Pandora announces Q1 earnings, new investment, but a possible sale is the real news

The streaming music service looks to see if it can be sold in the next 30 days before the $150 million strategic investment from the private equity company KKR is set to close

The streaming music service Pandora reported earnings on Monday and while it could also report that it received a $150 million strategic investment from the private equity firm KKR (Kohlberg Kravis Roberts), its losses have grown, and now a sale looks to be in the company’s future (assuming it can find a buyer).

With the new investment, Richard Sarnoff, KKR’s Head of Media & Communications Private Equity investing, joins Pandora’s Board of Directors, while James Feuille, chairman of the board, and Peter Gotcher, Lead Independent Director, resign from the board.

“Having secured a significant financial commitment from KKR to strengthen the Company’s balance sheet, we have positioned the Company to evaluate any potential strategic alternatives, including a sale, in the 30 days before the financing is set to close,” said Feuille. “I believe the steps we are taking today offer Pandora the ability to consider all opportunities and to set a course for the future. I thank my colleagues and our stockholders for their support, and look forward to following Pandora, whose future I truly believe is exciting.”

Centerview Partners LLC and Morgan Stanley are advising the company (so it looks like they won’t be using my services for any sale, darn), and a new committee headed by independent director Timothy Leiweke will be leading the effort to find new directors (or a buyer, or new management).

Pandora can certainly claim to have been a pioneer in the streaming music space. I once paid for the service, now called Pandora Premium, and millions of others use the free, ad supported service. Millions more try the service every year, about 1.3 million trial users in the past seven weeks, the company claims.

But its unique model, which helped it launch, also made it less desirable for many music fans when compared to Spotify or Apple Music, or other services.

But the space is still growing. Streaming music service revenue grew 60 percent in 2016, helping the music industry as a whole grow last year.

“Without streaming, the recorded music market would have declined in 2016,” Mark Mulligan, an analyst with Midia Research, told the Financial Times last month. “Streaming is driving revenue growth by both growing the base of users and, crucially, increasing the spend of more casual music spenders.”

Pandora’s revenue, too, grew last quarter. But not very much. Ad revenue climbed only 1.3 percent, even as subscription revenue grew 18.5 percent. But the company lost $124.8 million, more than the same quarter a year ago.

That’s why Founder and CEO of Pandora, Tim Westergren, can sound like a start-up, while at the same time the company’s action look like panic.

“Although it remains early days, we are enthusiastic about the recent launch of Pandora Premium,” said Westergren. “Pandora Premium is a major leap forward for the company and allows us to offer a variety of products to our large base of listeners. Additionally, our Q1 results were consistent with our expectations and demonstrated Pandora’s ability to improve ad monetization, while controlling costs and evolving our consumer experience in ways that enhance usage trends of our most engaged listeners.”

But then: “The governance measures we have undertaken today have the support of our major stockholders. The Board is squarely focused on maximizing stockholder value as we move ahead,” said Leiweke.


Here is Pandora’s Q1 earnings statement, assuming you are looking to buy a music streaming service and want to see the P&L:

OAKLAND, Calif. – May 8, 2017 – Pandora today announced financial results for the first quarter ended March 31, 2017.

“Although it remains early days, we are enthusiastic about the recent launch of Pandora Premium,” said Tim Westergren, Founder and CEO of Pandora. “Pandora Premium is a major leap forward for the company and allows us to offer a variety of products to our large base of listeners. Additionally, our Q1 results were consistent with our expectations and demonstrated Pandora’s ability to improve ad monetization, while controlling costs and evolving our consumer experience in ways that enhance usage trends of our most engaged listeners.”

Subscription Products

Pandora successfully launched its on-demand subscription product, Pandora Premium.

