Pandora Media (NYSE:P) is set to release fourth-quarter 2015 results this Thursday, Feb. 11, after the market close. With last quarter's painful 40% post-earnings plunge still fresh on investors' minds, you can bet the streaming music specialist is eager to show skeptics their pessimism was misplaced.
For perspective, analysts' consensus estimates predict Pandora's Q4 revenue will grow 23.8% year over year to $331.8 million, and translate to adjusted net income of $0.07 per diluted share. And Pandora, for its part, expects revenue to be in the range of $325 million to $330 million, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) should be $25 million to $30 million.
But keep in mind that last quarter's plunge had little to do with Pandora's actual financial performance in Q3; Pandora's revenue fell firmly within its guidance range, and adjusted EBITDA arrived well above expectations. Rather, the market panicked for three primary reasons that bullish investors hope will change for the better in this week's report.
Music from Cupertino
First, Pandora revealed that active listeners climbed just 2.1% year over year to 78.1 million but fell from 79.4 million in the second quarter. Pandora CEO Brian McAndrews blamed the widely publicized launch of Apple Music in June, leaving investors to fear intensifying competition was finally getting the better of the company.
However, McAndrews also reminded investors that he warned such a decline was possible during Pandora's second-quarter conference call. Going even further, he insisted that "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."
Recall that Pandora effectively rebuked Apple's more direct competitor two years ago, returning to growth shortly thereafter. Nonetheless, investors will be listening closely in this week's call for signs that the negative effects of its latest competing platform are indeed temporary.
Second, Pandora surprised investors last quarter by unveiling a $90 million settlement covering roughly 90% of its use of pre-1972 recordings, both in the past and through the end of 2016. Though some industry watchers chided the deal as too costly -- and keeping in mind Sirius XM struck a similar $210 million agreement covering it through 2017 only a few months earlier -- McAndrews defended it as an effort to "strengthen our relationships across the music landscape by resolving a historic source of tension."
That said, Pandora also took a charge of $57.9 million last quarter related to the settlement, and investors should anticipate seeing the remaining $32.1 million recorded to cost of revenue in the periods between the current (fourth) quarter and the end of 2016.
On a related note, you might recall that Pandora stock popped in December following a positive decision from the U.S. Copyright Royalty Board on its "Web IV" royalty rate-setting proceeding. That decision dictates that Pandora Media's music royalty costs will climb 15% in 2016 -- at least for music not covered under direct deals with publishers. That might sound like bad news at first, but Pandora management noted that it was well within its range of expected outcomes, with McAndrews calling it a "balanced rate that we can work with and grow from."
That's also not to mention the decision removed a long-standing source of uncertainty -- even though Pandora continues to sign more direct agreements with publishers with each passing quarter, with its list growing in December to include deals with ASCAP, BMI, and Atlas Music Publishing.
That's not to say these are the only driving factors behind Pandora Media's business. The company only just closed on its acquisition of certain technology and IP from bankrupt on-demand music company Rdio in December, with which Pandora hopes to accelerate its "plan to substantially broaden its subscription business and roll out a multi-tier product offering by late 2016."
Before that, in early November, Pandora completed its acquisition of TicketFly -- something that McAndrews stated during last quarter's call "will be truly transformative, extending our long-standing strength in music discovery to the large and fast-growing world of live events."
Keep in mind that any contributions from these initiatives aren't included in Pandora's full-year 2015 guidance, which it lowered last quarter to call for revenue in the range of $1.153 billion to $1.158 billion (down from $1.175 billion to $1.185 billion previously), and adjusted EBITDA of $51 million to $56 million (down from $75 million to $85 million).
During last quarter's call, management explained its expectations for for modest 3% growth in listener hours for the fourth quarter, which effectively limits inventory available to drive revenue higher. To blame was a combination of Pandora's choice to focus on "high-quality monetization" rather than chasing every dollar possible, as well as adjusting its focus toward executing on industry partnerships and integrating its acquisition of TicketFly.
That's fair enough -- even if it meant falling short of growth-hungry investors' quarterly demands. If it meets those demands with this week's report, so much the better. But ultimately, this should allow Pandora to emerge a stronger, more diversified business, and one more capable of achieving sustained profitable growth down the road.