Improved Monetization Could Offset Cost Increases For Pandora, Bob Peck Says

Pandora Media Inc P announced that it had entered into direct deals with most of the major labels in order to launch a new interactive service and improve its existing products.

Robert "Bob" S. Peck of SunTrust Robinson Humphrey reiterated a Buy rating on the company, with a price target of $18.

Monetization Could Offset Costs

“Under the terms of the deals, Pandora's royalty expenses likely would be higher than current estimates, and are easier to quantify. However, given limited information, the revenue opportunity remains uncertain,” Peck mentioned.

Related Link: Pandora's Direct Licensing Deals "Pave The Way For Product Diversification, International Expansion"

The analyst believes improved monetization through new higher-CPM ad units could mitigate potential increase in costs without affecting the user experience.

Impact Of The Agreements

According to the terms of the agreements signed with the major labels, LPM was likely to increase from $30.65 in Q2 to $33, which could impact gross profit by about $55 million in 2017, after which the impact was likely to narrow.

“Our estimates were based on a $7.50 monthly ARPU, which management clarified could be closer to ~$10. Versus our expectations, this could result in $10 million higher gross margin, with the impact likely higher in the future as the sub base grows,” Peck went on to say.

In addition, the analyst estimates that RPM on the ad business might need to rise by 25 percent year on year in 2017 to be able to offset the increased costs, which appears reasonable, given Pandora Media has several levers to improve monetization.

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