Opportunities Abound for Pandora, But at a High Cost

According to the Radio Advertising Bureau, advertising dollars spent on U.S. radio increased just 1% over the year to $17.4 billion last year. Digital advertising reported the highest growth among all forms of radio advertising of 15% to $0.71 billion. Off-air advertising, also known as non-spot advertising, increased 7% to $1.5 billion and network revenues 3% to $1.1 billion. Spot advertising revenues fell 1% to $14.1 billion. Online radio player Pandora continues to expand in content and reach to capture this massive advertising market.

Pandora’s Financials
Pandora’s (NYSE:P) Q1 revenues grew 58% over the year to $80.8 million, surging past analyst estimates of $74.5 million. However, a loss of $0.09 per share was significantly short of Street targets of a loss of $0.18 per share.

By segment, advertising revenues grew 60% over the year to $70.6 million and subscription revenues grew 38% over the year to $10.2 million. Among other user metrics, Pandora now have 150 million registered users, with monthly active users growing 53% over the year to 51.9 million. Listening hours grew 92% over the year to more than 3.09 billion radio hours across all their platforms. With that, Pandora now accounts for 5.95% of total U.S. radio listening market share.

Pandora’s mobile initiatives have helped to drive revenue growth. Of the $70.6 million advertising revenues, mobile devices contributed 55% of these revenues. Pandora claims that the top 50 biggest digital marketers in the U.S. advertise on Pandora’s mobile and desktop services.

Pandora forecasts current quarter revenues of $99 million-$101 million with a loss of $0.03-$0.05 per share, compared with analyst estimates of revenues of $100.5 million and a loss of $0.03 a share. For the year, Pandora expects revenues of $420 million-$427 million with a loss of $0.07-$0.11 a share. The Street projects revenues of $416.2 million with a loss of $0.16 a share.

Pandora’s Cost Structure Seems Unsustainable
While Pandora’s revenues may be growing, analysts are more concerned about their cost structure. At present, Pandora spends more than half of its revenues on content acquisition. Last year, the company reported content acquisition costs at 54% of revenues. During the current quarter, costs increased 91% over the year. Market projections suggest Pandora will end this year with 57% of revenues being spent on content acquisition. They will need to grow their subscriber base at a fast enough rate to be able to better manage these rising content costs. Worried by such costs, analyst Michael Pachter says that Pandora will not turn profitable until 2014 at the earliest.

Pandora’s Strategic Tie-Ups
Pandora continued their drive within the automotive segment, and tied up with Nissan and Suzuki. Pandora will now be integrated into Nissan’s Ultima starting this summer and in Suzuki cars through a Garmin GPS system by the end of this year. With these tie-ups, Pandora will now be available on more than 60 car and truck models. Considering that more than half of all radio is listened to in the cars, this seems to be a sensible strategy.

To gather more advertising dollars, Pandora also announced a tie-up with Triton Digital that will enable Triton to measure Pandora’s audience size and market reach at both national and local levels. Triton translates audience data into radio metrics such as average quarter hour and cumulative audience at the national and local level. The data will simplify the ability to size and scale the Internet radio market. These new metrics will give marketing agencies access to data to help with a more effective media and advertising planning.  The agreement has already showed that Pandora has the largest demographic of listeners aged 18-49 tuned into their radio network in the U.S.

Pandora’s stock is trading at $10.28 with a market capitalization of $1.7 billion. It touched a high of $26 soon after its listing in June 2011.