Pandora earnings: Positive financials; slowing audience growth; plummeting stock

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Pandora’s Q3 earnings call on Thursday marked an anniversary of the one-year directorship of CEO Brian McAndrews. McAndrews told a story of record-breaking financial results, and slowing audience growth. Wall Street punished the company severely in after-hours trading following the late-afternoon call, and in today’s formal session. The Q2 earnings call followed that same reactive pattern.

“We continue to operate the company profitably.” –Brian McAndrews, CEO, Pandora

Here are the headline points of the earnings call:

  • Record-setting quarterly revenue of $240-million
  • Earnings from mobile listening were $188-million
  • Local advertising, a key metric, was $42-million
  • Pandora‚Äôs audience size was 76.5-million monthly listeners in September, up 5.2% from a year ago, but level for recent months
  • Listener hours during the quarter totaled 4.99-billion hours, up 18% from a year ago, but flat from last quarter

To anyone who has been following Pandora metrics this year, it is clear that monthly audience growth is flat, having leveled off (for the time being) at about 76-million monthly listeners. In official statements and earnings calls, Pandora stresses year-over-year growth. But even that number is narrowing, and if a flat monthly line persists, the time will come when year-over-year looks pretty flat, too. In this call, McAndrews prepared investors for a less dramatic audience growth story:

“In an increasingly competitive environment, driving monthly active user growth will be more challenging, particularly given our already significant market position. Looking ahead, expecting historic active monthly user growth is not realistic,” McAndrews said.

Sensible guidance, but not without potential repercussion, and slowing audience growth might be why investors are rolling P stock down a steep hill. At mid-day today, the stock had lost 15% of its value, driving share price to its lowest level in over a year, and pushing the market cap to the $4-billion level.

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Brian McAndrews cited one financial statistic of particular interest: Pandora’s music licensing cost as a percentage of revenue. That number is 46%, the lowest percentage in Pandora’s history according to McAndrews. Pandora is asking the U.S. Copyright Royalty Board for a lower statutory music licensing rate starting in 2016. But no matter how that plays out, it appears that the company’s earning power is starting to shift the balance sheet.

One key metric of earning power is RPM — often neglected in media coverage of Pandora. RPM is revenue per thousand listening hours, and is a marker of Pandora’s audience monetization effectiveness. The RPM for Q3 was $48, up from $42 a year ago, and a record high. Pandora credits that gleaming result to “increased mobile monetization and scale.”

Other metrics from the third quarter:

  • Advertising revenue was broken out at $194-million, +44% year-over-year
  • Subscription and other revenue was $45-million, +25% year-over-year
  • Share of U.S. radio audience, a sometimes controversial private calculation, was 9.06% — essentially flat in monthly growth
  • The company is guiding toward Q4 top-line revenue of $273-278 million.

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Brad Hill