Pandora media Inc. (NYSE: P) came out with its Q3 2014 results on November 21st after market hours. The quarter saw the average revenue per user (ARPU) at the company increase by 13% over Q214. The worry point was a falling operating margin, mainly on account of expenses outpacing the huge growth in revenues. The stock price fell by 1.52% in the regular trading session on November 22nd the day after the earnings call.
Pandora Q3 2014 performance
The table below lists the important performance metrics for Pandora.
Numbers taken from Pandora Media Inc. SEC filings
The growth in active users accompanied by an increasing ARPU in the quarter saw the company register a topline growth just over 50%. The listening hours, an important metric tracked by the company, saw a 17.4% Y/Y growth. Another encouraging fact was the increase in the market share which had seen a sequential fall in the last two quarters. On a cautionary note, the growth in revenues was driven to a large extent by a decision to limit the free listening hours. The decision has been reversed and this is likely to slow the growth in subscription revenue over the coming quarters, which will put a pressure on the ARPU the company currently generates. The chart below shows the No of active users and the ARPU for Pandora.
After reporting losses for three subsequent quarters, Pandora has reported non-GAAP net income of $6 cents per share. With a 50% Y/Y growth in revenue and a positive net income margin, excluding one-time items and share-based compensation, the company still has many concerns for its investors. The operating expenses of Pandora, mainly research & development costs and sales & marketing costs have both stepped up and are increasing at a faster rate than revenues. R&D costs grew at 102% on a Y/Y basis while SG&A grew at 86% on a Y/Y basis. Adjusting these expenses for stock based compensation and one-time expenses, adjusted operating margin fell from 8.3% to 6.9% in the third quarter from a year ago. The company will either need to manage its costs, or boost the revenue growth more than its costs, to convert its revenues to actual profits.
Revenues in Q3 2014 were reported at $180 million, with an operating margin of 0.8%. The rise in the operating expenses more than offset the rise in revenues with the GAAP operating margin falling by 2.6% and the non-GAAP operating margin registering a fall of 1.4%. Let’s look at the revenue and margin trend for last eight quarters:
We shall now take a look at the current LTM valuation multiples of the company. The LTM price-to-sales multiple of 6 and an LTM price-to-book value multiple of 20 make the stock an extremely expensive and risky investment at its current price levels. Given the fact that the company is yet to generate any significant profits, the expensive valuation multiples of the stock makes us wary of putting our money on the stock. The table below shows the current valuation multiples f Pandora media Inc.:
Though the results met analysts’ estimates at the streetinsider.com on the non-GAAP earnings per share front, the lower future guidance given by the company failed to impress the investors leading to 1.52% fall in share prices, just after the release. The company beat the analyst consensus revenue estimates for Q3 2014 by a significant margin but the future revenue growth will likely see a slowdown in the absence of the limit on free listening hours.
The quarter saw good movements in the important performance metrics of the company. However it will be critical for the management to cut costs, which currently looks like an uphill task at the company. The increasing costs undid all the good work of a steeply rising topline and the profitability will be under tremendous pressure in case revenue growth slows down over the coming quarters. We will be watching the performance of the company over the coming quarters but at the current valuation multiples we do not see the stock as an attractive investment.
To see Pandora’s latest stock price movement, click here (NYSE: P)