Pandora (NYSE:P) has a revenue problem.

In its most recent earnings report, revenue growth looked good, but core business metrics were lackluster for the Internet radio company. With no way to monetize existing users and legal settlements surrounding song royalty violations, Pandora has suffered from inconsistent market growth year-over-year.

The streaming service needs to find a way to sell more ads, charge higher prices, and keep people on its service longer. Those are major tasks given how much competition the company faces.

On this video segment, Motley Fool analysts Dylan Lewis and Sean O'Reilly run through the numbers and see what has been going wrong for the company.

Listen to the full podcast by clicking here. A full transcript follows the video.

 

This video was recorded on Nov. 13, 2015.

Sean O'Reilly: So the first company we're talking about is Pandora. I know you have an attachment for this company. My son does. He actually knows how to go pull up Pandora on our phone and play nursery rhymes.

Dylan Lewis: Nice.

O'Reilly: Which is endlessly scary. But anyway.

Lewis: I always forget about how deep their catalog is. It's beyond standard pop rock music. The standup comedy channels that they have, some of the kids' stuff that they have... it's kind of surprising.

O'Reilly: Mary Poppins, ABC's, Barney.

Lewis: The things you forget about when you don't have children.

O'Reilly: Yeah. So the benefits of the product aside, they're having a rough time making money. Tell us a little bit about that.

So basically with them earnings happened, right? That's what happened, that's what caused all this devastation. So the company reported in late October over the last three months they'd reached peaks of 22 bucks a share. They're down around $13 right now.

O'Reilly: When we last talked about them, where was it? I mean the number 25 pops in my head but I feel like that's wrong.

Lewis: No, it was a little lower than that, and when we did our check-in post-acquisition of Ticketfly. I think that was about a month ago and they were in the high teens, maybe low 20s around then. Basically, in their quarterly report, we look at some of the main metrics for their business and they are a little disappointing. So listening hours and active listeners. Those are kind of your two money metrics to look at for an ad-based business. So listening hours were up just 3% year over year and down 3% sequentially.

O'Reilly: This is 2015. We're all supposed to be moving to the cloud and online and stuff, CDs are supposed to be dead, those are really low. That's not what you want.

Lewis: Not what you want. And active listeners up 2% year over year, so they reached 78 million but down 2% sequentially. So, again, like you're seeing some growth year over year, but you're not seeing it sustained over the calendar year, which is kind of frustrating.

O'Reilly: Do you feel like, and you might have some thoughts on this later, but have they reached the saturation point? Because $78 million, 78 million listeners is a respectable number. But I mean is it, they got everybody, and now they just need to wait 10 more years for more people or what?

Lewis: I think that's the market concern right now. So you look in ad-based business, the ways to make more money are to grow your listener base or have your listener base on there longer. Those are the multiples in that equation. And so if you see them starting to plateau, then you need to see them also becoming profitable.

The people that invest in tech have an appetite for losses so long as it's coming with nice growth that can eventually be monetized well. And I think people are worried that we're hitting saturation on the service, but the monetization plan isn't clear yet and it could be even more cloudy in a month or so when the new ruling comes out on their royalty rates.

O'Reilly: Right and that, of course, still remains to be seen. Revenues were up a bunch but for funny reasons.

Lewis: Yeah, so they were up 30% year over year. They hit $311 million in revenue, which was pretty solid.

O'Reilly: For a quarter, yeah.

Lewis: But losses widened. They get crushed with legal settlements about some song royalties that dated prior to 1972 I think. So it's a sign that it's just been tagging them along for a little while.

O'Reilly: Michael Jackson's estate, owner of the Beatles album, suing them?

Lewis: So they wound up with a charge of I think it was $85 or $90 million.

O'Reilly: If that hadn't been there, would it have been a decent quarter?

Lewis: It would've been all right. I think they would've been just about breakeven.

O'Reilly: OK, so it is still highly depressing.

Lewis: But, yeah, I mean it was a big charge for them to take and obviously the market was not happy to see the losses widen, but I think it's really more of an issue of the core metrics for the business of active listeners and listening hours.

Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.