By Gerry Shih
SAN FRANCISCO Aug 22 Internet radio service
Pandora Media Inc said on Thursday that rising
expenditures to acquire music and expand its sales force would
push fiscal 2014 earnings below analyst expectations, and its
shares slumped 5 percent.
The company also backtracked on a 40-hour monthly limit on
free music streaming that was announced just six months ago, a
measure originally implemented to control rising costs. Pandora
said it will lift the monthly cap Sept. 1 after watching its
The mixed message added to a sense of uncertainty
surrounding Pandora, which has otherwise reclaimed favor
recently on Wall Street. Aside from Spotify and Rdio, its usual
rivals, Pandora will soon face competition from Apple Inc
, which is preparing to launch its iTunes Radio offering
in the coming weeks.
Excluding certain items, Pandora said it expected to earn
between 0 and 5 cents per share for the year. That was below the
5 cent profit expected by analysts polled by Thomson Reuters
Its shares fell to $20.50 in extended trade.
But for the second quarter, Pandora exceeded expectations,
posting revenue of $162 million, a 58 percent rise, as it
continued to pick up listeners. Its earnings of 4 cents also
topped Wall Street expectations of 2 cents.
In an interview, Chief Executive Joe Kennedy said he felt
confident the company has proven its mobile monetization
strategy. But he signaled that earnings would be depressed in
the near future as he pursued an aggressive investment strategy.
In the past year, for instance, the company has increased its
sales force by three-quarters, he said.
"We're taking the increased margin that we're getting and
reallocating to invest in future growth," Kennedy said on
Thursday. "But everything says we're firing on all cylinders.
We're still in the earliest days. We have to invest to make the
most of a huge opportunity."
Kennedy downplayed the threat of competitors, saying that 7
percent of all radio listening was on Pandora, making it the
most popular online radio option.
"We've been on the market now for 8 years, and we've had
competitors large and small," he told Reuters. "We're still the
Kennedy told analysts the company would keep its
international expansion plans on hold but continue to
aggressively expand at the local level by selling targeted ads
for local businesses. But that would mean a significant effort
to ramp up sales across the country, he warned.
Steven Frankel, an analyst at Dougherty & Co, said it was
disappointing to see that "hard fought monetization gains aren't
going to translate into bottom line upside."
"This guidance is a reflection that this is a very difficult
and expensive business to scale," Frankel said. "Just when we
thought we understood all the cost dynamics, there's another
layer of complexity here."
Pandora's shares, which fluctuated wildly for the first year
after its June 2011 initial public offering, surged to a record
closing high of $21.71 on Thursday.
Pandora users listened to the service for a total of 3.88
billion hours during the quarter, an 18 percent increase from
3.30 billion hours a year ago, the company said.
Sameet Sinha, an analyst at B. Riley & Co, said although
Apple's entry into the market could siphon away some listeners,
it could ultimately help Pandora by expanding the market for
Internet radio advertising.
The iPhone-maker has already signed up advertisers including
McDonald's, Pepsi and Procter and Gamble
ahead of the radio service's imminent launch, according to an
"If Apple can prove to those advertisers that Internet radio
works, then you could expect to see a lot of advertising dollars
come into the market," Sinha said.