Pandora's Second Quarter: As Losses Grow, the Message Shifts to Mobile

Pandora shifted its message for its fiscal second-quarter earnings on Wednesday, putting more emphasis on the growth of its mobile revenue and listening hours.

During the earnings call, Pandora CEO Joe Kennedy unveiled an unprecedented number of details meant to show advertisers have and will continue to follow Pandora listeners to mobile devices. Compared to the prior-year period, mobile revenue was up 86%, mobile listener hours grew 96% year-over-year, and mobile revenue improved 86% to $59.2 million

"Our mobile monetization strategies are working," Kennedy declared confidently.

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Pandora shares were up 7.9% to $10.08 in after-hours trading -- not so much because of the disclosures about mobile growth, but because the company improved its fiscal 2013 guidance. Revenue is expected to be $425 million to $432 million, up from $420 million to $427 million, and net loss per share is expected to fall between ($0.04) and ($0.08), an improvement from earlier guidance of ($0.07) and ($0.11).

Top-line numbers looked good, as usual. In the second fiscal quarter ended July 31, Pandora grew its revenue 52% to $89.4 million. Total revenue for the first six months of the company's fiscal year was $182 million, with $160 million coming from advertising and $22 million coming from paid subscriptions. Although Pandora is no longer seeing revenue growth at or near triple digits, it grew revenue by $29.7 million in the first quarter and $34.3 million in the second quarter.

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The company posted a slight loss of $5.4 million for the quarter and $25.6 million in the first six months of its fiscal year (due to a $20.2 million loss in the first quarter). It posted a net loss of $3.7 million in the same period a year ago.

Content acquisition costs continued to drag on Pandora's earnings but improved from the first quarter. Royalties paid to rights holders -- mainly for the performance of sound recordings -- accounted for 59.8% of revenue during the most recent quarter and 63.9% during the first half of the fiscal year. Royalties accounted for 69.1% of revenue in the first fiscal quarter of 2012. Those content acquisition costs are between 9.4 percentage points (for the second quarter) and 12 percentage points (for the first quarter) higher than previous periods.

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Content acquisition costs keep growing because people keep listening. Listener hours increased 80% to 3.3 billion. Active users grew 48% to 54.9 million at the end of July. The company expanded into Australia and New Zealand in July, but its number of listeners and resulting royalties are immaterial relative to its U.S. operations.

Mobile, which accounts for 75% of Pandora usage, is an important topic because it presents a unique challenge (and is a major, ongoing concern of equity analysts). Listeners have moved from the desktop to mobile devices. Pandora has been coaxing advertising to its mobile platforms and slowly growing the revenue it generates per 1,000 impressions. It's a numbers game, and Kennedy believes Pandora is on the right track.

"If you look at the historical trend," he told Billboard.biz before Wednesday's earnings call, "we are narrowing that gap, meaning the revenue growth is approaching the listener hour growth and that ultimately is the key to getting the content acquisition costs down."

Pandora CFO Steve Cakebread announced during the earnings call he plans to leave the company later this year.