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Pandora's (NYSE: P ) held up just fine in fiscal 2013, and now we'll have to see if it can hold up in what promises to be a contested new fiscal year.
Shares of the leading music streaming service moved sharply higher in early trading Friday on better-than-expected quarterly results.
Revenue soared 54% to $125.1 million, and Pandora's net loss clocked in at $0.04 a share. This is actually better than the $0.05 a share deficit that Wall Street was targeting, making this the fourth consecutive quarter that the dot-com speedster has beat analyst estimates on the bottom line.
I had four questions going into the report. Let's see how Pandora responded.
1. Is sequential growth resuming after a soft January?
Pandora's sequential slide in active users for the month of January was problematic, slipping from 67.1 million listeners in December to only 65.6 million users a month later. The number of hours streamed was flat at 1.39 billion.
How would February's data pan out? Well, it was surprisingly upbeat. Don't let the 1.39 billion hours of streaming activity trick you. February had three fewer days! The number of active listeners for the month spiked to a record 67.7 million.
The only bad news here is that Pandora's guidance calls for $120 million to $125 million in revenue for the current quarter, and that's a sequential dip even at the high end after generating $125.1 million in revenue. However, the market was already braced for a slide to $119.5 million, so even that is welcome news.
2. Why did it start capping free mobile usage?
Pandora's decision to cap free usage through mobile devices at 40 hours a month last week was interesting. Despite arguing that just 4% of its users were bumping up against this ceiling, Pandora is making premium subscriptions and fees a priority.
Since Pandora has to shell out roughly $0.12 for every 100 songs it serves and bandwidth costs aren't exactly cheap, nipping aggressive freeloaders in the bud is a reasonable strategy. Monetization through ads has a long way to go for streaming services, though Pandora's getting better at it as it grows.
One fear -- that mobile monetization was starting to sputter, hence the push for tollbooths -- was debunked. Pandora's mobile revenue outpaced mobile listener hour growth, hitting a new record in revenue per listening hour.
3. Is Advertising revenue still growing faster than subscription revenue?
The one hole in Pandora's model is that too many people aren't paying.
In its fiscal third quarter, subscription revenue climbed slower than ad revenue, accounting for just 11% of the revenue mix.
The market likes premium. Sirius XM Radio (NASDAQ: SIRI ) is profitable and trading at a four-year high this week because folks are willing to pay for it. Spotify is a global darling because it has millions of premium subscribers.
Pandora has struggled, but it actually reversed the trend during the fourth quarter.
Subscription revenue's growth spurt of 74% exceeded the 51% uptick in ad money. Subscription revenue gobbled up nearly 13% of the total revenue. This needs to grow, but at least Pandora is moving in the right direction.
4. Will guidance for the new fiscal year meet or exceed estimates?
Fiscal 2014 -- which began last month -- is going to be a telltale year for Pandora. The competitive landscape is heating up.
Spotify, Sirius XM, and even terrestrial radio's iHeartRadio have rolled out personalized radio offerings to compete against Pandora.
The titans of tech are also starting to move in. Google (NASDAQ: GOOGL ) is now rumored to be rolling out not one but two music streaming services. One will go through Google Play and the other will be branded through YouTube. Billboard reports this week that Google has inked a licensing deal with Warner Music Group.
Apple (NASDAQ: AAPL ) is the other inevitable player here. Sources are telling Reuters this week that Apple has held talks with audio tech firm Beats Electronic on a partnership for the music service that Beats announced earlier this year. The New York Post is reporting that Apple is talking to record labels, trying to negotiate a streaming rate that would be half of what Pandora is paying.
With all of these fireworks and fisticuffs on the way, can Pandora hold up?
Well, Pandora's guidance is calling for $600 million to $620 million. The midpoint of its bottom-line range is break even. Analysts were forecasting a loss of $0.02 a share on $600 million. Naturally we'll have to see how some of the new players roll out before relying on Pandora's outlook, but at least the prognosis is good for now.
Cracking open Pandora's box
Pandora has won millions of devotees among music fans but few supporters on Wall Street. The online jukebox seems to be redefining the way we consume music, a transformation that's only likely to grow. But high royalty rates and competition from all corners threatens to silence the company. Can Pandora translate success with its listeners into a prosperous business model that will deliver for investors? Learn about the key opportunities and potential pitfalls facing the upstart radio streamer in The Motley Fool's new premium research report. All you have to do is click here now to subscribe to this invaluable investor's resource.