Pandora 2Q Earnings: Revenue Up, Beating Analyst Estimates
Pandora continued to turn a long corner in the second quarter of 2018. There’s more distance to travel, but the music streaming veteran again nudged the numbers in the right direction in the second quarter.
Monthly active users continued their slow decline, dropping to 71.4 million from 76 million in Q2 2017, according to earnings released late Tuesday afternoon. But the company was able to do more with less. Revenue grew 12 percent to $384.8 million. Ad RPM, or revenue per thousand impressions, grew 24 percent to $66.15 from $53.34 a year earlier. And subscription revenue jumped 25 percent to $68.9 million. Similar Q1 metrics sent Pandora’s share price soaring in May as well; quarterly revenue grew 12 percent, while ad RPM grew 9 percent.
Investors applauded Pandora’s performance. Revenue was $10 million above the high end of Pandora’s Q2 guidance. Overshooting the target sent Pandora shares up 11.2 percent to $7.50 in after-hours trading; Pandora’s share price would need to take into account higher-than-expected top-line revenue. Investor enthusiasm overshadowed the company’s continued losses as adjusted EBITDA deepened to $54.3 million from $25.1 in Q2 2017. The net loss numbers needed to be adjusted to account for Pandora’s sale of Ticketfly a year earlier. The sale hit Pandora’s books as a huge non-operating loss. A net loss adjusted for Ticketfly and other extraordinary items make comparisons easier. Adjusted gains and losses are not generally accepted accounting principles, however, and a $92 million net loss still sits at the bottom of Pandora’s income statement.
But Pandora operates in a cut-throat business. Spotify and Apple Music dominate the subscription market, and Spotify’s ad-supported service is popular with younger consumers. Third-party metrics show signs of the competition. Monthly data released by Triton Digital show Spotify’s lead over Pandora in monthly listening sessions averaged 41 percent from January to April, the last month Triton has reported. Fortunately for Pandora, YouTube Music and Tidal have not been threatening adversaries, and SoundCloud is trying to regain its status as the Internet’s best source for music discovery. Nor has iHeartRadio disrupted Pandora in advertising-supported radio.
Regardless of the business model, the music streaming business is made and lost on customer acquisition and retention. Bring in more than you lose, and you’re going in the right direction—with a caveat. In December, Pandora hired Aimée Lapic, formerly the CMO at Banana Republic, to build a marketing team and tools. The caveat is acquisition costs can’t get out of control. Lynch said the marketing team is spending at particular marketing channels based on their return on investment—does the acquisition cost exceed the user’s lifetime value? The cost-effectiveness of this marketing can’t be gleaned from the income statement, however; marketing and sales expenses are lumped together. Even so, sales and marketing, as a percentage of revenue, ticked down to 27.8 percent from 29.3 percent last year (excluding the unnecessary stock-based compensation expense included in the sales and marketing line item).
As for churn, the scourge of the digital subscription business, Lynch said the company has already made improvements and expects churn to improve from the new family plan for Premium, the company’s full-featured, on-demand service announced May 29. Family plans are standard in the premium subscription business. Each costs $14.99 (in the United States, Pandora’s lone market) and offers either five (Napster) or six (Spotify, Apple Music, YouTube Music, Tidal). Pandora was late launching the $14.99 per month option that allows up to six users per account. Lynch will be proven right; Spotify has said its family plan not only lowers churn but is “a primary driver of gross adds.”
Pandora has upped its partnership game, too. Partnerships are especially useful because they can give Pandora new customers “at the lowest acquisition costs,” Lynch said. Pandora has recently inked partnerships with AT&T, T-Mobile, and Snap, and a co-marketing deal with Cheddar, the live streaming financial news network. Spotify, too, has been engaging in partnerships. Spotify subscribers can get a combination plan of Spotify and Hulu, the video streaming service, for $12.99 per month, $5 less than the two service cost separately.
Subscribers to both Plus and Premium stood at 6million at the end of Q2. The number of paying customers has slowly risen over the last year and a half: 5.63 million in March, 5.49 in December, 5.19 million in September, and 4.86 million in June 2017. Pandora did not break out the number of Premium subscribers, who pay $9.99 per month (or $14.99 for the family plan) and Pandora Plus customers that pay $4.99 for ad-free radio. But the earnings releases provide a clue; the growth in the average revenue per subscriber to $18.95 last quarter from $14.18 a year earlier implies gains in more lucrative Premium customers.
With Lynch at CEO, and with a CMO firmly in place, Pandora appears to be finding steadier ground. A telling moment of the earnings call was Lynch’s description of the company’s new, data-driven approach to marketing in search of subscribers and new users. Lapac has been building the team and the tools “to meet listeners where they are,” meaning Pandora can attract subscribers to Plus and Premium while offering the ad-supported service to everyone else. Well, that should go without saying for a three-tier streaming service like Pandora. Maybe Lynch meant to say Pandora is building the team and tools to become better at uncovering subscribers and listeners. If Pandora can do it better and cheaper, Q3 2018 should be another step forward.