REFILE-UPDATE 6-Pandora Media begins search to replace CEO

Fri Mar 8, 2013 12:47pm EST

* CEO to depart, search for successor begins

* Surprise announcement comes same day Pandora reports solid results

* Revenue growth strong but profit growth still lacking

By Malathi Nayak and Jennifer Saba

SAN FRANCISCO/NEW YORK, March 7 (Reuters) - Pandora Media Inc CEO Joseph Kennedy is stepping down and the search for a replacement has begun, a surprise announcement that came the same day the Internet music service reported stronger-than-expected quarterly results.

Shares of the company, the leader in Internet-streaming radio, leapt 20 percent immediately after it reported results and forecast better-than-expected revenue for the first quarter of fiscal year 2014.

Kennedy's abrupt departure comes as Pandora is gaining market share and growing revenue, but still struggling to expand its profit. The company also has to grapple with intensifying competition from current rivals Sirius XM Radio and Spotify, as well as potential future entrants such as Apple Inc .

"As I approach the start of my tenth year, my head is telling me to get to a recharging station sooner rather than later," Kennedy told analysts on a conference call.

Kennedy said his decision to step down was "pretty recent" but did not elaborate.

"The cost of acquiring content is going to go higher and the competitive landscape is going to get more aggressive and difficult," analyst Mike Hickey at National Alliance Capital Markets said. "Maybe those are the headwinds he was feeling."

The former auto industry executive and amateur piano player, who confesses on his Pandora profile to being a pop music junkie, has led the company since July 2004. He will remain in his current role until the board names his successor, Pandora said.

Under his watch, Pandora grew to become the world's largest online radio service with over 67 million monthly listeners every month.

The Oakland, California-based company said that mobile revenue, an important metric, more than doubled to $80.3 million for the fourth quarter. But it reported a fourth-quarter loss of 4 cents a share, compared to 3 cents a year earlier, as the cost of obtaining streaming licenses and expanding its salesforce climbed.

Pandora makes money from user subscriptions and advertising, but analysts say it needs to focus more on the latter to boost its bottom line.

For the past decade, Pandora has been gaining market share as it becomes more popular. But as it attracts more listeners, Pandora has to pay more to license music.

"The big revenue growth is a positive. The lack of earnings growth tells you costs are rising pretty fast," Michael Pachter, analyst at Wedbush Securities said.

"I'm hopeful Joseph Kennedy is replaced by a guy who's got kind of an ad sales model and ran a radio station and is all about selling ads," Pachter said. "That's something they can do a lot better."

Last year, Pandora's former Chief Financial Officer Steve Cakebread left the company and was succeeded by Michael Herring in February.

"To have both the CFO and CEO resign in the last six months, I think it's a negative," analyst Mike Hickey of National Alliance Capital Markets, said.

LICENSE TO STREAM

Kennedy becomes the latest consumer dotcom chieftain to cede his post, after Groupon CEO Andrew Mason last week departed the daily deals giant he co-founded. Like Groupon and many other consumer dotcoms that debuted in the second half of 2011, Pandora's share price has headed steadily south since its June 2011 IPO.

Including Thursday's after-hours surge to $14, its shares are now down more than 12 percent from its $16 debut price. They closed at $11.73 on the New York Stock Exchange.

Pandora said it expects revenue in the first quarter of $120 million to $125 million, surpassing analysts' expectations of $119.5 million.

The company said fourth quarter revenue rose 54 percent to $125.1 million. Analysts were expecting $122.8 million, according to Thomson Reuters I/B/E/S.

Last week, the Oakland, California-based company said it would cap free mobile listening at 40 hours per month as it tries to overcome rising royalty costs.

Analysts believe the company capped mobile streaming because while its mobile advertising sales continue to rise, it is behind rising royalty payment costs.

Pandora's per-track royalty rates have increased more than 25 percent over the last three years, including 9 percent in 2013 alone and are set to increase an additional 16 percent over the next two years, co-founder Tim Westergren wrote in a blog posted last week on the company's website.

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