A deeper dive in Pandora’s Q2 earnings call

Often the most interesting parts of an earnings call lie beyond the numbers, especially in the investor Q&A which follows the company’s prepared statements. We took a deep dive into the unscripted portions of last week’s Pandora Q2 results.

The Big Launch

tim westergren canvasWe continue to make great progress toward our vision of building a complete music marketplace that satisfies the full range of music listening for the consumer, and provides a complete solution for artists.” That was Pandora CEO Tim Westergren, starting last weeks Q2 earnings call with a reference to his company’s top strategic mission: Creating an on-demand service to complement the market-leading non-interactive internet radio platform. “The product is really coming together, he said.

Much of the financial commentary during the call was geared to the long-term horizon of that big product launch. This was from mike Herring, President and CFO: “We believe product development is an investment in innovation to drive revenue 13 months to 36 months out, and thus we remain committed to increasing our spending in this critical area.”

Pandora stated in the Q1 report that the timeline goal would bring the on-demand service to market in Q4, with effect on financial results coming in 2017. o change there, according to Herring: “We are on track with our long‐term plan and executing against our strategy. The trajectory of the business in the second quarter gives us further confidence that we have the right plan in place to realize our vision and create shareholder value.”

“Shareholder value, of course, being the mandatory rationale for all business decisions, especially for Pandora which is constantly rumored as an acquisition target.

Six-Dollar CPMs Not Good Enough

In a discussion of ad monetization, Mike Herring offered insight into Pandora’s expected CPM ranges.

“There are big network deals you can do at CPMs that are pretty low, like $4 to $6. We don’t really do any of those deals and that’s a part of a large upfront that involves spot purchases as well. The national spot rates that we realize here are more like $8 to $10 or $11 CPMs or higher.”

That’s for national buys at scale. On the local scene, driven by Pandora’s dozens of market-specific sales offices, CPMs can be much higher thanks to Pandora’s ability to target precise audience segments”

And the local, because of the targeting aspect, drive significant value from that being able to reach a specific audience, can be anywhere from 50% to 200%, 300% national CPM.”

What about ad load? Pandora plays significantly few commercials than most terrestrial stations, but the company remains sensitive to consumer tolerance of ads in a streaming service. Pandora executives have been describing a balancing act around ad load for a few years. Here is what Herring said last week:

So we aren’t pushing aggressive ad load because we are balancing it against other pieces, but it’s not that we’re holding it back artificially either. We’re trying to balancing at the right mix between driving the right revenue, driving the right leverage in the business and setting this up for a long-term success.”

Listening in the Car and Home

Pandora started as a desktop app, and moved assertively into mobile phone, and also has enjoyed first-mover status in cars and many in-home consumer electronics devices. All that non-traditional listening is growing fast — quicker than the legacy delivery platforms, while remaining a minority of listener hours.

“CE {Consumer Electronics] and auto have grown significantly, and they’re growing much, much faster in terms of hours, again, off lower basis, than mobile audiences are for example,” said Mike Herring. “although they are small percentages of our overall hours relatively, I think together they make up about 10% of our total hours today.”

The value of that engagement is to increase listening hours of existing customers. “They’re growing quickly, but they’re not necessarily about driving users. It’s about getting users to use Pandora more.”

Postponing Programmatic Audio

Pandora’s approach to programmatic advertising is unusual for an audio platform. The company offers programmatic display ads, leveraging it immense Big Data operation to deliver smart impressions to targeted users. Pandora has not dived into audio programmatic, though executives have told RAIN News that it will eventually. CEO Tim Westergren touched on that point last week, in response to an investor query.

And we’ve been in this space for a while and we’ve developed a really good understanding where the pockets of demand are. And right now the money comes from really direct premium sold advertising. Programmatic will have its place over time, and when it’s significant, we will be there.”




Brad Hill