Pandora’s Growth Challenges Remain Despite New Leadership, Legal Victories

It’s been a turbulent few weeks for Pandora, with the company reporting earnings that included a net loss, appointing a new CEO, proposing a follow-on offering of shares to be sold, and today, winning a lawsuit that will ensure that its catalog of music won’t contract.

All that and the company admitted in the midst of it all that its growth rate will likely slip, which, it dryly noted, “could negatively impact [its] stock price.” Pandora, existing somewhere between the music and technology worlds, has long been a company worth watching.

The tension between the two realms that it has to balance has led to some ridiculous situations, including Pandora buying a regular radio station (KXMZ-FM) in a bid to pay lower royalty rates. With all its recent happenings, it’s worth our time to rewind and take them in order.

Revenue Up, Stock Down

Pandora reported its most recent quarterly earnings in late August, with revenue of $162 million for the quarter. That figure was up 58 percent year over year. However, its non-GAAP loss per share was $0.04, double what analysts had expected. In the next day’s trading, Pandora’s stock fell sharply.

The company reported that its 71.2 million users listened to a combined 3.88 billion hours of music during the quarter. That represented an 18 percent year-over-year increase. However, it was lower than the 4.18 billion hours that the company had racked up in its sequentially previous quarter.

It was a mixed quarter: Despite strong revenue growth, Pandora’s listening figures could be viewed as soft, and losses persisted, even on a non-GAAP basis. Investors were not heartened.

Hello, New CEO

Pandora picked up a new CEO, Brian McAndrews, in early September. McAndrews had previously done a stint at Microsoft after that company had picked up his former enterprise aQuantive for more than $6 billion. As you recall, that specific deal went to the dogs and Microsoft wrote down billions.

That aside, Pandora didn’t snag McAndrews directly from Microsoft. Instead, he was recently a partner at Madrona Venture Group.

Investors are more than happy, sending Pandora’s stock sharply higher, higher even than the level it was at before it reported its second-quarter earnings, which had caused it to have market heartburn. A new CEO can often bring new direction, and as Pandora was showing signs of slipping traction, the timing was strong. That a new chief executive was installed was not a surprise. Pandora had announced earlier in the year that it intended the change.

Still losing money, however, Pandora needed more cash.

We Need More Money

Pandora ended its most recent quarter with around $60 million in cash, equivalents, and short-term investments. That means that Pandora had far less than a single quarter’s revenue in cash of any sort. It decided that it needed more.

In mid-September, Pandora announced that it would offer 10 million new shares. Crosslink, an investor, would sell an additional 4 million. Ten million shares at Pandora’s current market price would generate about $250 million in cash for the company, less fees and such. That would almost triple its cash position and provide it with funds equivalent to more than two quarters’ worth of revenue, using second-quarter figures as a measuring stick.

That the company was recapitalizing to fight future wars was perhaps an encouraging sign, as it showed a willingness to stay combative. However, the company had a warning attached to its offering of new stock (emphasis mine):

We have experienced rapid growth rates in both listener hours and advertising revenue as a result of our growth strategy to commit substantial financial, operational and technical resources to build the Company. As we grow larger and increase our listener base and usage, we expect it will become increasingly difficult to maintain the rate of growth we currently experience. Slower growth could negatively impact our stock price, our ability to hire and retain employees or harm our business in other ways.

Investors appeared unsure how to react. Pandora opened lower the following day, but rose throughout normal trading to a new high. 

Legal Victory

This brings us to today, with Pandora winning a legal victory over the American Society of Composers, Authors and Publisher (ASCAP). In short, the musical group cannot limit the amount of music that it licenses to Pandora. This matters greatly for the firm as it struggles enough in competition with Spotify, Apple, and others without having to wage that war with a partial weapon; if Pandora can’t supply its listeners with a full catalog of songs, it provides far less value.

The ruling judge in the case was clear: “The language of the consent decree unambiguously requires ASCAP to provide Pandora with a license to perform all of the works in its repertory.” Pandora stated that it ‘welcomed’ the decision, and that it hoped that the ruling would “put an end to the attempt by certain ASCAP-member publishers to unfairly and selectively withhold their catalogs from [its service].”

Pandora is up less than 1 percent on the news. 

Moving Forward

All this comes to form a moment in time that matters for Pandora, a company with more than a decade of history under its belt. It has new leadership, will soon have new money, and has re-secured the music deals that it needs to continue pumping tunes to its users. Can the company continue to grow and finally post some — even on a non-GAAP basis — profits?

Pandora’s business is predicated on the idea that people like radio and being fed songs instead of selecting them on their own. That puts it at an angle with other popular sources like Spotify. We’ll find out if it is right.

Top Image Credit: Serendipiddy

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