Pandora Inc. (P) reported earnings of 4 cents per share in the fourth quarter of calendar 2013, which beat the Zacks Consensus Estimate by a couple of cents. Earnings (including stock-based compensation expenses) improved from 2 cents reported in the year-ago quarter.
Due to Pandora’s conversion to a calendar-based fiscal year (ending Dec 31), the company reported calendar fourth quarter results as well as results for the two month transition period that ended on Dec 31, 2013.
Calendar Fourth Quarter Details
Revenues jumped 51.1% year over year to $200.8 million, which beat the Zacks Consensus Estimate of $197.0 million.
The year-over-year increase was on account of higher advertising revenues (80.9% of revenues), which increased 39.5% from the year-ago quarter to $162.0 million. Subscription service and other revenues (19.1% of revenues) improved 149.8% year over year to $38.4 million.
Mobile advertising revenues increased 69.0% year over year to $366.3 million, despite intensifying competition from Google (GOOG) and Facebook (FB). Total advertising revenue per thousand listener hours (Ad RPMs) from mobile and other connected devices increased 40.0% from the year-ago quarter.
In September, the company cancelled the listening limit (40 hours per month) that it had imposed on free users. As a result, Pandora reported total listener hours of 4.54 billion in the calendar fourth quarter, up 16.0% on a year-over-year basis. Active users increased 12.0% from the year-ago quarter to 73.4 million.
Pandora’s share of the total U.S. radio listening market in January was 8.57%, up from 7.68% in the year-ago month. However, as more and more people try Apple’s (AAPL) iTunes Radio, we believe that Pandora will lose some market share going forward.
During the quarter, Pandora expanded its reach with the launch of the Pandora app on the Windows 8 phone and Android tablets. The company integrated with Facebook Timeline and Google’s new Chromecast product. It also launched a redesigned iPad app and TV.Pandora in the quarter.
Content acquisition cost, as a percentage of revenues, decreased 730 basis points (bps) on a year over year basis to 46.7%, which was an all-time low for Pandora.
Operating expenses (including stock-based compensation) as a percentage of revenues surged 530 bps to 42.3% in the last quarter. The significant year-over-year increase was primarily due to higher sales & marketing (up 330 bps), product development (up 110 bps) and general and administrative expenses (up 100 bps) in the quarter.
Pandora reported operating income of $9.1 million compared with $1.8 million in the year-ago quarter, primarily driven by a higher revenue base.
Net income (including stock-based compensation) was $9.6 million compared with net income of $3.0 million in the year-ago quarter.
As of Dec 31, 2013, cash and cash equivalents (including short-term investments) were $344.0 compared with $89.0 million as of Jan 31, 2013.
Two-Month Result
For the two-month November and December subperiod, Non-GAAP revenue was $137.2 million compared with $88.5 million reported in the year-ago period. The reported Non-GAAP revenue was also above the high end of the management guidance.
Non-GAAP net income increased to $20.9 million from $4.9 million in the year-ago period. For the subperiod, non-GAAP EPS was 10 cents compared with 3 cents in the year-ago period.
Outlook
For calendar first quarter 2014, revenues are expected to be in the range of $170.0 million to $176.0 million. The company expects a loss of 16-14 cents per share in the forthcoming quarter as compared to the Zacks Consensus Estimate of loss of 19 cents for the same time period.
For fiscal 2014, revenues are expected to be in the range of $870.0 million to $890.0 million, while earnings are expected to be in the range of 13-17 cents per share.
Our Take
Pandora reported impressive fourth quarter results. Improving monetization and strong mobile growth are positives. Pandora raised additional capital from its stock offering in September, which it expects to use for domestic and international expansion as well as for strategic acquisitions. This is expected to boost the top-line going forward.
However, rising costs related to licensing will remain a headwind in the near term. Moreover, higher operating expenses are expected to hurt profitability in the near term.
Nevertheless, we believe that Pandora’s popular service, driven by its effective discovery engine and a well-established infrastructure, places it well to compete against the likes of Apple, Spotify, and Sirius XM (SIRI).
Currently, Pandora has a Zacks Rank #4 (Sell).
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