Pandora Earnings Preview: Competition and Content Costs in Focus

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Pandora Media

Pandora Media (NYSE:P), the leader in Internet radio in the U.S., will release its Q4 and full year fiscal 2012 results on March 6, 2012. As with past quarters, investors and analysts will focus on the growth in Pandora’s user base and the trend in its content costs, which we look at as a percentage of revenues. Pandora has so far stood out in its ability to offer a unique and personalized Internet radio experience to its listeners. The growing competition is going to challenge the radio company’s unique ability and thus affect its subscriber growth. Pandora’s competition is coming from Clear Channel Radio and Spotify which is expanding via Facebook (FBOOK).

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Although the growth in its user base has so far been good in fiscal 2012 compared to fiscal 2011, the sequential growth has slowed. In Q4, the company could show the effects iHeartRadio service launch by Clear Channel Radio that might have further weighed on Pandora’s user base growth. As this happens, Pandora is attempting to strengthen new channels of growth such as in the vehicles market & business segments. The vehicle market is currently dominated by Sirius XM (NASDAQ:SIRI) and Pandora, and it will look to expand with its value proposition of personalization as well as free ad supported content. The fact that Pandora has lifted its 40 hour monthly cap on listening implies that it is strongly pushing for the ad supported business model.

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Overall we expect that the user base growth will be slightly lower in Q4 as a result of mixed effect of Pandora’s expansion of growth channels, including its foray into the business segment and emerging competition.

Investors should also look at where content costs are headed. The absolute increase will be obvious, but it will be interesting to see whether these costs as % of revenues go up or stays level.

Our price estimate for Pandora stands at $9.48, implying close to 25% discount to the market price.

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