Though Pandora's revenue and earnings were technically inline with the company's expectations, investors panicked when monthly active listeners declined 1.6% from the previous quarter to 78.1 million. For that, Pandora primarily blamed the recent launch of Apple (NASDAQ:AAPL) Music. Pandora also unveiled a surprise $90 million settlement related to its use of pre-1972 music on the platform. And between the charges related to that settlement and expected lower growth in listener hours, Pandora reduced its guidance for revenue and adjusted EBITDA for the year.
But at same time, investors would be wise to seek perspective on these seemingly troubling developments. Lucky for us, Pandora CEO Brian McAndrews offered this perspective during the company's subsequent earnings conference call. Here are five crucial points McAndrews discussed during the call:
1. Déjà vu with the launch of Apple Music
The June 30, launch of Apple Music with its 3-month free trial, as well as significant category spending and trial offers across multiple players, brought increased focus to the broader on-demand category during this period. As we discussed on our Q2 call, we expected some short-term impact to our audience growth as listeners tried this highly promoted new service. I am pleased to say that, given the scale of press and consumer attention on this launch, the impact on our active users and listening hours was muted and was, in fact, consistent with what we experienced during the launch of Apple's radio service in 2013. -- (all quotes credited to Seeking Alpha)
First, it's important to note Pandora already warned investors three months earlier that this drop in users was possible. But it's equally important that, based on Pandora's prior challenge from Apple Radio two years ago, the company is happy the impact of Apple Music has been "muted," and should prove temporary when the dust settles. Time will tell whether that turns out to be the case, but keep in mind Pandora management has been correct in relation to Apple's music offerings so far.
2. Pandora's market share is still growing
By our estimates, Pandora's share of all U.S. radio listening is now 9.49% as of September 30, 2015, up from 9.06% at the same time last year. As measured by comScore, Pandora's total multi-platform unique visitors in September 2015 held constant year-over-year at 84.8 million.
Though Pandora saw fewer listeners compared to last quarter, active listeners actually grew 2% from the same year ago period. And those listeners were increasingly loyal, driving total listener hours up 3% to 5.14 billion. So it should come as no surprise Pandora's share of U.S. radio listening continued to rise in Q3 -- and not just from the same year-ago period as McAndrews notes, but also slightly from the 9.47% share Pandora commanded last quarter.
Also during the call, McAndrews elaborated that comScore's September Mobile Metrix ranked Pandora the No. 1 mobile service in the U.S. in terms of average minutes per user -- placing it ahead of even Facebook -- while Pandora's per-user engagement was more than double the next-largest mobile music service.
3. Monetization is stronger than ever
[O]ur monetization efforts continue to hit record levels. Total RPMs [revenue per 1,000 listener hours] reached a record high of $60.52 during the quarter, a $12.52 increase year-over-year. Ad RPMs were up 28% year-over-year to a record $56.84. As monetization continues to outpace hours growth, our revenue mix shifts to direct sales versus performance, resulting in higher RPMs and gross profitability.
As Pandora endures this temporary decline in listeners, investors can take solace knowing the company is more efficiently monetizing its listener base than ever before. For now, the bulk of that monetization comes from advertising, revenue from which grew 31% year over year last quarter to comprise nearly 82% of total sales. And within that, local advertisements showed the most impressive growth at 52%. Pandora's much younger programmatic advertising platform is also gaining steam, achieving $4 million in revenue so far in 2015.
Alas for now, it's still not enough to propel the company to sustained profitability. For that, Pandora will need to eventually resume growing its listener base as it continues building upon its encouraging monetization progress.
4. A (necessary) $90 million settlement
We took another important step to strengthen our partnership with the music industry, announcing a $90 million settlement with the RIAA and major record labels concerning royalty payments for pre-1972 sound recordings. This progress points to a greater opportunity to work collaboratively toward a bright future for music in a digital era, for those who make it, and the fans who love it.
Some investors balked at the size of Pandora's settlement, which covers roughly 90% of Pandora's spins on pre-1972 music both proactively and through the end of 2016. But we should remember this follows a similar $210 million settlement struck between record labels and Sirius XM last year. By comparison, Sirius XM's deal covered 80% of its pre-1972 spins retroactively and through the end of 2017. In the end, while the exact calculations behind the dollar signs remain confidential, I think Pandora was right to pursue this deal in order to quickly move forward in a friendly fashion with the industry professionals who make its existence possible in the first place.
5. Ticketfly is a "game changer"
Let me now turn to a big strategic move we made in Q3, the acquisition of Ticketfly, a company that is using technology to transform live events to make life better for artists, promoters and fans. This is a game-changer for Pandora and much more importantly a game-changer for music. Over the past 10 years, we have amassed the largest, most engaged audience in streaming music history. With Ticketfly, we will thrill music lovers and lift ticket sales for artists, as the most effective marketplace for connecting music makers and fans.
Finally, when Pandora announced last month it had agreed to acquire Ticketfly, it opened the doors not only to a promising incremental revenue stream, but also another catalyst to improve its relationship with artists and listeners alike. For one, McAndrews pointed out artists generate more than 80% of their income through touring, and that per-capita spending on live music and events rose 22% last year. What's more, he noted around 40% of all tickets go unsold at mid-market concerts "primarily due to lack of consumer awareness of the events."
And Ticketfly's business is booming; through the first nine months of 2015, it sold more than 16 million tickets with a gross transaction value of roughly $530 million, which equated to revenue of $52 million. That said, Pandora closed on its acquisition of Ticketfly on November 2, 2015, so it will recognize only a partial quarter of the ticket seller's revenue in Q4. But when Pandora integrates Ticketfly seamlessly into its platform, it hopes to accelerate its growth by connecting listeners directly to the events featuring music they'll love.
Steve Symington owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Facebook, 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.