Pandora Media Inc (NYSE:P) should generate more profitability due to the ongoing improvement in mobile monetization that is leading to lower content acquisition costs (as a percent of revenue).
Pandora continues to post strong listener usage metrics in the face of increased competition and benefit from stronger and growing RPMs (revenue per 1000 hours) from its mobile listening hours.
Overall, Pandora's share of terrestrial radio grew to 8.44 percent in November 2013 from 7.09 percent a year ago and up from 8.06 percent in October 2013. Active users grew 23 percent to 72.7 million, and listener hours grew 12 percent to 3.98 billion.
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BMO Capital Markets analyst Edward Williams believes Pandora can continue to leverage its proprietary technology to drive stronger engagement and grow listener hours further. The company generates approximately 80 percent of its listener hours from mobile platforms.
Meanwhile, Pandora appears to have rebounded and fully recovered from the temporary weakness in listener metrics following Apple's (NASDAQ:AAPL) launch of iTunes Radio in September. Key metrics, including share, listener hours and active users are all at or near all time highs for the company, and it can grow further with the ongoing adoption of smartphones and tablets.
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In addition, RPMs for the recent quarter rose to $57.68 from $55.51 a year ago, an increase of 3.9 percent while mobile RPMs rose 58 percent to $39.32. The ongoing adoption of mobile devices, principally smartphones and tablets, will drive near-term growth for Pandora.
Williams noted that mobile RPMs should continue to rise as the company better monetizes its advertising inventory by leveraging its growing local sales force as well as its position as the leading radio station in most major markets in the US.
On the competition front, the landscape remains dynamic ! with new entrants (Apple) and long-standing alternatives (Spotify) all competing for listener hours. However, thus far Pandora has successfully grown share in the face of competition and it is now the leading radio station in most major markets in the US. Even when competing with well capitalized competitors – and/or well known brands – Pandora has been able to grow its listener share.
Pandora has driven revenue growth in part through stronger monetization of its mobile advertising inventory. In the September quarter, the company generated $35.30 of advertising per 1,000 streamed hours on mobile platforms versus $23.50 a year ago.
Williams expects content acquisition costs to drop to the company's long-term target levels as the company approaches a blended level of $50 per 1,000 hours streamed. He believes monetization should continue to improve as the company's investments in its sales team results in increased pricing-power.
As a percent of revenue, Pandora's content acquisition costs have been declining, and the third quarter 2013 represented 48.8 percent of revenue versus 58.2 percent in the same quarter of 2012. The key driver for this is the rate of growth of mobile monetization, which is now growing at a faster rate than mobile listening hours, allowing the company to generate some leverage. Further gains in mobile monetization should lead to lower content acquisition costs.
Meanwhile, international markets remain an almost entirely untapped section for Pandora. Though the company does operate in Australia and New Zealand, and recently surpassed the 1 million active users mark, there is still room for growth.
In addition, with 47 percent of radio listening in cars, full blown integration in the auto market remains a long term-driver for growth for Pandora. Williams noted that the company has dramatically increased the number of autos it's in and that the longer cycle adoption of Pandora in automobiles creates a potentially significant longer-term catalyst.
! Last but ! not the least, Pandora should also continue to benefit from the "internet of things" – especially as connected TVs and devices like Sonos systems continue to proliferate.
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