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What to Listen For When Pandora Media, Inc. Reports Earnings

By Steve Symington - Apr 26, 2016 at 9:15PM

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The music streaming leader has a lot to prove this week.


Pandora Media (P) is set to release first-quarter 2016 results this Thursday after the market close. With Pandora stock still down 30% year to date as of this writing -- and this despite rebounding nicely from its post-earnings drop in February -- any good news could be music to investors' ears.

So what should investors be watching when Pandora's report hits the wires?

About that big investment plan
First, recall that in February, Pandora shares plunged after the music streaming specialist offered reasonably solid fourth-quarter 2015 results but surprised the market with light guidance and an aggressive plan to invest $345 million this year toward scaling infrastructure and building new lines of business. 

More specifically, Pandora said it would dedicate $120 million to marketing, $100 million to product development (which includes its acquisition of assets from bankrupt music streaming company Rdio earlier this year), $125 million in general and administrative expenses (including content licensing and reporting infrastructure), and $120 million for developing and launching new music services to accelerate revenue growth beginning next year. Regarding the last of those investments, Pandora believes it can build a $1.3 billion subscription business over the next five years by introducing new product tiers. Listen closely, then, for any updates regarding whether Pandora's ambitious plans remain on track.

But these investments also come at the expense of Pandora's bottom line. Pandora told shareholders it expects to generate an adjusted EBITDA loss of $75 million to $65 million in the first quarter -- that is, assuming it meets its guidance for revenue in the range of $280 million to $290 million. And with the caveat that we don't lend much credence to Wall Street's near-term demands, note that analysts' consensus estimates predict that Pandora will achieve revenue of $286.4 million and a net loss of $0.32 per share. 

Metrics that matter
But we also can't forget that Pandora is still maintaining a thriving music community as it stands. So as usual, expect to receive color on Pandora's monthly active listeners, which last quarter fell half a percent from the year-earlier period, to 81.1 million, but also climbed 3.8% on a sequential basis. To that end, note that Pandora issued a press release revealing that it has now paid more than $2 billion in all-time royalties to artists and songwriters, including $500 million over the past nine months alone. But it may have offered a hint at its most recent listener numbers in that release, stating, "Every month, nearly 80 million users now spend an average of over 23 hours" on the platform.

To be fair, that acceleration in royalty payments shouldn't be entirely surprising. Management told investors last quarter that royalties should increase around $160 million in 2016, thanks to a combination of its recent not-so-bad "Web IV" royalty decision from the U.S. Copyright Royalty Board, a $90 million settlement for its use of pre-1972 recordings, and other recently signed direct-publishing deals. Nonetheless, as Pandora CEO Brian McAndrew stated when the initial CRB ruling was issued, the new rate structure was "well within our range of expected outcomes [and] is a rate we can worth with and grow from."

We should also anticipate updates on Pandora's listener hours, which last quarter increased 3.3% year over year, to 5.37 billion. Most importantly, it's encouraging to see growth in listener hours continue to outpace the growth of Pandora's actual number of active listeners, as this indicates those listeners are increasingly loyal and active within Pandora's platform.

Pandora will also offer metrics to help gauge its progress monetizing that base. Total revenue per 1,000 listener hours (RPMs), for example, increased 18% year over year in Q4, to $60.75, while ad RPMs rose 19%, to $57.20 -- and both metrics set new company high marks. As a result, Pandora grew advertising revenue 22% year over year, to $269 million, while subscription and "other" revenue rose 19%, to $57 million. Pandora also gathered just over $10 million in revenue last quarter from Ticketfly, which it acquired late last year for a hefty sum of $450 million.

On guidance
Finally, look for any changes to Pandora's full-year 2016 guidance, which currently calls for revenue of $1.40 billion to $1.42 billion -- representing year-over-year growth of 21% at the midpoint -- and an adjusted EBITDA loss of $80 million to $60 million. 

In the end, though, those losses should prove temporary as Pandora lays the groundwork to increase its scale and expand the scope of its business. If Pandora demonstrates that it remains on track to achieve just that when it reports later this week, investors should be more than happy with where it stands.

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