Pandora’s strong revenue growth didn’t stop a widening of its net loss in the second quarter ended July 31. The company had revenue of $157.4 million in the quarter, up 55.4% from $89.4 million in the prior-year period.
Although net loss increased, the company made clear during Thursday’s earnings call that it would continue to make investments — from sales force to product — to take advantage of opportunities to grow market share. In other words, Pandora will plow money back into the company as its revenue grows.
Revenue grew 60% to $162 million on a non-GAAP basis. Pandora’s GAAP revenue of $157.4 million does not take into account $4.7 million related to subscription revenue. (Pandora defers subscription revenue until refund rights lapse or the company has an adequate transaction history to estimate a reserve.) Mobile revenue grew 92% to $116 million and accounted for 73.7% of revenue, up from 59.7% a year earlier.
The additional revenue did not help Pandora’s bottom line. Net loss grew 43.8% — about 11 percentage points less than revenue growth — to $7.8 million from $5.3 million. Loss from operations grew at roughly the same amount, 44.0%, to $7.6 million from $5.4 million.
“I think the business is firing on all cylinders,” Pandora CEO Joe Kennedy tells Billboard.
Where some people see continuing and mounting losses, Kennedy sees improvement in Pandora’s ability to leverage its business model. He singles out the 92% increase in mobile advertising and the simultaneous decrease in royalties as a percentage of revenue as proof the business model is working as the company scales.
Since Pandora is a mobile-dominant company, the metric that best charts its progress is mobile advertising RPM, or revenue per thousand listener hours. In the second quarter, mobile advertising RPM rose to $33.90 from $22.17 a year earlier. Although mobile RPM is still well below desktop RPM of $59.3, investments in advertising technology and internal sales force “are paying off,” Kennedy says.
Investors expected better results. Shares of Pandora were down 4.4% to $20.75 in after-hours trading. Shares closed up 1% to $21.71 Thursday. Pandora shares are up 136.5% year to date.
Royalties became less of a burden in the second quarter. As a percent of revenue, royalties dropped 12.9% to 52.0% from 59.8% in the prior-year period. For the first half of the year, royalties as a percent of revenue were 58.2%, an 8.9% improvement from the prior-year period’s 63.9%.
Improved mobile monetization, the listening cap implemented earlier this year, a “tight control over content costs” and other measures had a “very significant” impact on royalty costs, Kennedy says. Those other measures include a further limit on the number of skips allowed on mobile devices, a new wrinkle in cost control the company had not previously mentioned.
As a result of improved mobile advertising RPM and the addition of more levers such as mobile song skips, Pandora will lift the mobile listening cap on Sept. 1. The company says the six months of experience with the mobile listening cap provided “critical insights” into listeners that give it greater control over its cost structure.
But Pandora isn’t about to focus on profitability just yet. It sees a huge potential in the growth of connected devices and will invest according. CFO Mike Herring said during the earnings call that growth in earnings per share will trail growth in revenue growth as the company maximizes investment as Pandora attempts to realize its “full market potential.”