Before the market open on Thursday, Pandora (NYSE:P) released Audience Metrics for the month of March that included better-than-expected listener hours. Listener hours were 1.71 billion, up sequentially from 1.51 billion last month and 1.49 billion last year. Our model forecast was 1.66 billion hours, so the figure exceeded our expectations. The sequential increase in hours, roughly 13 percent, outpaced the increase in the number of days in March versus February, roughly 11 percent, resulting in an uptick in share of total U.S. radio listening, which was 9.11 percent in March, up from 8.91 percent last month and 8.05 percent last year.
Active listeners remained at 75.3 million for the second consecutive month, up from 69.5 million last year, but below our 78 million estimate. We expect listener hours to continue to rebound over the next several months as in-car integration increases. We also expect revenue per thousand listener hours (RPMs) to trend up as improving measurement techniques increase Pandora’s appeal among advertisers.
Our initial takeaway from March Audience Metrics is that Pandora is well-positioned to meet or exceed our Q1:14 estimates, as listener hours for the quarter slightly exceeded our expectations. Total listener hours were 4.80 billion, slightly above our estimate of 4.75 billion, with listener hours the driver for advertising revenue. Our revenue estimate is $176 million, versus consensus of $175 million and guidance of $170 – $176 million. Our EPS estimate is $(0.12), versus consensus of $(0.14) and guidance of $(0.16) – $(0.14). Pandora will report Q1 results after the market close on Thursday, April 24, and we will publish a results preview note with our final view on the quarter ahead of that date.
Last month, Pandora stated that it will no longer disclose key audience metrics on a monthly basis, after having done so for two years. The final monthly release will be provided in June 2014 (for the May 2014 metrics), although quarterly disclosures will continue. According to the company, the monthly metrics were provided to help advertisers make informed buying decisions. As Pandora believes advertisers can now make accurate side-by-side comparisons between the company and a variety of competitors through different measurement tools, including Triton Digital’s Webcast Metrics Local product (discussed below), it no longer believes that there is a business reason to provide monthly metrics.
Pandora continues to show strength in the face of increasing competition. We do not expect competing services to seriously threaten Pandora until they can provide the kind of personalization that Pandora’s Music Genome Project provides to each of its listeners over time.
A recent win for Triton Digital (Triton) should positively impact Pandora’s advertising revenue growth. Last month, Triton announced that the Media Rating Council (MRC) had granted accreditation to its Webcast Metrics Local (WCML) product. We note that the MRC had previously provided accreditation to Triton’s national measurement product. The MRC is a non-profit industry association comprising TV, radio, print, and Internet companies, as well as advertisers, advertising agencies, and trade associations, seeking to ensure valid, reliable, and effective measurement services. WCML provides traditional audio metrics to advertisers and agencies that enable the side-by-side comparison of terrestrial and digital listening. Accreditation at the local level should increase the appeal of advertising on the Pandora platform over the long-term.
Pandora once again showed signs of operating leverage in its business model in Q4:13. RPMs continued to grow at a faster rate than licensing per thousand listener hours (LPMs.) While RPMs are variable based upon ad numbers and pricing, LPMs are largely fixed with annual increases. We note that total RPMs increased by roughly 27 percent year-over-year, while LPMs increased by roughly 12 percent. The operating leverage is also apparent in content acquisition costs, which decreased to 47 percent of revenue in Q4:13 from 55 percent in the prior year.
We are maintaining our NEUTRAL rating and our 12-month price target of $35. We value the company based on its present number of users. We assign a 15x multiple to our $7 operating profit per user per year estimate, and arrive at a value per user of $100. At $100 per user, 76.2 million users at year-end, and a share count of 218 million, we arrive at our $35 PT, which reflects continued user growth and improving monetization.
Risks to the attainment of our price target include increasing competition from larger and more established companies, changes to the royalty rates paid for streaming music and other content, the implementation of data caps by Internet service providers, and the proliferation of native music/radio applications for computers, mobile devices, and other connected devices.
Michael Pachter is an analyst at Wedbush Securities.