  • Approximately 1.3 million trials were started in the last seven weeks, including more than 500 thousand Premium trial starts.
  • Total subscribers increased approximately 20% year-over-year.
  • To date, more than 80% of new trial subscribers were acquired on-platform—virtually free of acquisition costs—again demonstrating our marketplace strategy in action.
  • Nearly half of Premium trial listeners used Pandora daily during their first week, significantly higher than non-Premium listeners.
  • Approximately half of all early Premium users are taking advantage of features on the tier that are unique to Pandora, including the My Thumbs Up playlist, Linked Playlists, and the “magic wand” that is Add Similar Songs.
  • Research tells us that more than 30% of our ad-supported and paid radio listeners are strong candidates for an on-demand tier.

Advertising Products

We anticipate strong tailwinds as the advertising technology investments we are making in the first half of 2017 come online in the seasonally strong second half of the year.

  • Programmatic led to significantly higher effective CPMs in display.
  • Video inventory per hour increased 27% year-over-year in Q1 as well as increased pricing.
  • Auto and Consumer Electronics remain our fastest-growing listening and monetization segments, with 26%

First Quarter 2017 Financial Results

Revenue: For the first quarter of 2017, total consolidated revenue was $316.0 million, a 6% year-over-year increase. Advertising revenue was $223.3 million, a 1% year-over-year increase, during our seasonally weakest advertising quarter.

Subscriptions: Total subscribers increased from 3.93 million in Q1 2016 to 4.71 million in Q1 2017, growing approximately 20% year-over-year. Subscription and other revenue was $64.9 million, a 19% year-over-year increase.

Ticketing: Ticketing service revenue was $27.8 million, a 25% year-over-year increase.

GAAP Net Loss and Adjusted EBITDA: For the first quarter of 2017, GAAP net loss was $132.3 million compared to a net loss of $115.1 million in the same quarter last year, and adjusted EBITDA was a loss of $71.3 million, compared to a loss of $57.4 million in the same quarter last year. For the first quarter of 2017, adjusted EBITDA differs from GAAP net loss in that it excludes $29.6 million in expense from stock-based compensation, $17.7 million of depreciation and amortization expense, $7.2 million of other expense, $6.2 million in expense associated with the workforce reduction and $0.3 million of provision for income taxes.

Cash and Investments: For the first quarter of 2017, the Company ended with $203.0 million in cash and investments, compared to $243.3 million at the end of the prior quarter.

Cash used in operating activities was $36.0 million for the first quarter of 2017, compared to $13.1 million in the same period of the prior year.

Other Business Metrics

Listener Hours: Listener hours were actively managed this quarter to optimize margins in our ad-supported service. Total listener hours were 5.21 billion for the first quarter of 2017, compared to 5.52 billion for the same period of the prior year.

Active Listeners: Active listeners were 76.7 million at the end of the first quarter of 2017, compared to 79.4 million for the same period of the prior year.

Guidance

Based on information available as of May 8, 2017 the Company is providing the following financial guidance:

Second Quarter 2017 Guidance: Revenue is expected to be in the range of $360 million to $375 million, the midpoint of which reflects 7% year-over-year growth and 16% growth relative to the prior quarter. Our revenue guidance reflects material year-over-year advertising growth resulting from seasonality and the first period during which Pandora Premium is broadly available.

Adjusted EBITDA loss is expected to be in the range of $65 million to $50 million, driven in part by marketing spending timing to support the premium launch. As a reminder, we expect marketing spend to be essentially flat on an annual basis from 2016 to 2017. Adjusted EBITDA differs from GAAP net loss in that it excludes forecasted stock-based compensation expense of approximately $34 million, depreciation and amortization expense of approximately $19 million, other expense of $7 million and a provision for income taxes of approximately $0.4 million and assumes minimal cash taxes given our net loss position.Basic shares outstanding for the second quarter of 2017 are expected to be approximately 241 million. We anticipate a year to date non-GAAP effective tax rate between 30-37%.

Full Year 2017 Guidance: Pandora expects full-year revenue in the range of $1.50 billion to $1.65 billion.

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