Tuesday, October 27, 2015

Report: Pandora's Biggest Risk Is Shrinking Listener Base

On the face of it, Pandora had a very good quarter, according analyst George Kesario at SeekingAlpha.

For the third quarter of 2015, total revenue was $311.6 million, a 30% y/o/y increase, advertising revenue was $254.7 million, a 31% y/o/y increase, and subscription and other revenue was $56.9 million, a 26% y/o/y increase.

So why did the stock take a 35% dive? Two reasons:
  1. If one reads between the lines, the quarter was actually bad in terms of listeners .
  2. Valuation - the stock was already at bubble valuations as I have said in a previous article, and it adjusted to reality.
In terms of listeners, the end of Q3 finds Pandora with 78.1 million active users, up 2% from last year, while total listener hours were 5.14 billion for the quarter, higher by 3% y/o/y.

Brian McAndrews
Chairman, President and CEO Brian McAndrews had this to say about the audience numbers:
"Let me address these audience growth numbers directly. 
This was obviously a unique quarter in the streaming music business. 
The June 30, launch of Apple Music with its 3-month free trial, as well as significant category spending and trial offers across multiple players, brought increased focus to the broader on-demand category during this period."
Looking at the sequential numbers of active listeners, you will see a pattern that is more than disturbing:
  • Active listeners at the end of Q2 2015 were 79.4 million
  • Active listeners at the end of Q1 2015 were 79.2 million
  • Active listeners at the end of Q4 2014 were 81.5 million
As you can see from the numbers, sequentially over the past 4 quarters (current included), active listeners have been falling!

In Kesario's mind, the current quarter is just a continuation of what has been going on for a while now, and that is:
  • Spotify has been taking listeners away from Pandora.
  • Pandora is reaching its limit as far as listeners are concerned (until further notice).
  • And Apple will probably pick up where Spotify left off starting this quarter, something that will probably show up on next quarters numbers. And that is, Pandora's listener base might shrink even more because of Apple.
However, he notes there was a bright spot in the current quarter. Pandora's advertising revenue continues to grow at a very healthy pace, with monetization outpacing both active listeners and hours growth.

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