Jim Boyle: Thoughts From Pandora's 'Analyst Day'
July 13, 2011 at 3:55 AM (PT)
GILFORD SECURITIES analyst JAMES B. BOYLE attended MONDAY's "Analyst Day" held by PANDORA (NET NEWS 7/12), and came away with the following observations:
* P States Margin Desire, But Haven’t Gotten Religion: During P's Investor Day, mgmt. did indicate a desire to expand operating margins, but I suspect their near-term passion in the user experience may be too intense to allow substantial mid-term margin increase. P cannot directly control sell-through or CPM; it can directly bump up commercial load w/o damaging listener experience, whether vs. internet peers or Radio’s ad bloat. Trimming our estimates in the out years until, and if, P gets a little margin religion.
* Broadband Caps Said Less Onerous Than Investors Fear: Mgmt. said its free service avgs. ~13 hrs-16 hrs. (@ 32kbs) so well under 2Gb cap of some telecomm providers, which needs 140 hrs./mo. to hit the cap. It noted that in a year of AT&T’s cap, P has seen no reaction by users. But P’s paid service is 6x as much bandwidth. Even the free service consumes noticeable mobile usage. Be aware caps are for new smartphones.
* High Growth: P is blessed/cursed with superb growth, now at 100MM accounts. In JUNE, P has grown to 3.6% total radio share from 1.1% in JAN. 2010. Robust growth boosts P's ad surge; yet it also boosts its stratospheric royalties. Investors, love growth, but also love margins and profits.
* Lofty Valuation & On The Come: P is 42.3x FY’14E EBITDA, quite a lofty multiple and far out. Our $14 target is a 5.0x FY‘13E Price/ Sales, a modest discount to Google’s consensus CY’12E P/S. P is a pricey stock.
* Slow Hours' Cost & Speed Ad Rev. Minutes: P might accelerate margins by bumping its minimal commercial load of ~1 min./hr. This tempers royalties while driving even more ad rev. Off-air radio is 16+ mins. Bumping P’s minimal ad load would still keep P attractive to listeners and ad clients. P having fewer ads is 4th best reason by P users; so important, not mandatory.
* High, Variable Royalty Burden: P paid 50% of its rev. last FY as royalty to music labels. Royalty to drop to ~40% in out years mgmt. projects.
* Risks: Incl. existing/new competition, royalty status, technology, economy, higher mobile access cost, and manages its high rev./cost growth. Risks to our sell rating incl. better than expected results or a take-out offer.
For details, contact GILFORD SECURITIES Sr. Analyst JIM BOYLE at (212) 940-9238 or email@example.com.