Pandora Inc. (P) reported loss of 6 cents per share in the second quarter of 2014, wider than the Zacks Consensus Estimate by a couple of cents and the year-ago loss of a penny. Shares fell 9.47 % ($2.72) in extended hours of trading due to weak earnings guidance for the third quarter.
Quarter Details
Non-GAAP revenues jumped 38.2% year over year to $218.9 million, almost inline with the Zacks Consensus Estimate.
The year-over-year increase was on account of higher advertising revenues (81.0% of revenues), which increased 39.0% from the year-ago quarter to $177.3 million. Subscription service and other revenues (19.0% of revenues) improved 62.7% year over year to $41.6 million.
Total revenue per thousand listener hours reached $43.41 in the second quarter, up 7.0% from $40.53 in the year-ago quarter. Advertising revenue per thousand listener hours (Ad RPMs) from mobile and other connected devices increased 6.0% from the year-ago quarter to $40.11 in the reported quarter.
Mobile advertising RPMs were $36.00 in the second quarter, increasing 11.0% from $32.56 in the year-ago quarter, despite intensifying competition from Google (GOOGL) and Facebook (FB). Currently, mobile advertising accounts for 76.0% of total ad revenue. The investments in local advertisements seem to have paid off as local revenue surged 144.0% on a year-over-year basis.
Total listener hours grew 29.0% on a year-over-year basis to 5.04 billion in the second quarter in comparison to 3.91 billion in the same period last year. Active users increased 7.5% year over year from 71.1 million to 76.4 million in the second quarter of 2014.
Moreover, for the month of June specifically, Pandora had more than 25.0 million daily unique listeners every Friday, which is an all-time-high to date. Listeners consumed on average 21.1 hours in June, up 20.0% on a year-over- year basis.
Pandora’s share of the total U.S. radio listening market increased from 7.0% a year ago to 8.9% at the end of June. 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 formed an alliance with Stubhub as a part of the latter’s next stage concert series in order to extend support to emerging artists. The quarter also witnessed the introduction of Pandora’s Discovery Den to Miami as part of the hottest week in Latin music. This program was produced in collaboration with State Farm, P&G Orgulossa and Sprint.
Margins
Operating expenses (including stock-based compensation), as a percentage of revenues, surged 430 basis points (bps) to 48.0% in the quarter. The significant year-over-year increase was primarily due to higher sales & marketing (up 230 bps), product development (up 100 bps) and general and administrative expenses (up 110 bps) in the quarter.
Pandora reported an operating loss of $11.7 million compared with a loss of $6.8 million in the year-ago quarter. Net loss (including stock based compensation) was $11.5 million or 6 cents per share compared with net loss of $1.5 million or a penny reported in the year-ago quarter.
Balance Sheet & Cash Flow
The company exited the quarter with $437.9 million in cash and investments compared with $445.9 million in the prior quarter.
In the quarter, the cash outflow from operating activities was $7.1 million as compared to $4.6 million in the year ago quarter.
Outlook
For the third quarter of 2014, revenues are expected to be in the range of $235.0 million to $240.0 million. The Zacks Consensus Estimate for the same is pegged at $234.0 million. The company expects to report earnings in the range of 5 cents to 8 cents per share.
For 2014, revenues are expected to be in a range of $895.0 million to $915.0 million, up from the prior range of $880.0 million to $900.0 million. The Zacks Consensus Estimate stands at $895.0 million. Earnings are expected to be in the range of 16-19 cents per share for the full year, up from the prior guidance of 14-18 cents per share.
Our Take
Pandora reported not-so-encouraging second quarter results. Management provided a pessimistic guidance for the third quarter as it intends to plough back a majority of its profits in the business.
Improving monetization and strong mobile growth are positives. We believe that Pandora will benefit from growing listening hours, market share gains and introduction of the new music recommendation unit called Promoted Stations. These stations will feature sponsor-branded listening stations.
We believe that this newly-launched feature will work especially well on mobiles, which accounts for about 80.0% of Pandora’s overall listening and 74.0% of the company’s last-quarter revenues.
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, Google, Spotify, and Sirius XM.
Currently, Pandora has a Zacks Rank #3 (Hold).
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