Pandora (P) Q1 'Strong' - Needham & Company

Needham & Company analyst Laura Martin reiterated a Buy rating and $41 price target on Pandora (NYSE: P) following 'strong' Q1 results. The stock remains their Top Pick.

Martin commented, "P reported strong 1Q14 results at Non-GAAP revenue of $194mm (12% above our estimate) and an Operating EPS loss of $0.13 ($0.02 better than our estimate). P updated their 2Q14 and FY14 guidance, and we raise our estimates based on P’s comments. P remains our top pick for 2014, and we maintain our $41 target price."

Key take-aways from the earnings call included:

• P is now available in 10 out of the top 10 bestselling passenger vehicles, with 5mm new activations in cars in 1Q14. We estimate that P has a 5 year head start over other ad-driven streaming services.
• Peak ad loads were 6 ads/hour in 1Q14, up from 4 ads/hour in 1Q13. Average RPM in 1Q14 were $37.55, up 37% y/y. Advertising RPMs rose $34% to 33.40. Mobile RPMs rose 44% y/y to $29.46. Mobile advertising revenue hit $103mm, up 59% y/y.
• Engagement hit record highs, with an average of 21.9 listening hours per active user for the 30 days of March.
• At 3/31/14, P’s subscribers reached 39.5mm, up 94% y/y. As previously announced, P is raising its price for new subscribers from $3.99/month or $36 per year, to $4.99 and NO option for an annual contract. P noted on their EPS call that their content costs for this service had risen 53% over the past 5 years. Current subs will be grandfathered and will not see a rate increase.
• Regarding programming costs, P mentioned on its call that it pays 1.8% for radio content rights, but interactive rights cost 10% instead. P also mentioned that it paid $100mm in content license fees to artists in 2013, the highest fees paid by a single company in the world.
• Local sales people and markets continue to grow. At 12/31/13, P had 73 local ad salespeople. To date in 2014, P has hired 27 more. In total, P is now in 37 local markets with feet-on-the-ground local salespeople.
• As P enters more local markets and hires more salesfolks, this puts upward pressure on RPMs (which is a good thing). We estimate that national RPMs are $6-9, well below local RPMs of $9-12, which are well below local targeted RPM’s of $17-20. As local sales becomes a larger piece of total revenue, this puts upwards pressure on RPMs.

The firm raised FY EPS from $0.15 to $0.17 and set FY 2015 EPS at $0.48.

For an analyst ratings summary and ratings history on Pandora click here. For more ratings news on Pandora click here.

Shares of Pandora closed at $28.20 yesterday.

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