Pandora beat Wall Street expectations when it reported its first quarter results on Thursday, posting revenue of $297.3 million despite losses during the period. The Oakland-based company said it had a loss of 51 cents per share, with losses -- adjusted for stock option expense and pretax expenses -- coming to 20 cents per share. Analysts on the Street were expecting a loss of 29 cents per share.
With revenue jumping 29 percent from nearly $231 million in the corresponding quarter in the prior year, Pandora continues its growth story. But its losses also widened, to $115.7 million from the $48.3 million loss it had in the corresponding quarter in the prior year.
The company attributed its widening losses to increased costs from employee growth from acquisitions; an increased emphasis on product development and innovation; increased product costs due to higher rates from the Copyright Royalty Board; and from signing some direct music publishing deals at higher rates than what the company would have paid if it employed the compulsory license.
As a result of the first two causes, operating expenses also grew dramatically, to $199.7 million, up 45.9 percent from $136.9 million in the corresponding quarter in the prior year.
Advertising revenue grew 23 percent to $220.3 million from $178.7 million in the earlier period, exceeding company exceptions due to strength in local market advertising, which accounted for 28 percent of advertising revenue during the quarter.
Subscription revenue also increased 5 percent, to $54.7 million, from 3.9 million subscribers. Ticketing revenue from its first full quarter of operating Tickefly resulted in Pandora posting $22.3 million of revenue to its income statement, while noting that Ticketfly's overall gross ticket value grew 20 percent to $170 million for the quarter due to the sale of 3.8 million tickets.
Content acquisition costs jumped 35.9 percent to $171.3 million, from $126 million in the year earlier period due to the previously mentioned increase on rates imposed by the Copyright Royalty Board on sound recordings, as well as a change in strategy with music publishers to do direct deals at higher rates, instead of fighting them tooth and nail for lower rates.
While the company now has increased product costs, those costs also come with a clarity that allows the company to execute its plan to reach profitability, Pandora president and CFO Mike Herring said during the conference call.
"While the CRB decision increased the royalty rates we pay for sound recordings going forward, our ability to drive significant gross profit persists," Herring said in prepared remarks. "We have a clear path to increase RPMs, [revenue per 1,000 ad-supported listening hours] thus gross margins in the future," as first quarter advertising growth shows.
As it is, currently Pandora's RPM reached a record high during the quarter to $49.84, up 14 percent from $43.53 in the corresponding period a year ago; while LPM (licensing costs per hour) rose almost 31 percent to about $32 from $24.72.
"Thus we have a clear path to a 60 percent gross margin and a 20 percent operating margin by 2020 in our core radio business," he added. That means that Pandora expects its revenue to exceed product costs and operating expenses by 20 percent in its core radio business.
While licensing costs increased dramatically, Herring said that going forward that cost would stabilize and only grow at a rate equal to the Consumer Price Index. The company expects its advertising revenue to continue its growth at a predictable rate.
As part of the company's focus on improving relations with music companies and artists, it is also moving to dramatically improve listeners' experience, the company said.
The company also reported that the number of active listeners in the first quarter was 79.4 million, up slightly from last year. Total listener hours were listed at 5.52 billion, beating predictions.
During the conference call with investors, Chief Operating Officer Sara Clemens said the company is accelerating a stream of features, including Browse, which provides listeners with an intuitive graphical environment; Thumbprint Radio, described as "more" than a user's greatest hits and based on their listening history; its acquisition of Ticketfly; and with PandoraAMP, which provides an array of tools to helps artists market themselves to their fans, while also providing the artists with data analytics.
Looking at the balance sheet where liabilities and shareholder equity total $1.19 billion, cash was down to $382.5 million compared to $416.9 million at the end of the prior quarter; long term debt stood at $239 million and total liabilities at $521.9 million, leaving shareholder equity at $670.4 million. That's down from shareholder equity of $743.4 million at the end of the year.
Going forward, the company said it expects revenue to come in at $345 to $355 million in the second quarter of this year, while it expects to have adjusted earning before interest, taxes, depreciation and amortization to range between $20 million and $30 million. For the full year, the company's guidance suggested that revenue is expected to be $1.41 billion to $1.43 billion, while it expects to produce an adjusted EBITDA loss of $50 million to $70 million.
"This was a really strong start to the year, and I see clear signs of momentum across our business," said founder/CEO Tim Westergren in a press release. "Our team is rapidly bringing Pandora's audacious strategy to life, fundamentally changing how listeners discover and enjoy music while helping artists build sustainable careers."
At 3 p.m. Apr. 29, Pandora' stock was at $10.10, up from the previous day close of $9.44.