Pandora Media's New CEO Sees Room for Improvement

Pandora Media (P) announced third-quarter 2017 results on Thursday after the market closed, highlighting strong subscription revenue growth and a new company record for ad RPMs (or revenue per 1,000 listener hours). The music streaming leader also marked the completion of its previously announced deal with Sirius XM (SIRI -1.29%) and its planned divestment of Ticketfly, providing a massive boost to its coffers in the process.

But Pandora also warned of difficult market conditions for its advertising business in the months ahead, and offered fourth-quarter guidance that left investors wanting more. 

Let's take a closer look at how Pandora kicked off the second half of the year and what we can expect from the company going forward.

IMAGE SOURCE: Pandora Media.

Pandora Media results: The raw numbers

Data source: Pandora Media, Inc.

What happened with Pandora Media this quarter?

• On an adjusted (non- GAAP) basis, which excludes items like stock-based compensation and one-time divestment expenses, Pandora's net loss was $15.9 million, or $0.06 per share, slightly narrowed from an adjusted net loss of $16.1 million, or $0.07 per share in the same year-ago period.
• After adjusting for the divestiture of Ticketfly and the wind-down of its Australia/New Zealand business (announced last quarter), Pandora's revenue would have grown 10% year over year.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) arrived at a loss of $5.3 million, narrowed from an adjusted EBITDA loss of $6.6 million in the same year-ago period.
• These results compared favorably to Pandora's guidance provided in late July, which called for revenue in the range of $370 million to $385 million and an adjusted EBITDA loss in the range of $20 million to $5 million.
• As expected, this quarter included two months of ticketing service revenue from Ticketfly in the amount of $18.5 million (up 16% year over year).
• Paid subscribers climbed 29% year over year to $5.19 million, driving a 50% increase in subscription and other revenue to $84.4 million. Within that, paid Pandora Premium subscribers exceeded 1 million in the month of October.
• Average revenue per paid subscriber (ARPU) climbed to $5.58, up from $4.82 last quarter. Licensing costs per paid subscriber (LPU) rose to $3.87, up from $3.11 last quarter.
• Advertising revenue climbed 1% year over year to $275.7 million, as a higher average price per ad was offset by a lower number of ads sold.
• Pandora's Ad RPMs climbed 21% to a company-record $70.27.
• Total listener hours fell 4.6% to 5.15 billion.
• Active listeners were 73.7 million during the quarter, down from 76 million in Q2, and 77.9 million in last year's third quarter. Note this excludes roughly 1.1 million active listeners from Australia and New Zealand.
• Ended the quarter with cash and investments of $499.4 million, including gross proceeds of $307.5 million from the close of the second tranche of Sirius XM's investment in the company and $150 million from the sale of Ticketfly.
• Appointed Roger Lynch -- the former founding CEO of Sling TV -- as Pandora's new CEO, effective Sept. 18, 2017.

What management had to say

Lynch stated:

After just a short time here at Pandora, it's clear to me we have a tremendous opportunity to meet the full spectrum of our listeners' and advertisers' needs. We have significant scale, distribution and products that deliver a superior listening experience. We will leverage these strengths to become a more integral part of our listeners' lives and reinforce our position as the definitive source for audio advertising.

During the subsequent conference call, Lynch elaborated that he wants to help Pandora tap into new forms of content like podcasts, spoken word, and traditional radio to attract new and lapsed listeners. Pandora will also expand its partnerships to foster new distribution opportunities on smart devices, connected home solutions, and automotive. Lynch further hopes to expand Pandora's recent reach into "rewards-based" advertising -- that is, ads that allow users to unlock features like more skips, song replays, and on-demand listening. Next, Lynch believes that Pandora has an opportunity to better optimize its marketing execution, specifically with more disciplined allocation of marketing dollars and more aggressively leveraging partner marketing. 

Perhaps most important, Lynch believes that Pandora needs to invest more to address significant ad-tech gaps to make itself a more attractive, efficient partner to advertisers and better compete with its digital peers. For example, Pandora will soon be expanding access to its data and engagement metrics to give advertisers a better way to monitor and adjust their respective campaigns.

Looking forward

In the meantime, after coupling those ad-tech challenges with persistent difficult ad market conditions in the fourth quarter, Pandora anticipates fourth-quarter revenue will be in the range of $365 million to $380 million -- far below the roughly $413 million investors were expecting. Trending toward the bottom line, Pandora expects to incur an adjusted EBITDA loss of $15 million to $5 million. 

To be fair, Pandora is up against a difficult comp; the midpoint of that range represents modest 3.3% growth after adjusting for the sale of Ticketfly, the Australia/New Zealand exit, and roughly $10 million of political advertising revenue recognized ahead of last year's elections.

Bottom line: This was a reasonably solid quarter, and Pandora's new CEO has put together an ambitious plan to help the company realize the full potential of its enviable audio streaming platform. But that's little consolation for a market that hates being effectively told to "hurry up and wait" for the plan to bear fruit. It's no surprise, then, to see that Pandora shares pulled back hard in after-hours trading.