Pandora Conference Call Highlights; Eyes User Metrics
Pandora Media (NYSE: P) reported its first quarter earnings on April 24, 2014. Shares of the company are down 16.63 percent or $4.69 per share to $23.51. Below are some key takeaways from its conference call:
Brian McAndrews, Pandora's Chairman, CEO and President:
• McAndrews: Additionally, we continue to expand Pandora's availability wherever consumers want to listen with a focus on extending access and usage in autos and consumer electronic devices. As an example of our progress, Pandora is now available in 10 out of 10 of the best-selling passenger vehicles, and we now have more than 5 million unique users activating Pandora through all of our native automotive integration.
• McAndrews: All of this is contributing to our increasing market share. According to our estimates, which includes third-party data, our share of total U.S. radio listening increased from 8.1% a year ago to 9.1% at the end of March.
• McAndrews: Bolstered by the momentum in our monetization efforts, we made some important program changes to optimize Pandora One, including a modest price increase for new subscribers, which will begin to take effect during Q2.
• McAndrews: For nearly 10 years Tom Conrad served as Pandora's Chief Technology Officer and Executive Vice President of Product, building a great team and leading the market in innovation. In March, Tom announced that he would be leaving Pandora after a transition period. Tom's efforts and accomplishments over the years at Pandora are greatly appreciated, and he has earned a well-deserved break.
Mike Herring, Chief Financial Officer
• Herring: Our ability to improve our bottom line is largely dependent on leverage we can realize on content costs, which are significant. This quarter, Pandora paid more than $100 million in content royalties to rights holders.
• McAndrews: First quarter non-GAAP revenue reached $180.1 million, an increase of 54% over $117 million in the first quarter of 2013.
• McAndrews: On a non-GAAP basis, our first quarter net loss was $25.5 million or $0.13 per share compared to a non-GAAP net loss of $30.2 million or $0.18 per share for the first quarter of 2013.
• McAndrews: Our focus on monetization has continued to lead the strong results. Total non-GAAP RPMs reached $37.55 in the first quarter, up 37% compared to the year-ago period RPM of $27.41.
• McAndrews: Advertising RPMs maintained the momentum we built in 2013, climbing 34% from $24.85 in the first quarter last year to $33.40 this year. And mobile monetization growth was significantly stronger as mobile advertising RPMs reached $29.46 in the first quarter of 2014, increasing 44% from $20.43 in the same quarter last year.
• McAndrews: While the landscape around content licensing remains a complex topic, we reached an important milestone related to content costs during Q1 with the decision in the ASCAP trial. In her ruling, Judge Cote confirmed our longstanding belief that "Pandora is Radio," an important finding with wide-ranging legal implications for our company. Additionally, the court set a rate of 1.85% of Pandora's revenue for the five years ending December 31, 2015, which was the upper end of our proposed range of rates.
• Herring: Starting with revenue, we ended the first quarter of 2014 with non-GAAP total revenue of $180.1 million, representing 54% growth from the year-ago quarter, above the high end of our guidance range.
• Herring: As mentioned in our Q4 call, we now have sufficient operating history to estimate a reserve for in-app subscription return and released the accumulation of these previously held adjustments in the first quarter. As such, GAAP revenue of $194.3 million for the calendar first quarter of 2014 includes a one-time reversal related to the subscription return reserve of $14.2 million.
• Herring: Advertising revenue increased 45% in the first quarter 2014 to $140.6 million, compared to $96.7 million in the same quarter last year. Mobile execution continues to drive ad revenue and for the first quarter mobile ad revenue was $103.1 million, an increase of 59% over $65 million in the same quarter last year.
• Herring: First quarter GAAP basic and diluted loss per share was $0.14. Basic and diluted non-GAAP loss per share of $0.13, which excludes $14.2 million in revenue related to the subscription return reserve, approximately $17.4 million in stock-based compensation expense
• Herring: Despite content costs increasing in January based on the statutory rate schedule, RPMs grew faster year-over-year. And thus, for the first quarter, non-GAAP gross margin expanded from 18.7% to 32.1%. To walk through the specifics, when measured on a non-GAAP basis, total RPMs for the quarter grew 37% year-over-year to $37.55, compared to $27.41 for the first quarter of 2013.
• McAndrews: Despite typical Q1 seasonal advertising headwinds, these strong financial results were driven by increasing user engagement, rising listening hours, and our continued focus on improving monetization.
• McAndrews: Active users increased 8% year-over-year from 69.5 million to 75.3 million in the first quarter of 2014, and our listeners are strongly engaged as listener hours grew faster at 12%, increasing from 4.26 billion in Q1 2013 to 4.8 billion in Q1 2014.
• McAndrews: In March, we experienced our first ever week with over 25 million active listeners every weekday. We also had more than 26 million daily unique listeners every Friday in March for the first time in any month in our history.
• McAndrews: For context, last year that high watermark was 23 million. Importantly, those listeners are using Pandora for record lengths of time consuming an average of 21.9 hours per active user for the last 30 days of March.
• McAndrews: This strengthening connection with listeners was supported by recent product enhancements like our Alarm Clock, Sleep Timer, and Station Recommendations platform.
• McAndrews: To highlight just one example of incremental impact these programs can deliver, people using our Alarm Clock functionality on Android are listening to Pandora 30% more days per week and 3% more hours each day than they listened prior.
• Herring: Turning to subscriptions, for the first quarter, non-GAAP subscription and other revenue was $39.5 million, an increase of 94% over $20.3 million in the same period in 2013. Since its debut in 2009, we have offered Pandora One with $36 per year and later a monthly option of $3.99 per month.
• Herring: Over the past five years, content costs for this service have increased 53%. And in order to optimize our business in a market with increasing content costs, we are implementing changes to our Pandora One pricing, resulting in a modest price increase to $4.99 per month for new subscribers and a discontinuation of our annual subscription option. Current monthly subscribers will be grandfathered at $3.99 per month for the foreseeable future and will not currently be affected by the change.
• McAndrews: Now I'd like to speak for a few minutes about some exciting activities and developments during the quarter that have continued to strengthen our brand and our business.
• McAndrews: Our relationship with our users has always been a priority at Pandora, and we truly delight in introducing listeners to new music they love and reintroducing older favorites.
• McAndrews: As an industry leader at the intersection of technology and media, we are at the heart of the action, including in forums such as South by Southwest, where we demonstrate why what we do at Pandora every day online and through connected devices.
• McAndrews: At this year's South by Southwest festival in March, we showcased 37 live acts over four days at Pandora's Discovery Den and streamed the event live with online engagement up 20% from last year with 419,000 live streams.
• McAndrews: These events are a natural environment for brands to partner with Pandora to connect authentically with engaged users, much as they do online. This year's Discovery Den was sponsored by major national advertisers, including Diageo, Sony Pictures, Unilever, St. Ives, Revlon, Alex and Ani, Esurance, Nordstrom Rack and Sprint.
• McAndrews: To further engage listeners, provide new opportunities for advertisers, and extend our presence in the music community, we continue to host a series of live personalized concerts designed to connect fans with artists they love in a live setting.
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