Pandora (P) Tops Earnings as CEO Steps Down

Shares of Pandora Media (P: Analysis) surged after the company posted better-than-expected fourth quarter earnings. However, its CEO surprisingly stepped down just as the company is starting to grow. What's going on at this Oakland, Calif.-based company, the largest online radio company in the world? Daily Chart

Pandora reported a loss of $0.09 per share, or $14.6 million, in contrast to a loss of $0.05 per share, or $8.18 million, it reported a year earlier.
Adjusting for one-time benefits and charges, Pandora lost $0.04 per share, beating the analyst consensus by a penny. Pandora's continued lack of profitability can be attributed to higher costs of obtaining streaming licenses (royalties) and sales team expansion. Meanwhile, revenue rose 54% to $125.1 million, topping the consensus estimate of $122.8 million. Ad sales, its primary source of revenue, rose 51% to $109 million. Wedbush Securities analyst Michael Pachter summarized the problem bluntly. "The big revenue growth is a positive. The lack of earnings growth tells you costs are rising pretty fast." Pandora's user base is still growing, albeit slower than before - it finished last month with 67.7 million active listeners, claiming roughly 8.5% of the domestic radio market. However, active listener growth has declined slightly, from 47% growth in the previous quarter to 38% growth at the end of January. Yet a slowdown in total listeners isn't necessarily a weakness for the company. Over the previous year, Pandora had difficulty balancing its growth, since mobile usage was rising at a faster rate than it could sell ads. Royalty payments that it made to record companies and artists rose 59% to $77 million. These royalty costs are a major cause of concern for investors, since they tend to fluctuate unfavorably. Pandora co-founder Tim Westergren stated that Pandora's per-track royalty rates rose 25% over the past three years, and 9% in 2013 alone. He also expects these costs to rise an additional 16% over the next two years. Pandora needs to increase its ad revenue or adopt a stronger subscription-based system to offset these costs. Pandora recently capped free listening hours at 40 per month to hold back rising royalty costs. Listeners also spent more time using Pandora, with mobile listener hours growing by roughly 70% from the prior year. The mobile market is a key one for the company, since nearly 80% of total listener hours now come from Pandora's mobile platform. Now, a slowdown in users means that Pandora can directly match its mobile ad inventory to users through direct sell-through. Pandora investors were the most encouraged by its mobile revenues - which rose 111% to $80 million. Its mobile RPM (revenue per thousand listener hours) rose to $25.05, up from $20.15 a year earlier. For the full year, Pandora's mobile revenues grew 105% while listener hours rose 89% - increasing the average mobile RPM to $23.83 - up from $21.93 in fiscal 2012. Looking ahead, Pandora expects to generate first quarter revenue between $120 to $125 million, topping the Thomson Reuters' consensus of $119.5 million. However, forward earnings growth, the focus in the face of rising royalties, remains the primary concern. After Pandora reported its fourth quarter earnings, CEO and co-founder Joseph Kennedy abruptly announced his resignation. Kennedy simply told analysts, "I love this business, which I helped create. But as I approach the end of my tenth year, my head is telling me its time to find a recharging station." He will remain in the top post until a successor can be named. Other News About P Pandora Soars After Q4 Earnings Pandora surges after topping analyst estimates. Pandora CEO Joseph Kennedy to Step Down Pandora's CEO abruptly resigns. Other Stocks in the News Martha Stewart, J.C. Penney and Macy's Ordered to Mediation Macy's and J.C. Penney continue to square off over the rights to Martha Stewart. Is This Smith & Wesson's Last Stand? Will increased gun regulations shoot down Smith & Wesson's future prospects? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. 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Published on Mar 11, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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