It seems unlikely that from a fundamental standpoint, there will be a lot of news in the Pandora Media Inc (NYSE:P) earnings report on Thursday.
Pandora already announced last month that fourth-quarter results would come in ahead of guidance for both revenue and adjusted Ebitda. That disclosure sent P stock up 6%, and would seem to limit the possibility that the numbers in the Pandora earnings report will boost the stock further.
That doesn’t mean there will be no news coming out of Pandora earnings. The company has set itself up for a busy 2017. The replacement of Pandora One with Pandora Plus appears to have had some success in the fourth quarter. Commentary on that initiative will be closely watched on the Q4 conference call.
Meanwhile, in December, Pandora announced a new “Premium” service to compete with offerings from Spotify, Apple Inc. (NASDAQ:AAPL) and others.
That product should roll out shortly, potentially boosting growth in 2017. And Pandora has said it is aiming to return to Ebitda profitability in 2017. The Q4 report should give some color as to whether investors in P stock should believe the company.
A Busy 2017 for Pandora Stock
Pandora stock actually is up about 65% over the past year, after coming close to all-time lows in early 2016. Those gains have come despite mixed performance in the business. Revenue is up 14% through the first nine months, and likely rose a similar figure in Q4. But about half the year-to-date growth came from the acquisition of TicketFly last October. Advertising revenue also increased 14% through the first three quarters — but came solely from higher pricing. Active users were actually down year-over-year at the end of Q3, and subscription revenue declined in the quarter as well.
The user and subscription figures are a major problem for Pandora stock. The market simply doesn’t trust that Pandora can create consistent profits based on advertising revenue alone. That’s particularly true given the higher royalty rates that took effect at the beginning of last year. So the move by Pandora to upgrade One to Plus — adding features like song replays — and to develop Premium are a clear step toward a subscription-based model.
The plan from Pandora, as detailed after the third quarter, is for that type of model to provide a more stable revenue base. Moving customers to subscription-based services both helps margins and improves retention. If Pandora is successful, Pandora stock likely will rise. But that remains a relatively big “if.”
What to Watch for in Pandora Earnings
In the Pandora earnings report, then, the most important numbers likely will come from the company’s guidance. That guidance will give some color as to how successful management thinks Plus has been so far — and what kind of opportunity Premium has to boost Pandora earnings this year.
But the Pandora earnings conference call also seems like it might move P stock. Management will have another opportunity to detail its strategy for 2017 and beyond. The company laid out its “three-legged stool” strategy — Plus, Premium and Ticketfly — after the third quarter, but investors weren’t terribly impressed. Pandora stock fell about 14% over the next seven sessions
The issue with P stock is that there’s a real fear that Pandora’s model simply doesn’t quite work. The product itself is attractive, as evidenced by the nearly 80 million active users. But it’s not clear that Pandora can pay higher royalty rates through ad revenue alone. The company did announce layoffs of about 7% of its employees in a bid to improve 2017 profits. That simply raised additional concerns about Pandora stock. The most notable is: Can Pandora really compete with Apple, Spotify and Amazon.com, Inc. (NASDAQ:AMZN)?
After all, those companies have much larger businesses — and much more cash — than Pandora. P stock still is worth almost $3 billion, yet the company has burned about $127 million in cash just in the first three quarters of 2016. Full-year Ebitda loss is likely to be huge as well, and that’s not counting depreciation or the additional $139 million in Pandora stock awards.
For Pandora stock to appreciate in the near term, the company needs to get at least close to breakeven in 2017. So full-year guidance given in the Pandora earnings report will be key. But that aside, investors also will be looking for more information on the plan going forward here.
Can Pandora find a niche in the music industry? Is Pandora Premium “too little, too late” against the offerings from Spotify, Amazon and Apple? And is there really a profitable business model here, or are royalty rates simply too difficult to manage?
Those questions can’t be answered quite yet, but investors will be looking at the Pandora earnings report closely to better assess the company’s prospects. And it’s likely the commentary on the future — not the past — that will determine how Pandora stock reacts to Q4 earnings.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities. The author does receive royalties from Pandora.
