Premium Raises Hopes For Pandora, But Bottom Line Continues To Be A Worry

by Trefis Team
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Pandora (NYSE:P) released its Q2’17 earnings on July 31. In a surprise, Pandora beats the analyst estimates by reporting a 10% increase in revenue amounting to $376.8 million, however it continued to report a net loss, but managed to limit the loss lower than the estimates.

While the stock saw a 6% rise after the earnings due to the hopes of a turnaround in the company, we believe that Pandora’s bottom line has not been impressive enough to sustain a bullish momentum in the stock.

On a positive note, the 25% rise in subscription revenues can be a game changer for Pandora in the near future.

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Bottom Line Has Failed To Impress

Non-GAAP gross margin of the company has fallen by almost 3% from 38% in Q2’16 to 35% in Q2’17. This has primarily been because of higher statutory rates offset to some extent by higher Advertising CPM. However, overall the content acquisition costs continue to be around 52% of the net revenues, despite the fact that the company is aiming to limit the usage of its free users.

On comparing the bottom-line of Q2’17 with the same period last year, the non-GAAP net loss has increased by almost 87%, which continues to be a worrying factor for Pandora. Therefore, the positive outlook around the stock after these earnings can be short lived.

Premium Starts To Drive The Subscription Revenue

Pandora’s on-demand music service, Pandora Premium, was launched earlier this year and has been able to put a positive impact on the top line as the company has reported a 25% increase in its subscription revenues, as compared to a 5% rise in advertising revenues. It is worth noting that the absolute rise in both the divisions has been almost the same, at around $13 million, despite the fact that subscription business is approximately 5 times smaller than advertising.

Number of paid subscribers for Pandora have surged by 24% y-o-y reaching 4.86 million, which can be attributed partially to Pandora Premium. This will offset the effect of a decline in the total number of active users which have fallen from over 80 million last year to 76  million recently, as Pandora won’t mind losing free users as long as it keeps on getting extra paid subscribers.

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