Pandora Inc. (P) recently reported fourth quarter and full year 2014 results. The company posted fourth quarter earnings of 6 cents per share missing the Zacks Consensus Estimate of 9 cents by 33.3%. Earnings improved from the prior-year quarter’s figure of 4 cents a share.
The company shares plummeted more than 22% in the after-market trading session following the release.
Quarter Details
Quarterly revenues increased 33.8% year over year to $268 million but lagged the Zacks Consensus Estimate of $277 million. For 2014, Pandora reported revenues of $906.6 million, an increase of 40% year over year.
The year-over-year increase in the quarter was on account of higher advertising revenues (82.11% of revenues), which increased 35.9% from the year-ago quarter to $220 million. Subscription service and other revenues (17.9% of revenues) improved almost 24.9% year over year to $47.9 million.
Active listeners increased 7% year over year to 81.5 million in 2014. Total listener hours grew 20% on a year over year basis to 20.03 billion.
Pandora’s share of the total U.S. radio listening market increased from 8.6% a year ago to 9.7% at the end of December.
Total revenue per thousand listener hours (RPM) reached $51.54 in the quarter, up 24.9% from $44.14 in the year-ago quarter. Advertising revenues per thousand listener hours (Ad RPMs) from mobile and other connected devices increased 17.7% from the year-ago quarter to $48.19 in the reported quarter.
Mobile advertising RPMs were $44.37 in the quarter, increasing 22.6% from $36.20 in the year-ago quarter, despite intensifying competition from Google (GOOGL), Apple (AAPL) and Sirius XM (SIRI).
Margins
Gross margin expanded 380 basis points (bps) to 51.1%, primarily due to improved monetization in the quarter.
Pandora paid more than $115 million in content acquisition costs. However, the company managed to reduce its content cost to 43% of revenues in the quarter — the lowest in its history — due to improving monetization.
Operating expenses (including stock-based compensation), as a percentage of revenues, surged 360 bps to approximately 45.8% in the quarter. The significant year-over-year increase was primarily due to higher sales & marketing (up 250 bps), product development expenses (up 70 bps) and general and administrative expense (up 40 bps) in the quarter.
Pandora reported GAAP operating loss of $12.6 million compared with a loss of $9.1 million in the year-ago quarter.
Net loss (including stock-based compensation) was $12.5 million compared with net loss of $9.1 million in the year-ago quarter.
Balance Sheet & Cash Flow
Pandora exited the quarter with $354.6 million in cash and investments compared with $344.4 million in the prior quarter. In the quarter, cash flow from operating activities was $25.1 million compared with $12.3 million in the year-ago quarter.
Outlook
Pandora provided an outlook for the first quarter and full year 2015.
For the first quarter of 2015, revenues are expected in the range of $220 million to $225 million. The Zacks Consensus Estimate for the same is currently pegged higher at $238 million
The company expects adjusted EBITDA to be a loss in the band of $35 million and $30 million. Stock-based compensation expense of about $25 million and depreciation and amortization expense of $5 million are excluded from the forecasted adjusted EBITDA.
For 2015, revenues are now expected in the range of $1.15 billion to $1.17 billion.
Adjusted EBITDA is forecasted to be in the range of $70 million to $80 million. The figure does not include the estimated stock-based compensation expense of $122 million and depreciation and amortization expense of $23 million.
Our Take
Pandora reported not-so-encouraging results with a soft outlook for the forthcoming quarter. We believe that maintaining low licensing costs will remain a challenge for the company. Additionally, higher operating expenses are expected to hurt profitability in the near term.
Nevertheless, improving monetization and strong mobile growth are the positives. We believe that Pandora will benefit from the growing listening hours, market share gains and introduction of new music recommendation units called Promoted Stations.
We believe that improving listening hours is necessary for subscriber base growth, which is the primary revenue source for Pandora.
Currently, Pandora has a Zacks Rank #3 (Hold).
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