How Will Subscriber Growth Drive Pandora In The Second Half Of 2018?

P: Pandora Media logo
Pandora Media

Pandora (NASDAQ: P) recently reported better than expected Q2 results, beating both revenue and earnings consensus estimates. Revenues in the quarter came in at about $385 million (+2% year-on-year), while the company reported a loss of 15 cents per share on an adjusted basis. The narrower than expected loss was driven by strong growth of its premium subscriber base and ARPU, slightly dampened by subdued advertising revenue. Advertising revenue contributes nearly 75% of its overall revenue, and the company has seen its active monthly users and total listener hours decline steadily over the years. However, Pandora has seen strong growth in its premium subscribers. The company expects the advertising to improve as a result of its recently concluded acquisition of AdsWizz – which should expand its addressable market. On the other hand, subscription growth is set to continue with growth in premium subscribers. Further, its partnerships with AT&T, Snap, Cheddar, and T-Mobile should help boost Pandora’s paying subscribers over the long run and provide a strong long-term growth opportunity. These various digital partnerships should also help Pandora lower its subscriber acquisition costs and retain subscribers. In addition, any changes to royalty payments should increase expenses for the company, but could limit damages charged in related lawsuits. Further, the organizational redesign should help it to improve margins.

We have updated our model – raising our price estimate for Pandora to $8, which is slightly below the market price, based on the expected growth of its subscribers as a result of multiple partnerships with AT&T, Snap, Cheddar, and T-Mobile. Our interactive dashboard analysis of Pandora’s Performance In Second Half Of 2018 details our expectations for the second half of 2018. You can modify the different driver assumptions, and gauge their impact on the company’s valuation.

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For the second half of 2018, Pandora remains optimistic about further expanding its subscriber base, driven by podcast services, more device partnerships, multiple digital partnerships with AT&T, Snap, Cheddar, and T-Mobile, and increased music consumption. The AT&T deal, which bundles Pandora Premium with AT&T’s unlimited data plan, should boost its subscriber base and add significant value to the top line in the near term. Further, Pandora expects this partnership to provide subscribers with a higher lifetime value as a result of lower churn and lower acquisition costs. In addition, its co-marketing partnership with Cheddar should give Pandora access to a host of young subscribers. This should drive subscription trials for Pandora. However, the Snap partnership is unlikely to add significant value to the top line in 2018. The deal, over the long run, should boost ad revenues and could potentially boost Pandora’s paying subscribers, but is unlikely to move the needle much in the immediate term. The company’s recently concluded acquisition of AdsWizz – a digital audio ad tech company – which should likely improve its advertising capabilities and expand its addressable market. This should help draw more advertisers to the digital audio space. Given the fact that audio is the fastest growing format in digital advertising, this acquisition makes sense for Pandora. Furthermore, it is expected to be accretive to its earnings as it should help them generate higher revenues from free listeners and should provide decent medium-term growth opportunities. We expect the positive outlook for Pandora to continue into rest of 2018, driven primarily by the massive growth opportunity in the digital audio market, smart speakers, and increased consumption of podcasts.

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