Pandora Media (P) released fourth-quarter 2015 results Thursday after the market close, but not before stirring up some excitement earlier in the day. Shares of the streaming-music specialist closed up around 8.5% in Thursday's regular session following a report that it was in talks to sell itself, then largely gave up those gains in after-hours trading following its official earnings release.
I don't expect the company to shed light on these reported talks at this stage. So for now, let's talk about what Pandora Media accomplished in Q4, and where it's headed from here.
The headline numbers
Quarterly revenue climbed 25.4% year over year, to $336.2 million, while adjusted earnings before interest, taxes, depreciation and amortization fell 43.4%, to $24.8 million. For perspective, Pandora's guidance called for lower revenue of $325 million to $330 million, but higher adjusted EBITDA of $25 million to $30 million. Keep in mind, however, that excluding the negative effect of Ticketfly -- which Pandora acquired last quarter for $450 million -- adjusted EBITDA would have been in line with expectations at $27.3 million.
Based on generally accepted accounting principles (GAAP), that translated to a net loss of $19.4 million, or $0.09 per share. On an adjusted (non-GAAP) basis -- which adds perspective by excluding items like stock-based compensation and acquisitions expenses -- Pandora's net income was $10.2 million, or $0.04 per diluted share.
On active listeners, monetization
Pandora's massive post-earnings plunge three months ago arguably had little to do with its actual financial performance, but rather came as a reaction to concerns over increasing competition, royalty settlements, and declines in active listeners. Pandora's active listeners at the end of Q4 fell slightly (down half a percent) from the same year-ago period, to 81.1 million, but also climbed just more than 3.8% sequentially, from 78.1 million in Q3.
In addition, Pandora's market share of U.S. radio listening also grew to a new all-time high of more than 10%, while total listener hours grew 3.3%, to 5.37 billion. It's encouraging to see this sequential increase in listeners, particularly as Pandora distances itself from the launch of one certain Cupertino-based music service.
Meanwhile, total revenue per 1,000 listening hours (RPMs) grew 18% year over year, to $60.75, and ad RPMs climbed 19%, to $57.20 -- both new company records. Pandora's advertising revenue climbed 22% year over year, to $269 million, while subscription and "other" revenue combined to increase 19%, to $57 million. In addition, ticketing-service revenue from TicketFly totaled $10.2 million.
On royalties, plans for the future
Referring to last quarter's $90 million settlement for its use of pre-1972 recordings, Pandora also confirmed that the first and second installments of $60 million and $7.5 million were paid in October and December 2015, respectively. The remaining amount will be paid in three equal installments of $7.5 million from April 1, 2016 through October 1, 2016.
Pandora CFO Mike Herring explained during the subsequent call that in 2016, content costs are expected to increase roughly $160 million from 2015, due to a combination of the recent "Web IV" royalty decision from the Copyright Royalty board, the pre-1972 settlement, and recently signed direct-publishing deals. Although this means that Pandora's progress driving gross profit and EBITDA in recent years will take a step back, Herring says, "these events have significant long-term upside as they have created the certainty and fixed cost framework that will allow us to drive improving profit margins over the next few years."
Looking forward to Pandora's longer-term plans, Pandora CEO Brian McAndrews stated:
We enter 2016 with an enhanced portfolio of assets, cost certainty and substantial competitive advantages. We're invested in the long-term and I could not have more conviction about the ability of Pandora to lead the future of music. Given our confidence in our core advertising model, the massive long-term opportunity and the competitive advantages we have built, we believe 2016 is the time to build on this foundation and invest in our many opportunities to fuel revenue acceleration in 2017 and bolster long-term growth prospects.
For the current quarter, Pandora expects revenue of $280 million to $290 million, which should result in an adjusted EBITDA loss of $75 million to $65 million. For the full-year 2016, Pandora anticipates revenue of $1.40 billion to $1.42 billion, and an adjusted EBITDA loss of $80 million to $60 million.
So why the big adjusted EBITDA losses? During the subsequent conference call, McAndrews explained that Pandora is planning to invest heavily to expand the scope of its business from advertising and subscription to the world of music transactions and commerce, including its entrance with an on-demand product using technology acquired from Rdio later this year. In doing so, Pandora will grow from "just" the roughly $45 billion U.S. radio and digital advertising market to the "much larger $200 billion global music marketplace."
For example, Pandora believes that, during the next five years, it can build a $1.3 billion subscription business as new product tiers are launched and adopted, conservatively based on converting 10% of its U.S. audience. To accomplish that goal, Pandora has initiated investments totaling $345 million in 2016 aimed at scaling infrastructure and building new lines of business. This includes:
- $120 million in marketing, including $80 million in external marketing spend
- $100 million in product development (8% of revenue, up from 4% in 2015) driven by acquisition of assets and talent from Rdio in January
- $125 million in general and administrative expenses (or 10.2% of revenue, up from 9.4% last year) including content licensing and reporting infrastructure
- $120 million for developing and launching new music services to accelerate revenue growth starting in 2017
Meanwhile, an additional $80 million to $90 million in Ticketfly revenue will largely cover the live-events platform's negative impact to EBITDA in 2016. Combined with roughly $275 million in contribution margin from Pandora's core business, this is how Pandora came to its mid-point estimate for an EBITDA loss of $70 million in 2016.
McAndrews summed up the company's bold plans well:
Simply put, it is a generational opportunity to drive the future of music for years -- if not decades -- to come. And in 2016 with a profitable core business -- even with the step-up in royalty rates -- combined with a strong balance sheet and clear path to grow profitability in our core business, we are confidently making the decision to invest now to fully capture that opportunity, which is why we are comfortable being temporarily EBITDA negative.
In the end, it remains to be seen how the market reacts to Pandora's expensive ambitions. But this does give investors their clearest picture yet on the company's plans to dominate the music industry going forward.