Pandora Media (P) is up more than 30% over the past month, and for good reason: When the company reported second-quarter results on July 23, 2015, it easily outpaced analysts' estimates for both its top and bottom lines.
But as a music streaming specialist with nearly 80 million active listeners, Pandora's business is about more than just revenue and earnings. Luckily for investors, Pandora management regularly spends some time with analysts discussing its results each quarter, which goes a long way toward helping us fully understand what drives this promising company. Here are five of the most important points Pandora discussed during this quarter's call:
1. Listeners are as loyal as ever
In terms of listeners as of the end of June 2015 -- traditionally a seasonal low point -- monthly active users were 79.4 million, an increase of 4% over last June and up slightly from last year. Our listeners continue to be increasingly engaged as listening hours per active user grew to 22.2 hours this quarter. Total listener hours were 5.3 billion for the quarter, a 5% increase from this time last year. -- Pandora CEO Brian McAndrews
For clarification, that growth in hours listened outpaced growth in the actual number of listeners is a strong indication each of Pandora's listeners have become more loyal to the service over the past year. What's more, McAndrew's later noted that due to a combination of better playlisting functionality and recent improvements to the user interface, Pandora has seen less song skipping over the same period. In turn, this reduces the number of songs paid for but not fully played, and has a short-term negative impact on reported listener hours. Considering Pandora's listener hours grew in spite of this impact, McAndrew's rightly called it a "very positive sign about the long-term health and potential" of Pandora's business.
2. Programmatic ads on mobile launched ahead of schedule
[W]e launched our new programmatic offering in mid-June ahead of the Q3 schedule and we are very pleased with the early advertiser interest and reaction, which we expect to translate to more meaningful revenue in 2016. This is a nascent category, one we are helping to define and educate marketers on and one with huge potential. -- Brian McAndrews
Next, Pandora launched its programmatic ad-buying solution for mobile devices on June 18, 2015. And in contrast to at least one analyst's skeptical view in light of what he called "tepid buyer enthusiasm" for the service, investors are rightly encouraged with the "very pleased" state in which Pandora management currently finds itself. Between Pandora's new sponsored listening ads (which allow users to enjoy an hour of uninterrupted listening with engagement of a brand's video or rich media at the beginning of the session), the results put up by its growing local ad sales force (local advertising grew 67% last quarter), and this new programmatic offering, Pandora should be poised to enjoy sustained revenue growth in the coming quarters.
3. Monetization is stronger than ever
While we continue to grow audience, our monetization efforts have really hit their stride. Total [revenue per 1,000 listening hours] reached a record high of $53.91 during the quarter, an impressive $10.50 increase year-over-year and $2.37 higher than Q4, traditionally our seasonal peak. -- Brian McAndrews
The proof is in the pudding: Pandora's overall revenue climbed 30% year over year to $285.6 million, a new company record despite the seasonally slow quarter. All told -- and though it's admittedly a somewhat arbitrary measure -- McAndrews also pointed out that Pandora has officially crossed the $1 billion threshold for trailing-12-month revenue.
4. Apple (AAPL 0.47%) Music's debut was a non-event
In terms of the Apple Music, in Q2, of course, Apple Music launched at the end of June, so there was no impact in terms of going forward, you know we feel really good about our trajectory competitive and position. I think it's really obviously very early days and with any big launch like this and the noise and things happening in the marketplace, there could be some listeners who experiment with the service and there could be some short-term impact, but we don't –we aren't seeing any meaningful listener impact at this time and we don't expect any long-term meaningful impact either. -- Brian McAndrews
Next, it turns out many industry pundits were overly concerned with the widely publicized debut of Apple Music during the quarter, especially knowing the folks in Cupertino offered users a three-month free trial in an effort to kickstart the competing streaming music service.
That's not to say Apple's offering doesn't still hold promise; last week, Apple senior VP Eddy Cue revealed in a USA Today interview that Apple Music reached 11 million users in the five weeks since its launch. To be fair, though, those users are still within their free trial period, so it remains to be seen how many will stick around when the time comes to pull out their wallets. For now, it's no surprise Pandora management isn't particularly concerned.
5. Copyright Royalty Board arguments are complete
On [July 21, 2015], the month-long trial portion of the Copyright Royalty Board's rate-setting proceeding concluded with closing argument. We presented a comprehensive case with experts and witnesses and are confident in the positions laid forth in our filings and trial presentations to the CRB Judges. [...] We'll now wait until to hear the CRB determination but are already planning for a range of scenarios, and are confident in Pandora's ability to deliver long-term growth no matter what outcome the Court decides. -- Pandora CFO Mike Herring
For perspective, this royalty rate-setting proceeding -- often referred to as "Web IV" -- was commenced by the CRB last year with the goal of determining rates and terms for webcasting under the license used by Pandora (and thousands of other digital radio services) from the beginning of 2016 through 2020. However, royalty collector SoundExchange wasted no time early on requesting the CRB raise royalties to a rate much higher than Pandora says it can afford.
This is a potentially a huge problem for Pandora, as content costs are its single biggest hurdle to achieving sustained long-term profitability. During each of the last fourth quarters, for example, Pandora has paid at least $100 million in royalties to rights holders, and by the end of last month had totaled more than $1.5 billion in royalties paid since its founding.
As I wrote this past December, however, the CRB proceedings could be a moot point. Even if the ruling is unfavorable, Pandora still has the option of signing more direct deals with labels to achieve terms acceptable to both parties. This alternate resolution explains Herring's "no matter what outcome" comment above.
With that in mind, and given all the other catalysts Pandora management discussed during this quarter's call, I see no reason Pandora stock won't be able to continue rewarding patient shareholders going forward.
