Please ensure Javascript is enabled for purposes of website accessibility

Is the Competition Catching Up With Pandora?

By Adam Levy - Feb 6, 2014 at 8:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pandora guided for weak earnings in 2014 as it spends heavily to outdo the competition.

Pandora Media (P) released its earnings on Wednesday for the two-month stub-period to align its fiscal year with the calendar year. The results were better than expected, with the company's new fourth quarter bringing in $200.8 million in revenue to produce $0.11 in earnings per share, minus items. The Street was expecting revenue of $201.1 million and $0.07 per share after Pandora announced better-than-expected listener metrics for the month of December.

Still, the stock plunged after-hours due to a weak outlook. Although revenue was in line with expectations, profitability was lower than analysts had hoped. Is this a sign that competition from the likes of Apple (AAPL 0.24%) and Google (GOOGL -0.14%), among others, is starting to weigh heavily on the Internet radio leader?

Unsurprising surprise
Pandora's fourth-quarter results were in line with expectations after the company telegraphed results with its listener metric data. In its third-quarter report, the company had forecasted revenue of $132 million-$136 million for the stub-period. The company ended up bringing in $137.2 million.

It was a foregone conclusion after reporting a combined 3.07 billion listener hours in November and December that the company would be able to top its outlook. Based on its third-quarter revenue per thousand listener hours, or RPM, of $43.48 and the fact that the holiday season usually results in higher ad prices, this revenue "surprise" is no surprise.

For the stub-period, Pandora produced an RPM of $44.78 -- a new record. It's worth noting, however, that the vast majority of RPM growth came from desktop users, which brought in $64.07 per thousand listener hours. That's a huge jump from the $57.44 RPM the company generated from desktop users in the prior three months. Mobile RPM was nearly flat, increasing just $0.25.

Part of what may be weighing on mobile RPM is listeners with Pandora capabilities in their cars. The company doesn't yet monetize those listeners, but plans to in 2014. Once ads start rolling out in cars, the mobile RPM number will increase, but prices for in-car ads will likely be lower than traditional mobile, and certainly lower than desktop.

Surprisingly poor outlook
Pandora's outlook for the first quarter and fiscal 2014 was very disappointing. For the current quarter, the company expects earnings per share losses in the range of $0.14-$0.16, where the Street expected a loss of $0.12 per share. For the year, management forecasted earnings between $0.13-$0.17 per share. The Street expected $0.19 per share. Revenue guidance was also slightly below expectations.

It's evident the company is spending heavily on things besides music licensing. Strong competition from Apple's new iTunes radio and Google's music subscription service, in addition to Spotify, Rdio, Beats Music, and YouTube, are crowding the space Pandora once occupied alone. As a result, the company needs to spend heavily to attract advertisers and continue growing listeners.

Both Google and Apple have the advantages of mobile ecosystems, which give them the ability to build their services directly into a mobile OS. iTunes radio attracted 20 million listeners in just a few weeks thanks to this advantage. Additionally, as people turn to YouTube to stream songs on demand, Google is better able to monetize them due to its wealth of data on its users.

In Pandora's earnings release, CEO Brian McAndrews said the company will "continue to aggressively invest in 2014." This will have an impact on the bottom line as it fends off competition and attracts new listeners. The plan is to stay in growth mode, for now.

Listener growth is slowing, however. On Wednesday, the company released listener metrics for January, and active listeners fell to 73.4 million from 76.2 million in December. Although this is seasonal, the year-over-year growth in listener hours was just 13% after the company had been growing listener hours near 20% just a few months ago and last January grew listener hours 47%.

Bottom line impact
Although Pandora reported good results for its stub-period, the competition is apparently catching up, not necessarily in listener metrics, but in financial metrics. This competitive pressure isn't going away any time soon, and it will eventually impact music licensing costs when the company's current agreements expire. Pandora's product is stickier than most of its competition, but the company needs to spend heavily to remain on top.


Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google, and Pandora Media. The Motley Fool owns shares of Apple and Google. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$169.66 (0.24%) $0.41
Alphabet Inc. Stock Quote
Alphabet Inc.
$119.53 (-0.14%) $0.17
Pandora Media, Inc. Stock Quote
Pandora Media, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.