Moving Upstream: Pandora's Must-See Quarter

Pandora's first-quarter report showed an important metric improvement that could strengthen the company's foundation -- and put an Apple battle to rest.

Apr 26, 2014 at 11:30AM

Pandora (NYSE:P) shares fell more than 4% after the market closed Thursday following its first-quarter report. The music streaming company met analyst estimates, but the structure of the business requires deeper digging. Pandora actually loses money with an increase of listeners, thanks to content-acquisition costs. Were the first-quarter metrics enough to support the costs, or will Pandora fall behind newer streaming services from Google and Apple (NASDAQ:AAPL)?  

Analysts had estimated revenue of $180 million and a loss per share of $0.14. Pandora met revenue estimates -- year-over-year growth of 54% -- and posted a loss per share of $0.13. Listener hours increased 12% from the prior year's quarter to 4.8 billion, while the number of active listeners at the end of March increased 8% to 75.3 million.

But increased listeners don't matter if Pandora can't monetize those listeners enough to offset costs. Did Pandora hit this mark in the first quarter? 

Key metric shows big improvement
Advertising accounted for more than 78% of first-quarter revenue, with the rest coming primarily from paid subscriptions. The monetization metric that matters most for Pandora is advertising revenue per thousand listener hours, or ad RPMs. The company breaks this number down into two segments based on listening platform: traditional computer versus mobile and other connected devices.

Here's a look at historic ad RPMs updated with the first-quarter results:

Pandora Ad Rpms

Source: Pandora Media 

First-quarter ad RPMs were up year over year, with an 18% increase for traditional computers and a 44% increase for mobile and other connected devices. The numbers dropped a bit from the fourth-quarter report, but that's the nature of Pandora's business. Advertisers increase purchases going into the holiday season and then draw back.

Was that growth enough to offset the costs of revenue? Pandora reported its highest first-quarter gross profit at about $71 million. That's a bit shy of four times the gross profit reported in the first quarter of last year.

So, Pandora's monetization model has improved. But there are still questions about whether the company can continue to rise amid increasing competition from Google and Apple.

Can Pandora hold off Apple?
No. That one is easy. Apple isn't concerned with competing with Pandora. A recent Edison Research survey showed that far more users were aware of Pandora's streaming service than Apple's, but Apple doesn't have as much at stake since its service is at best a minor side project.  

I previously detailed the estimated content acquisition costs for Pandora compared to Apple's iTunes Radio and Google's Play Music All Access. But the important takeaway was that it doesn't matter to Apple or Google if their content costs are more than Pandora's. The companies only offer Internet streaming as a means to an end: collecting more shoppers for the app stores.

Apple reported its second-quarter results on Wednesday and disclosed during the conference call that there are now approximately 800 million iTunes accounts. The majority of accounts have a linked payment method for purchasing content. So, Apple can easily offset the content-acquisition costs if it brings more people into the iTunes ecosystem.

Foolish final thoughts
Content-acquisition costs remain a problem for Pandora, especially with record labels prone to suing for higher payments. But the company has done an impressive job of improving the ad RPMs, while the gross profit for the first quarter was worth cheering. The competition question is less "Can Pandora hold off Apple?" and more "Does Pandora need to hold off Apple?" The first-quarter results suggest that the answer to the second question is no. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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