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Pandora and iTunes Radio - Ear Deep in Competition

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By: Larry Darrell
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Pandora Media, Inc. (P), the leader in the US internet radio market, reported record revenues of $181.6 million (non-GAAP) for third quarter (3Q) of fiscal year (FY) 2013, beating the consensus estimate of $175.6 million, while revenues grew 50% year-over-year (YoY). A 58% YoY increase in mobile monetization, which crossed $100 million, caused the rapid growth for Pandora.

Despite the positive growth, Pandora reported losses of $1.7 million in 3QFY13, compared to profits of $2.05 million in the same quarter last year. Its adjusted EPS (earnings per share), which excludes extraordinary items, was six cents per share, in-line with consensus estimates. The company faces tough competition from Apple Inc.’s (AAPL) recently released iTunes Radio, which attracted 11 million users right after its launch. Other key players vying to get a larger market share include Spotify and Sirius XM Holdings Inc. (SIRI) radio. Pandora has increased its investments on product development and has also concentrated its efforts on sales and marketing to keep up with the growing competition.

The company's active listeners grew to 70.9 million, growing 20% YoY. However, on a monthly basis, its active users fell from 72.7 million to 70.9 million in October 2013. Its listener hours grew 17% to 4.18 billion, which in turn led to content costs to jump to $86.9 million, 32% higher than the quarter a year ago. The company's monetization metric from traditional computers fell 0.8%, whereas mobile RPM, which measures the company’s ability to monetize its user base on a per thousand listener hours basis, grew 40.7%.

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Success for social media companies hinges upon their ability to monetize the increasing user base, and Pandora has been doing that successfully so far. However, stiff competition in the market now calls for concentrated efforts towards attracting and retaining the user base. Pandora's active user count fell on a monthly basis this quarter due to customers trying out iTunes Radio and other internet radio platforms. The user base may stabilize, however, as the iPhone is the world’s most popular cellphone and Apple’s iTunes radio will continue to pose a serious threat to Pandora’s dominance in the market.

The company has guided revenues of $185-190 million for the next quarter, and it expects adjusted EPS to be between two and four cents while the analysts expect EPS to be at four cents per share. Pandora has also revised up its guidance to $657-662 million from previous guidance of $640-655 million for the full fiscal year 2013.

Pandora’s stock price has been up more than 230% year-to-date (YTD). It has a three year historical revenue CAGR (compound annual growth rate) of 97% and a projected three year revenue CAGR of 26%. Currently, its enterprise value is trading at 6.9 times its next twelve month sales compared to competitors’ average of 4.6 times. The company’s valuation will expand if it is able to grow its user base and monetize it, amid the intense competition.

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