Company Overview
Pandora Media, Inc. (NYSE: P) is an online music streaming service and music discovery platform. Pandora offers a free ad-supported service, a radio subscription service (Pandora Plus), and an on-demand music service (Pandora Premium). The company allows advertisers to deliver targeted campaigns using audio, display, and video advertisements.
In addition to the Pandora music segment, the company operates a ticketing service through its subsidiary, Ticketfly. Pandora is primarily based in the United States, but also has locations in Australia, New Zealand, Canada, and the United Kingdom. The company is headquartered in Oakland, California.
Products and Services
Pandora’s platform lets users create personalized stations which allow the company’s proprietary technology (The Music Genome Project) to predict listener preferences, play music suited to the listener’s taste, and introduce listeners to new music. As noted above, the company offers three tiers of service:
Ad-Supported Service – Users may access Pandora’s music and comedy catalogs and personalized playlist generating system for free across all platforms. By watching an advertisement, users may replay or skip songs more frequently.
Pandora Plus – Users pay a monthly or annual subscription fee and receive ad-free access to the Pandora catalogs, higher quality audio on supported devices, and longer timeout-free listening. Pandora Plus also includes features such as replays, additional skipping, and offline listening. Pandora Plus is available from $4.99 per month or $54.89 per year.
Pandora Premium – Launched in March 2017, Pandora Premium offers all the benefits of Pandora Plus in addition to the ability to search and play any track or album on demand. Pandora Premium is available from $9.99 per month or $109.89 per year.
The majority of listener hours and revenue generated from advertising on the Ad-Supported Service comes from mobile devices. For the quarter ended March 31, 2017, Pandora streamed 5.21 billion hours of internet radio. As of March 31, 2017, the company had 76.7 million active users in the prior 30-day period and 4.7 million paid subscribers.
Pandora’s Ticketfly subsidiary provides ticketing and marketing services for venues and event promoters in North America. Ticketfly’s digital marketing and analytics platform helps promoters book talent, sell tickets, and drive in-venue revenue, while guests can use the platform to find and purchase event tickets. Segment revenue consists primarily of service and merchant processing fees generated on ticket sales.
In the three months ended March 31, 2017, Ticketfly sold tickets for 44,000 live events with a gross transaction value of more than $215 million.
Recent Developments
- On May 8, 2017, the company announced a $150 million investment from private equity firm KKR who will receive Series A convertible preferred stock. The offering may be increased to $250 million at the option of the company. Pandora will pay a quarterly preferred dividend at an annualized rate of 7.5 percent if paid in cash, or 8 percent if paid in kind. The Series A preferred stock is convertible into common stock, cash, or a combination thereof at a conversion price of $13.50. As part of the deal, KKR’s Richard Sarnoff will join Pandora’s board of directors. The investment is intended to strengthen the company’s balance sheet, and Pandora CFO Naveen Chopra noted that it gives the company the ability to accelerate growth investments. The deal is expected to close on June 8, 2017.
- However, the company also announced that despite receiving new financing from KKR, it is still exploring strategic alternatives such as a sale. On May 9, 2017, it was reported that Pandora believes it can complete a transaction within the 30 days prior to the closing of the KKR investment. It should be noted that the company will owe KKR a $15 million break-up fee if the deal falls through.
- According to a company filing last week, Stephen A. Cohen, the billionaire hedge-fund manager has amassed 12,558,792 shares in Pandora, or a 5.4% stake in the world’s largest internet radio operator. Importantly, the stake is a so-called “passive” investment, meaning that Cohen isn’t able to use those shares to launch a proxy contest, i.e. to challenge the current board of directors.
First Quarter Earnings Review
After reporting fourth quarter earnings in February, the company offered relatively weak first quarter guidance compared to the analyst consensus. Pandora’s first quarter results were generally in-line with the estimates provided by the company.
In the first quarter ended March 31, 2017, Pandora’s consolidated revenue increased six percent year-over-year to $316 million. Strong growth in subscription and ticketing revenue helped to overcome relatively weak growth in advertising revenue. Due to higher content acquisition costs, gross margin fell to 26.7 percent from 30.3 percent one year earlier.
Operating expenses in the first quarter of 2017 increased nearly five percent year-over-year to $209 million. Overall, the company reported a net loss of $132 million, or $0.56 a share, up from the 1Q 2016 loss of $0.51 a share. Pandora’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was negative $71 million, compared to negative $57 million in the same quarter last year. Cash used in operations for the first quarter of 2017 totaled $36 million, nearly three times that used in the same period a year ago.
At March 31, 2017, the company listed cash and short-term investments totaling $203 million, $37 million less than at December 31, 2016.
While paid subscription users increased by 322,000 from the quarter ended December 31, 2016, total active users decreased 4.3 million to 76.7 million.
Forward Guidance
Pandora expects second quarter revenue to improve from the first quarter (between $360 and $375 million) due to better seasonality for advertising revenue and the increased availability of Pandora Premium. The company anticipates an adjusted EBITDA loss between $50 million and $65 million.
For the full year, Pandora expects revenue between $1.50 billion and $1.65 billion. The company did not provide guidance for full-year adjusted EBITDA.
Outlook
The main question is whether Pandora will find a buyer in the next 30 days. Sirius XM Holdings, controlled by Liberty Media, previously made an informal offer for the company at $15 per share but was rejected by Pandora’s board. More recently, Liberty CEO Greg Maffei has downplayed merger rumors, although Pandora’s ad-sponsored radio service remains an appealing asset due to its relatively low cost structure. As of now, there are no other names linked to an acquisition.
Without a sale, Pandora will attempt to grow revenue while controlling marketing and other costs. The new $150 million financing package from KKR should give the company additional flexibility to do just that. However, it remains unclear whether there are sufficient growth opportunities in the already crowded streaming services market.
Stock Influences
- Changes in subscriber and active-user metrics;
- Changes in revenue and profitability;
- Agreements with content and hardware partners; and
- M&A activity.
Risk Factors
- The company faces substantial competition from online streaming services;
- The company’s ability to attract customers and convert them to paying subscribers is uncertain;
- Certain segments of the company’s business rely on maintaining commercially viable licenses with copyright owners; and
- Certain royalty rates are set by the Copyright Royalty Board, which is currently determining the rates for the five-year period beginning January 1, 2018. There is no guarantee that these rates will not increase significantly.
Stock Performance
As of May 16, 2017, shares of Pandora closed at $9.35. Shares traded as high as $14.98 last September on the heels of the buyout offer from Sirius, but sold off sharply shortly thereafter. More recently, the stock has been weighed down by weak earnings. Short interest remains significant at 68.5 million shares, or approximately 12 days of trading volume.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Stan Meyers | Piper Jaffray | Overweight | $18.00 | 4/18/2017 |
| Matthew Thornton | SunTrust | Buy | $16.00 | 4/13/2017 |
| Scott Kessler | CFRA | Buy | $14.00 | 4/13/2017 |
Summary
Pandora is aggressively seeking a buyer, and it believes that it can find one before closing its $150 million financing package from KKR. However, there are no obvious suitors other than Sirius/Liberty, who have publicly downplayed their interest. If Sirius makes an offer, it will likely be less than the $15 per share previously tendered. Stephen A. Cohen, the billionaire hedge-fund manager has amassed 12,558,792 shares in Pandora, or a 5.4% stake. It would appear that he thinks the company has some upside value. Without a deal, Pandora still needs to show significant improvement to reach cash flow neutrality. Accordingly, the recent analyst price targets seem aggressive, and a $13.00 price target appears much more reasonable.
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