Pandora: Tuned Into the Revenue-Growth Station

by YCharts Staff August 31, 2012

Pandora Media (P) dominates the internet radio industry, with 72.7% market share, up from 71.7% last March. And more importantly, it’s eating away at the $16 billion market dominated by traditional radio.

Many Americans driving from work to home and back prefer Pandora to the blather they could be listening to on many stations. On its earnings call, chief Joe Kennedy said Pandora’s the largest radio station reaching adults in 25 U.S. markets including New York and L.A. Total listener hours grew 80% to 3.3 billion, more time than consumers spent frittering away time on YouTube. And Pandora said 75% of its total hours were mobile listeners, and those brought in 58% of revenue.

For the second quarter, revenues increased 51% to $101.3 million. Most of that came from advertising, which was up 53%. But subscription and other revenue –- it charges $4 a month or $36 a year -- was up 36%. Investors gushed.

P data by YCharts

But hey, where are the profits? Those have yet to materialize, and that's the ultimate question for Pandora, and every other internet company including Groupon (GRPN) and Facebook (FB). In the second quarter, Pandora lost money -- $1.8 million on a GAAP basis, and break-even if you don’t count a few million worth of stock-based compensation paid. As of January 31, it had an accumulated deficit of $101.4 million.

P Profit Margin data by YCharts

It seems any potential profits are being redirected elsewhere, namely to content acquisition costs (read: royalties paid to copyright owners). That's the company's largest expense, $60.5 million or 60% of revenue. As listener hours grows, this does too. From the 10-k: "However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs associated with increased listener hours, we may not be able to achieve or sustain profitability."

And here's the problem:

P Expenses TTM data by YCharts

Investors seem thrilled Pandora raised its guidance, Pandora expects to lose just 4 to 8 cents per share for the year, not 7 to 11 cents per share it had projected. Analysts expect it to turn a profit in 2014, with William Blair predicting around $20 million of adjusted EBITDA.

But like Jimi Hendrix sang, Who Knows.