Pandora Faces 'Headwinds' in Tough Competition With Surprising CRB Rate Increase
Pandora challenges include more competition, increased royalties and hardware integration, executives and analysts said as shares closed down 7.2 percent to $4.52 Thursday. Q1 sales projections were lower than expected. On Wednesday’s earnings call, Chief Financial Officer Naveen Chopra said Pandora will face many of the same advertising revenue “headwinds” this quarter as in second half 2017, projecting Q1 revenue of $295 million-$305 million. The company cut 5 percent of staff this month (see 1802010055).
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Recent changes in royalty rates for interactive streaming​ (see 1801290001) set by the Copyright Royalty Board -- increasing gradually through 2022 to 15.1 percent of revenue from 10.8 percent -- were “a little bit of a surprise,” Chopra said. He said there’s industry discussion about how to handle the increases and noted “a pretty significant dissenting opinion from one of the judges.” Industry players are evaluating an appeal, and Pandora will continue to monitor the situation, he said.
The music streamer expects one in two people to have a connected device at home by 2022, leading to more listening, in what CEO Roger Lynch predicted will be a “sea change” in audio. The company has partnerships for Comcast's Xfinity X1, Sonos, Amazon Fire TV and Android TV. Pandora listening on voice-activated devices jumped 145 percent in Q4 vs. the 2016 quarter, Lynch said.
Lynch, “a big believer in building a business with partnerships,” referenced his days launching Sling TV, saying half of subscriber adds came through partnerships. “My approach has always been with device partners to think of them not only as devices that play back your content but as distribution partners who can help market your service,” he said: There’s opportunity for integrated billing.
Consumers’ listening to more audio content challenges Pandora, said Dougherty & Co. analyst Steven Frankel. Spotify and Apple expanded their subscriber bases through aggressively priced family plans, something Pandora is working with the labels to roll out, Frankel said. On the device side, Pandora won’t have Amazon Echo support until later in the year, he said.
Macquarie's Amy Yong told investors of “glimmers of hope” -- 1.4 percent quarter-on-quarter active user growth and a 12 percent jump in Q4 advertising revenue per user -- but cited investments including restructuring initiatives and said the focus on ad-tech, device integration and marketing. Industry cost structure and competition “remain tough.”
In Q4, revenue rose 7 percent to $395.3 million, with 300,000 subscriber additions to 5.48 million total. Total listener base was 74.7 million, said the company.