Women in Music 2019

Pandora Predicts Subscriber Growth, Reports Record Q4 Revenues as Losses Mount

David Paul Morris/Bloomberg via Getty Images 
Tim Westergren, co-founder of Pandora Media Inc., sits for a photograph after a Bloomberg Studio 1.0 television interview in San Francisco, Calif. on April 15, 2015. 

On the eve of the launch of its on-demand premium service, Pandora executives told Wall Street analysts that it expects to lasso between 6-9 million subscribers between its plus (ad-free customer radio) and premium-interactive service in its first year of operation. That’s up from its current total of 4.39 million paid subscribers for its plus service .

It also said it plans to manage the company to profitability, that is adjusted EBITDA profitability, or earnings before interest, taxes, depreciation and amortization, with some other expenses like employee stock based compensation subtracted out too.

As it was, the company reported that in its fourth quarter ended Dec. 31, it posted a net loss of $90 million, or 79 cents per diluted share, on revenue of $313.3 million, as compared with a $19.4 million loss, or 9 cents per share, on revenue of $269 revenue. That means that while revenue grew 16.1%, Pandora produced more than four times the amount of red ink in its fourth quarter of 2016, as compared to the fourth quarter of 2015. 

Pandora founder and CEO Tim Westergren noted that the fourth quarter was the largest revenue producer in the company’s history, during a conference call with Wall Street analysts. 

“We made significant progress in 2016 by driving leverage in our core business while accelerating subscriptions to our paid product," he added in a statement. "We enter 2017 laser-focused on the growth of our ad-supported business, the launch and growth of our subscription products, and an artist-to-fan platform to drive listener engagement and ticket sales. These three strategic pillars operate in harmony to create mutually reinforcing revenue streams across a large and growing addressable market." 

Sometime in March, Pandora is expected to launch its premium on-demand service, made possible by the acquisition of Rdio at the end of 2015; direct deals with labels and publishers; and leveraging its own assets to support the new initiative. 

“For our premium launch, we will make a major statement,” Westergren told analysts. “We think we are bringing something new to the market. It will look very different than what’s out there; its not a me-too service. We will be loud and proud with a whole plan around the launch."

Getting back to its financial results for the full year, Pandora produced a $343.2 million loss, or $1.49 per diluted share, on revenues of $1.38 billion, versus the prior year when the company lost $169.7 million, or 79 cents per share, on revenues of $1.16 billion. That represents a 102% increase in red ink for the full year, while revenue grew nearly 19%.

During the year, Pandora’s cost of content, i.e. royalties to labels, artists, publishers and songwriters, grew to $734.4 million, up 20.3% from $610.4 million. As a percentage of revenue, it grew to 53% in 2016, up from 52% in 2015. That increase is in contrast to the way royalty costs have been trending down the last few years as Pandora grows its revenue base.

In the conference call, Pandora executives attributed the increase to the Copyright Royalty Board increase per play royalties to $0.0017 for ad supported from $0.0014in the prior year. In addition, they noted that another factor in the fourth quarter, the royalty rates imposed from the CRB became moot because of the direct deals the service has struck with labels, which are also believed to be higher than the CRB rates.

Moving over to its quest for profitability, Pandora reported that in 2016 it produced a loss before interest, taxes, depreciation and amortization of $373 million, but when adjusted for stock-based compensation, and other expenses, adjusted EBITDA was $119.5 million. 

For 2017, Pandora president Mike Herring offered guidance on revenue for 2017, suggesting that the company would hit between $1.55 billion to $1.7 billion. Westergren added the company "will manage toward" adjusted EBITDA profitability and get into the black, he declined to predict an amount; nor did the company forecast when the company would hit overall profitability.

Going forward into 2017, Westergren said Pandora had made great strides in artist to fan connection, which has resulted in the music industry awakening to the "promotional power possibilities to artists offered by the Pandora platform." 

The company's redesigned artist marketing platform "has far exceeded our expectations," says Herring, with thousands of artists publishing messages heard by Pandora listeners over 600 million times. This has resulted in click through rates averaging 2.6%, with many campaigns reaching much higher levels. These click through rates are 2-8 times higher than those typically seen by paid advertising and social media. 

Moreover, Pandora’s platform has been heightened by its inclusion, beginning in 2017, as part of the metrics that determine Billboard’s Hot 100, he said.

At the end of the year, Pandora said it had 81 million active listeners, basically the same as it had at the end of 2015, but it said listening hours grew 4% to practically 22 billion from 21.11 billion in 2015.

Herring said that Pandora’s ability to measure its listener behavior will be one of the pluses in bringing on board subscribers from its ad-supported to its plus service and from its $4.99 plus service, to the more expensive but still undisclosed price of its premium service. When it targeted certain ad-supported listeners with a seven-day free trial to its plus service, Pandora picked up 460,000 new subscribers for that tier. “That shows we can drive subscribers with minimal investment,” he said. 

Moreover, its understanding of its listener base will also help Pandora to successfully launch its premium service. 

"When we launch the premium service, when you go there, it won’t launch with a search box as the first thing the listener will see," Westergren said. "The service will start pre-populated with [content based on] all your listening history. Remember, we weren't the first to launch Internet radio, but here we are; and we plan to do this all over again" with the premium service.


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