Thumbs Up for Pandora Media's Latest Quarter

By Steve Symington Markets Fool.com

Pandora Media(NYSE: P) announced solid first-quarter 2017 results on Monday after the market closed, highlighting improved monetization of ad-supported products, accelerating subscription growth, encouraging early progress for its new Pandora Premium service, and -- in a separate release -- a large new private equity investment.

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Let's turn down the volume, then, and have a closer listen to the tone of Pandora's business as it kicked off the new year.

IMAGE SOURCE: PANDORA MEDIA.

Pandora Media results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Growth

Revenue

$316.0 million

$297.3 million

6.3%

GAAP net income (loss)

($132.3 million)

($115.1 million)

N/A

GAAP earnings (loss) per share

($0.56)

($0.51)

N/A

Data source: Pandora Media, Inc.

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What happened with Pandora Media this quarter?

  • On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and restructuring expenses, Pandora's net loss was $57.2 million, or $0.24 per diluted share, compared to an adjusted net loss of $45.2 million, or $0.20 per share in the same year-ago period.
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was a loss of $71.3 million, compared to an adjusted EBITDA loss of $57.4 million in last year's first quarter.
  • These results were above the midpoints of Pandora's guidance, which called for revenue in the range of $310 million to $320 million and an adjusted EBITDA loss of $80 million to $70 million.
  • The top line included 1% growth in advertising revenue to $223.3 million, 19% growth in subscription revenue to $64.9 million, and 25% growth in ticketing service revenue to $27.8 million.
  • Total listener hours declined 5.6% year over year, to 5.21 billion. Pandora elaborated that "listener hours were actively managed this quarter to optimize margins in our ad-supported service."
  • Roughly 1.3 million trials of subscription products were started over the last seven weeks, including over 500,000 Pandora Premium trial starts. Over 80% of new trial subscribers were acquired on-platform with almost no acquisition costs.
  • Total subscribers increased 20% year over year, to 4.71 million.Total active listeners declined 3.4% to 76.7 million.
  • Ad revenue per 1000 listening hours (RPMs) increased 12% year over year, $50.87.
  • Average revenue per paid subscriber (ARPU) was $4.76 (up from $4.73 last quarter), and licensing costs per paid subscriber (LPU) were $2.96 (down from $3.12 last quarter).
  • Ended the quarter with cash and investments of $203 million, down from $243.3 million last quarter.
  • In a separate release, Pandora announced it has entered into an agreement for a $150 million strategic investment in new designated Series A convertible preferred stock of Pandora from investment firm KKR. In connection with the investment , KKR's Richard Sarnoff will join Pandora's board of directors.
  • Pandora also announced new governance measures focused on maximizing shareholder value. James M. P. Feuille and Peter Gotcher will resign from the board, and the board is forming an independent committee to be helmed by independent director Timothy Leiweke. Leiweke will then identify and appoint new directors who will offer "additional expertise and leadership as the company moves forward." And arguably most compelling, Pandora confirmed it will continue its review of strategic alternatives, which could include a potential sale.

What management had to say

Pandora Founder and CEO Tim Westergren stated:

Although it remains early days, we are enthusiastic about the recent launch of Pandora Premium. Pandora Premium is a major leap forward for the company and allows us to offer a variety of products to our large base of listeners. Additionally, our Q1 results were consistent with our expectations and demonstrated Pandora's ability to improve ad monetization, while controlling costs and evolving our consumer experience in ways that enhance usage trends of our most engaged listeners.

CFO Naveen Chopra elaborated on the KKR deal, saying, "We are happy to be partnering with KKR on this investment. A strong balance sheet gives us the ability to accelerate growth investments when appropriate and to compete aggressively in a rapidly changing, complex market."

Looking forward

For the second quarter, Pandora expects revenue of $360 million to $375 million, or roughly 7% year-over-year growth at the midpoint. Trending toward the bottom line, that should translate to an adjusted EBITDA loss of $65 million to $50 million.

So Pandora now expects full-year revenue of $1.50 billion to $1.65 billion, marking a reduction from previous guidance for 2017 revenue of $1.55 billion to $1.7 billion -- though it's worth noting that when Pandora issued that previous guidance, management admitted it was a wider-than-usual range "due to uncertainty around the speed at which subscription products ramp."

Sure enough, during this quarter's conference call Pandora CFO Naveen Chopra explained that full-year guidance takes into account that Pandora Premium launched later than expected due to issues with third-party billing integrations. That means most Premium users will remain in trial mode throughout the second quarter, which in turn means we won't see a significant ramp in subscription revenue until the second half of the year.

Nonetheless, it's encouraging to have that launch finally in the rearview mirror and collecting a reasonable number of early trial subscribers. To that end, Pandora's research indicates that over 30% of its ad-supported and paid radio listeners are "strong candidates for an on-demand tier" based on their activity, feature utilization, and listening habits. For perspective, when Pandora outlined its initial goal last year of building a $1.3 billion subscription business, it conservatively based that goal on converting roughly 10% of its U.S. listener baseas new product tiers were launched and adopted.

In the end, Pandora's unsurprising full-year guidance reduction notwithstanding, I think this was a strong quarter that should leave Pandora investors excited for what's to come.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. The Motley Fool has a disclosure policy.