--> Shares of P slide lower in the premarket, indicated about -8.9% on light volume, approaching mid-June lows near the $11-level
Pandora Media color on qtr; misses on revs, guides Q4 lower than expectations and cuts FY16 rev guidance
- FBR & Co. lowered their rating on P to Market Perform from Outperform and cut their tgt to $12 from $16 following earnings as they were particularly bearish on the ad slowdown and higher spending guidance. Firm had thought that the guide for $120 million of spending for the on-demand launch in 2016 captured the opex impact. But P said there is an additional $24 million per quarter of spending starting mainly in 4Q16. This appears to be tied in part to the cost of administering complicated licensing contracts with labels. Firm had already captured the additional $22 million per quarter in costs from the higher licensing fees for the direct deals with labels. They assume P comes in shy of its 2020 ad targets but hits the subscription goals. But higher costs and slower ad growth make the 2017 guide disappointing, and prompt firm to hike the risk premium on the 2020 goals, taking their SOTP price target down $4 to $12. The slower ad trend also could lessen the value of Pandora to Sirius, weakening the argument for downside support in a potential takeout.
- RBC Capital Mkts raised their tgt on P to $14 from $13 following earnings as they felt that similar to Q2, P posted a Miss & Lower Q3, with the company seeing weakness in its core Advertising segment. P hosted an analyst day to accompany the earnings release, with management focusing on the upcoming (Dec. 6th) launch of the Pandora Premium On-demand product.Firm is incrementally more cautious on the name.
- Mizuho lowered their tgt to $12 from $13 on P noting they would highlight two things: 1) they agree that Pandora has a big and unique opportunity to drive new and meaningful revenue from subscriptions products, but it will take time; and 2) investments will continue to be significant into 4Q and possibly through 2017. While they like the LT opportunity of subscription, proof will be in execution over the next few quarters. With continued weakness in ad revenue, flat user growth and increased investments, they still remain on the sidelines.
- Needham held onto their Buy, $16 tgt on P following earnings noting what they liked most was the promise of higher transparency and extra metrics in 2017, to help Wall Street track execution. They believe investors in P are hedged because they see several potential acquirers if P stumbles, including the record labels because P should represent 11% of total US music industry revenue in 2017 (i.e., too big to fail, in their view).
- Wedbush too held onto their rating of Outperform, $15 tgt following the report noting they expect losses to persist into early 2017 as Pandora invests in on-demand music and international expansion. In addition to its new live events venture, its on-demand service and international expansion are Pandora's strategic priorities. Further, they believe that Pandora can convert 2 million Pandora One subscribers to on-demand, can attract 1 -- 2 million new U.S. on-demand subscribers, and can sign up 1 -- 2 million international on-demand subscribers in 2017, if it is successful in launching on time with a competitive offering.
- Dougherty & Company notes P is on a mission, aggressively investing to expand the functionality of its legacy business, as well as on the development of a new On-Demand service, and into international markets, all with the goal of creating the go-to platform for music discovery. This vision doesn't come cheap, especially in a business where the company has yet to sustain any meaningful margin leverage. Making matters worse, the company stumbled in Q3 and guided down for Q4. The company now faces a steep climb to profitability and until they have more confidence that the new product launches can drive sustainable profitability, firm is going to remain on the sidelines.