdown than the revenue growth. Investors were concerned with either competition or fourth quarter guidance of $325 to $330 million. Fewer than 30 minutes after the close of the trading day, shares of Pandora had dropped 20.5 percent to $15.50 in after-hours trading.
Two extraordinary items hit Pandora's bottom line in the quarter. One was a $57.9 million charge related to the $90 million settlement with record labels that was announced Thursday afternoon. The remainder will be recorded in content acquisition costs over the next five quarters based on expected listening activity of pre-1972 recordings.
The other item was a $23.9 million charge related to Pandora's decision to forego the application of lower licensing rates afforded by the Radio Music License Committee. Pandora's acquisition of KXMZ in 2013 allowed it to qualify for a lower royalty rate for the performances of ASCAP and BMI repertoire. Pandora started recording royalties at the lower rates for ASCAP in March 2014 and for BMI in May 2015. Forgoing the application means Pandora will record these royalties at the rates set by the rate courts. The difference between the RMLC rates and the rates set in court is the amount of the one-time charge.
Excluding the two charges related to content acquisition costs, royalties as a percent of revenue declined to 41.0 percent from 46.4 percent in the prior-year period.
The earnings call provided some insight into Ticketfly, the ticketing service Pandora acquired earlier this month for $450 million. Through September, Ticketfly sold 16 million tickets with a gross ticket value of over $530 million. The net revenue to Ticketfly was $52 million. Revenue after fees to clients was $29 million.
Pandora plan to use Ticketfly to create a stronger link between artists and listeners. Pandora is now allowing some artists -- a wider rollout will follow -- to send targeted audio messages to fans, inserted between songs, according to level of interest or location. A message can include a call to action to buy concert tickets. Ownership of Ticketfly allows for a seamless process from message to ticket purchase.