Pandora Q2 up 38%; active listeners down; loss continues


PandoraQ2 2014 revenue was $218.9 million, representing YOY growth of 43% and 38% on a GAAP and non-GAAP basis.  Q2 total mobile revenue was $167.5 million, growing 59% and 51% YOY on a GAAP and non-GAAP basis.  The quarter saw 39% advertising revenue growth and 35% subscription revenue growth. Ad revenue growth came primarily from a 144% YOY increase in local advertising. The bottom line was $0.04 per share, which beat estimates of $0.03. However, on a GAAP basis, EPS was a loss of $0.06.

The share of total U.S. radio listening for Pandora in June 2014 was 8.90%, an increase from 7.04% at the same time last year. But the number of active Pandora listeners fell 1.5% to 76.4 million between May and June while listening hours also fell 7%–but that could be due to Pandora limiting free mobile listening in March 2013. Active listeners were 76.4 million at the end of the quarter, an increase of 7.5% from 71.1 million from the same period last year.

Pandora’s stock fell 12% in after-hours trading.

For the quarter, Pandora ended with $437.9 million in cash and investments compared to $445.9 million at the end of the prior quarter. Cash used in operating activities was $7.1 million for the second quarter of 2014, compared to $4.6 million in the year-ago quarter.

Q3 guidance

Revenue is expected to be in the range of $235 million to $240 million. Non-GAAP diluted EPS is expected to be between $0.05 and $0.08. Non-GAAP EPS excludes stock-based compensation expense and amortization of intangible assets, assumes minimal tax expense given their net operating loss position, and is based on 221 million diluted weighted average shares outstanding for the three months ending September 30, 2014.

FY Guidance

Non-GAAP revenue is now expected to be in the range of $895 million to $915 million, up from prior full-year guidance of $880 million to $900 million. Non-GAAP diluted EPS is expected to be between $0.16 and $0.19, up from prior full-year guidance of $0.14 and $0.18.

Said Brian McAndrews, Pandora CEO:

“As we have grown revenue, we are driving increased gross profits and we have been reinvesting those dollars back into the business, building out our sales team and expanding our product development capability, as we look to capitalize on the short and long-term opportunities available to us.

Despite those significant investments we are operating the company profitably with non-GAAP second quarter 2014 net income of $9.1 million or diluted EPS of $0.04, compared to non-GAAP net income of $8.6 million or diluted EPS of $0.04 for Q2 2013.

Our better than expected financial results were driven by continued increases in user engagement, rising listener hours and our focus on local and mobile monetization. As of the end of June, a traditionally seasonal low point, active users’ increased 7.5% year-over-year from 71.1 million to 76.4 million.

At the same time listeners are increasingly engaged as listener hours rose 5% quarter-to-quarter in 2014 from 4.8 billion in Q1 to 5.04 billion this quarter. On an annual basis listening hours grew 29%, increasing from 3.91 billion in Q2, 2013 to 5.04 billion in Q2, 2014.

As you may recall, we began limiting free mobile listening to 40 hours per month in March of last year, making year-over-year comparisons less relevant than the increasing engagement momentum we see in the near-term, and in that respect, this quarters hours were a milestone, as we served over 5 billion hours of music in a quarter for the first time.

For the month of June specifically, we had more than 25 million daily unique listeners every Friday, an all-time high for the seasonally slower summer period. For context, last year the high watermark for a Friday in June was 22.6 million daily uniques. Importantly, listeners are using Pandora more frequently and for longer periods of time, consuming an average of 21.1 hours per active user in June, up 20% over the last year.

Pandora began measuring market share on our own, because no third-party measurement firm could provide accurate market share numbers across web and connected devices. Our estimates, which include third party data show our share of total U.S. radio listening increased from 7.04% a year ago to 8.9%. We are pleased to say that now several third-party measurement sources are available. Specifically, Triton, comScore and Edison published estimates at Pandora’s audience.

Edison Research’s inaugural share of the year report estimated Pandora’s overall radio market share at 9.2% of total broadcast satellite and Internet radio listening, slightly above our own estimates. The most recent comScore multiplatform top 100 properties report has Pandora at 81.8 million monthly unique; and finally Triton Digital top 20 U.S. ranker has Pandora at an all-time high market share for U.S. Internet radio at 77.6% of the top 20 properties.

While all of these pieces of research have slightly different methodologies and objectives, they all lead back to the central theme, that Pandora is the clear market leader in Internet radio and a growing force in radio overall.”

Noted Seeking Alpha:

The Hits

  • Advertising revenue, where Pandora makes the lion’s share of its top line results, grew 39% year-over-year to $177 million.
  • Total revenue for Q2 2014 was $219 million, up 43% versus Q2 2013.
  • Gross profit margin was 43% of revenue, up from 41% in Q2 2014; within that, content acquisition costs as a percentage of revenue improved to 51% during the quarter, down from 52% a year ago and 56% during Q1 2014.
  • Non-GAAP earnings per share of $0.04 beat analysts’ estimates of $0.03. On a GAAP basis the company recorded a loss of $0.06 per share.

The Misses

  • For Q3 2014 the company estimates non-GAAP earnings per share of $0.05 to $0.08 on revenue from $235 million to $240 million. According to Reuters I/B/E/S, average analysts’ estimates were 8 cents per share on revenue of $235 million.
  • Listener hours were 5.04 billion in Q2 2014, up 29% and 5% in comparison to Q2 2013 and Q1 2014, respectively. However, listener hours fell to 1.61 billion in June 2014 from 1.73 billion in May 2014.
  • Listener hours matter most because they drive advertising revenue. The trend may exacerbate as competitors like Apple (NASDAQ:AAPL)/Beats, Spotify, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) attempt to muscle in on Pandora’s music streaming turf.

Will Pandora Trade At $11-$12/Share Warranted By Apple/Beats?

The market will award high valuations to momentum stocks until they disappoint on earnings or forward guidance. At a market capitalization of $5.9 billion (based on yesterday’s closing price of $28.72/share), Pandora was trading at 7.6x run-rate revenue of $777 million. However, based on the 3x revenue multiple Apple paid for Beats Electronics LLC, Pandora should have traded at $11-$12 per share:

Apple paid about 3x revenue for Beats. Though Beats was private, we understand its revenue growth was impressive – growing to over $1 billion from less than $200 million in 2010. A multiple of 3x run-rate revenue of $777 million would give Pandora an enterprise value of $2.3 billion …

The 3.0x revenue Apple paid for Beats represents how a third party would value a music streaming service. Based on that metric, Pandora is worth about $11.35 per share.


After disappointing Q3 earnings guidance and a decline in listener hours in June, Pandora’s stock fell in after-hours trading by over 9% to $26/share. Whether it falls to the $11-$12/per share range warranted by the Apple/Beats transaction remains to be seen.