Pandora May Turnaround Its Declining User Figures

Going into Pandora Media (NYSE:P) earnings on Thursday, 11th Feb, after the market close, I feel fairly confident that the commentary on user retention metrics will be the most important earnings theme coming out of the Q4’15 call. For the most part, the company has exhibited fairly stellar growth through FY’15 as a result of a 30% improvement to RPMs (revenue per thousand listener hours). The company rolled out better comparative metrics on ad pricing relative to local market radio. However, the company’s subscription product growth is starting to slow.

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The company mentioned that it has a goal of reducing its sales and marketing spend from 30% (current) to 20%. The message seems somewhat conflicting given the potential risk of losing subscribers. The active listener figures barely grew by 2% year-over-year in the most recent quarter and declined sequentially. The management team mentioned that they had to increase marketing spend in the past quarter to generate some year-over-year growth. In other words, I find it highly unlikely that the management team can simply lower marketing expense without risking a further reduction in the total number of active users on the platform as such investors shouldn’t anticipate a magical recovery to profitability.

Wedbush analyst Michael Pachter reiterated his outperform rating:

We expect revenue of $328 million, Adjusted EBITDA of $29 million, and EPS of $0.10, vs. consensus of $332 million, $28 million, and $0.07, respectively. This compares with guidance for revenue of $325 – 330 million and for Adjusted EBITDA of $25 – 30 million. Our estimates assume listener hour growth of 3%, in line with guidance, and ad revenue growth of 23% driven by increasing local advertising mix.

Pandora does have rapidly growing revenues, but I don’t see massive improvements to profitability in the near term. The company will most likely report a miss on EPS given the shaky commentary on marketing spend. Furthermore, active listener growth will need to grow higher if management wants to reduce its marketing spend. In other words, I’m taking the stance that revenue could potentially surprise to a slight extent given the prioritization to user growth, but margins could suffer in the near term.