Pandora Q3 earnings: splashy, scary to Wall Street, and about the long view

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Pandora reported its third-quarter earnings yesterday afternoon, with a splashy presentation that framed the quarterly ritual as Analyst Day. Analysts were evidently disappointed, based on a tumbling stock with two to three times normal trading volume. The shuddering Wall Street reaction was due to lowered guidance, in which Pandora projected total 2016 earnings of $1.35B – $1.37B, reduced from a previous expectation of $1.4B.

The report was about more than numbers. Pandora is focusing attention on the company’s upcoming on-demand service as a potential game-changer.

The Numbers

Here are the basic earnings metrics for Q3:

  • Total Q3 revenue was $352-million, a 13% increase from Q3 2015.
  • Advertising revenue was the largest part of that, at $273-million.
  • Subscription revenue: $56-million. (Pandora recently rebranded and improved its $5/month plan, now called Pandora Plus.)
  • Ticket service revenue, derived from Pandora’s Ticketfly acquisition, was $22-million.
  • Pandora spent borrowed and spent cash in Q3, reducing its bank account from $311-million to $264-million. Part of that money went to labels, distributors, and publishers in advance payments of new licensing agreements which will underlie Pandora’s upcoming on-demand music service.

In addition to the financials, Pandora investors and pundits are always interested in audience metrics:

  • Pandora reported 77.9-million active listeners (that’s people who listen at least monthly). A year ago, that number was 78.1-million. Investors don’t love it when they¬†see that plateau.
  • Year-over-year listening hours grew 5% to 5.4-billion in the third quarter.

In a colorful online presentation, Pandora notes other bragging points:

  • The Pandora app is available in 1,800 devices and 190 car models.
  • Pandora owns just under 10% of U.S. radio listening hours, more than satellite radio. (Pandora credits all of U.S. terrestrial radio with 79% of radio listening hours.)
  • On the pureplay side, Pandora claims 55% share of listening, compared to 32% for Spotify and 8% for iHeartRadio. This is a crucial talking point for the company as it prepares to position a new on-demand service in that listening share.
  • Pandora has more mobile hours spent in its app than Facebook — a lot more (19.7 average hours compared to 13 average hours for FB).

The Plan

In this year’s earnings calls, Pandora has put everything in the context of its expansion plan. With Pandora Plus ($5/month) in the market now, Pandora Premium (fully on-demand, directly competitive with Spotify) remains the big bet. Pandora frames that challenge as “addressing the entire demand curve.”


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The plan is well articulated and its pre-launch investor marketing is nicely designed. Much will depend on the product itself, especially in two regards. First, how effectively it differentiates from Spotify, Apple Music, and other on-demand services which lay out the same essential feature set. Second, how effectively Pandora can retain its radio users and funnel them upward to the top payment tier.

Pandora promises a great and distinctive product. Importantly, the company has also been preaching to investors that there is low customer acquisition cost, thanks to the 78-million activated users currently in the thrall of Pandora’s radio experience.

Even with all that, Pandora’s top-level subscriber growth projection is modest by the standards of Spotify and Apple Music, the two main on-demand antagonists. Pandora projects 11.3-million subscribers by the end of 2020 — that is after three full years in the market. Apple Music claimed 17-million subscribers in September, after 14 months. Spotify has about 40-million.

However, Pandora has the middle tier as well. That $5/month revenue source never played a major role in the balance sheet when its main selling point was ad ad-free experience. Pandora Plus now offers other, semi-interactive features, notably the ability to replay songs and store a limited cache of music for offline listening. Pandora Plus seems to be an elevated point of ambition for the company, which projects “Total U.S. Subscribers” at 51.3-million for end-of-year 2020. That is ten times the number of subscribers to Pandora One, the predecessor to Plus.

As we have been saying quarter after quarter, since Pandora acquired Rdio assets one year ago, time will tell. Next quarter, when Pandora discusses Q4 results, there will probably be an on-demand service live in the market. Then things will get really interesting for this market-leading pioneer of online listening.


Brad Hill