Online music streaming company Pandora Media Inc. (P, Financial) reported lackluster fourth quarter earnings for FY 2014, with revenue growth for the quarter well short of the company’s own guidance. While the company’s reported earnings of $0.18 per share is in line with expert estimates, overall revenue of $268 million for the quarter fell short of consensus estimates that had pegged the figure in the $273-$278 million range. With the results adding to investors’ skepticism regarding the volatile profitability of Pandora’s business model, the company’s share price saw a 20% drop in a single day of trading.
Listener Hours Grow, but Advertising Revenue Suffers
Although Pandora missed consensus estimates, the company’s revenues did witness a healthy growth, with net revenues for Q4 2014 increasing 33% on a non-GAAP basis. The company’s overall revenue for FY 2014 was $268 million, up from the previous year’s figure of $200.4 million, while mobile revenue grew 43% to clock $209.5 million.
While total listener hours grew 15% from 4.54 billion in the prior-year quarter to 5.20 billion, the figures for the full year 2014 saw a 20% climb to 20.03 billion compared to 16.7 billion in FY2013. Further, the company reported a total of 81.5 million active listeners at the end of the fourth quarter, a jump of 7% compared to the previous year’s figure of 76.2 million for the same period.
With advertisers tending to invest higher amounts during the holiday season, the company’s net income in the fourth quarter totalled $12.2 million or 6 cents a share, up from $8.9 million or 4 cents a share from the prior-year quarter. However, the company witnessed a drop to 35.9% in revenue growth rate from advertising in the quarter compared to 39.5% in the prior-year quarter. The company cited comparatively soft sales in consumer electronics, retail and telecoms during Black Friday and Cyber Monday for Pandora’s weak holiday sales.
Pandora, which recommends music by predicting listener's preferences, is also facing solid competition in the online music streaming market. While rivals such as Amazon.com Inc. (AMZN, Financial), Google Inc. (GOOG, Financial) and Apples Inc.’s (AAPL, Financial) Beats streaming service are spreading their reach, Spotify is close at Pandora’s heels with 60 million reported active subscribers at the end of FY2014. Spotify also logged in 15 million users in January 2015 alone.
Outlook for 2015
Pandora predicted a lower-than-expected outlook for Q1 FY2015, pegging revenue to fall in the $220-$225 million range against expert estimates of $244 million. Concurrently, the company’s guidance of annual 2015 revenue in the $1.15-$1.17 billion range falls well short of the expert consensus estimate of $1.21 billion. With the company trying to pry away more advertisers from traditional broadcasters, Pandora announced plans to invest all additional margins in 2015 into operations.
On the positive side, with programming costs witnessing a historical fall to below 50% of revenue, the company foresees cost of song rights eating up lesser of its revenue. However, a potential increase in royalty rates still poses a major threat to Pandora. For instance, the company might have to pay considerably higher royalty rates if the pending proposal by SoundExchange to the Credit Royalty Board goes through, putting enormous pressure on Pandora’s profits.
Final Thoughts
While Pandora saw a seasonal gain in Q4, the company lost significantly in advertising revenue on a full-year basis, resulting in around $29.8 million in lost revenue. Although the annual loss fell 25% in FY2014 compared to FY2013, the sustainability of the company’s ad-based business model is open to question.
Consensus price targets peg Pandora to trade at $28.27 a share – down from the earlier $36 a share, with a 52-week trading range of $15.26-$40.44. While Pandora’s results have belied its earlier valuation at 92 times the expected trailing earnings per share, it remains to be seen whether the company would live up to its valuation at about 37 times earnings expectations for 2015.
