Pandora Earnings Preview: Revenues To Swell, But Bottom Line Remains In Question

The internet radio service Pandora (NYSE: P) will release its Q1’17 earnings on May 8^th. Pandora’s revenues have skyrocketed from nearly half a billion dollars in FY’13 to over a billion in FY’16, primarily led by the boost in its number of subscribers due to ever increasing smart phone and mobile data usage.

On the contrary, Pandora has been unable to trickle down these benefits to its bottom line because the number of free subscribers has risen faster than the paid ones. Pandora has 81 million subscribers, of which only around 4.5 million are paid. Free subscribers do add to its advertising revenues, but the cost of content acquisition surpasses the money banked from the advertisements. In addition, the CRB (Copyright Royalty Board) had revised the content acquisition rates last year (from $0.0014 per played song to $0.0017 per play for 2016-2020), which can continue to hurt Pandora’s bottom line in FY’17 as well.

To overcome this, the company has been changing its advertising strategy and has recently partnered with ‘A Million Ads,’ a company which offers features like real time dynamic and tailored audio ads. On the other hand, Pandora has launched its much awaited on-demand music service, Pandora Premium, in Q1.

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Advertisement Business Going Through A Makeover  

Advertisement constitutes over 77% of Pandora’s total revenues and the profitability of this segment is inevitable if the company wants to see a green bottom line. Keeping this in view, Pandora has made some changes to its advertising strategy by increasing the frequency of ads, and is diverting them to the areas of high demand. As a result, its RPM (revenue per thousand hours of listening) increased from $57 in Q4’15 to $67 in Q4’16.
To tighten its grip on the advertisers, Pandora will now be offering dynamic audio advertisements through ‘A Million Ads.’ This feature allows the automatic customization of audio and video ads on the basis of user data. It can save the advertisers from extra production costs and, in turn, can make Pandora a favorable destination for them. As this feature was added in February, it will be interesting to note if it had any positive impact on the company’s Q1 advertising results.

All Hopes On Pandora Premium

Pandora Premium has put Pandora back in the competition with Spotify and Apple Music. The former has been late in introducing the on-demand feature, but the company believes that Premium can pull its bottom line out of the territory of losses by the end of this year. Although it might not have a significant impact on Q1 results as this service was launched later in the quarter to a limited number of users, but the initial user reviews about Pandora Premium were positive and gave it a thumbs up for its user friendly interface and new playlist features. It also costs $10 per month, similar to what its competitors charge for their on-demand music service.