Pandora Inc. (P) reported loss of 21 cents per share in the first quarter of 2014, wider than the Zacks Consensus Estimate by a couple of cents.
Quarter Details
Revenues jumped 53.9% year over year to $180.1 million and comfortably beat the Zacks Consensus Estimate of $176.0 million.
The year-over-year increase was on account of higher advertising revenues (72.4% of revenues), which increased 45.4% from the year-ago quarter to $140.6 million. Subscription service and other revenues (27.6% of revenues) improved 191.6% year over year to $53.7 million.
Total advertising revenue per thousand listener hours (Ad RPMs) from mobile and other connected devices increased 34.0% from the year-ago quarter. Mobile advertising RPMs reached $29.46 in the first quarter increasing 44.0% from $20.43 in the year-ago quarter, despite intensifying competition from Google (GOOGL) and Facebook (FB).
Total listener hours grew 12.0% on a year-over-year basis to 4.8 billion in the first quarter in comparison to 4.26 billion in the same period last year.
Active users increased 8% year over year from 69.5 million to 75.3 million in the first quarter of 2014. In March, Pandora experienced its first-ever week with over 25 million active listeners every weekday, which it considers a milestone.
Pandora’s share of the total U.S. radio listening market increased from 8.1% a year ago to 9.1% at the end of March. However, as more and more people try Apple’s (AAPL) iTunes Radio, we believe that Pandora will lose some market share going forward.
Operating expenses (including stock-based compensation), as a percentage of revenues, surged 590 basis points (bps) to 55.5% in the quarter. The significant year-over-year increase was primarily due to higher sales & marketing (up 180 bps), product development (up 90 bps) and general and administrative expenses (up 320 bps) in the quarter.
Pandora reported operating loss of $28.9 million compared with a loss of $35.8 million in the year-ago quarter. Net loss (including stock based compensation) was $42.9 million compared with net loss of $36.8 million in the year-ago quarter.
The company exited the quarter with $445.9 million in cash and investments compared with $450.1 million in the prior quarter.
During the quarter, Pandora declared its intention of discontinuing the monthly disclosure of key audience metrics. The final monthly release will be provided in June covering the key metrics for May 2014. However, the company’s usual practice of providing listener metrics on a quarterly basis will remain unchanged.
Pandora increased headcount, primarily in sales and engineering, by 47.0% on a year over year basis to 1206 employees in the first quarter.
Outlook
For the second quarter of 2014, revenues are expected to be in the range of $213.0 million to $218.0 million. The Zacks Consensus Estimate is pegged at $220.0 million. The company expects to report results in the range of a breakeven to earnings of 3 cents per share.
For 2014, revenues are expected to be in the range of $880.0 million to $900.0 million, up 37.0% from the prior range of $870.0 million to $890.0 million. The Zacks Consensus Estimate stands at $895.0 million. Earnings are expected to be in the range of 13-17 cents per share for the full year.
Our Take
Pandora reported mixed first 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 place it well to compete against the likes of Apple, Spotify and Sirius XM (SIRI).
Currently, Pandora has a Zacks Rank #2 (Buy).
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