A Few Thoughts Ahead of the Pandora Release
Author: John Moschella CFA, CPA Published: February 6, 2016 at 6:15pm, Category: Earnings Preview
We have calibrated our Pandora Media Inc (NYSE:P) Earnings & Valuation Model to meet consensus estimates in preparation for this week’s earnings release. Here are a few of the items we considered in our model updates:
1) Revenue/Gross Margin: For the fourth quarter we brought our revenue estimate up from the midpoint of Management’s guidance of $328M to the consensus estimate of $336M. In December, we brought our full-year 2016 gross margin estimates down to reflect the impact of the Copyright Royalty Board’s (CRB) Web IV ruling on royalty rates which were about 15% higher than Pandora’s 2015 per-performance rate.
2) Operating Margin: For each of the three opex items (Product Development Costs, Sales & Marketing, and General & Administrative expense) we are assuming a sequential decrease as a percentage of revenue, which is consistent with historic seasonality in the fourth quarter.
3) Convertible Notes: We included the expected proceeds from the convertible note issuance of $292.7M, net of the capped call costs of $37.5M, in our December Balance Sheet and Cash Flow Statement. At an interest rate of 1.75%, this transaction results in a reduction of the Weighted Average Cost of Capital (WACC) in the DCF valuation summary section of our model.
4) Non-GAAP Adjustments: Management guided stock-based compensation for the fourth quarter to $32M. We left amortization of intangibles in-line with the third quarter, and we added a $7.3M charge related to the pre-1972 royalties, which was included in management’s guidance last quarter. The resulting non-GAAP EBITDA in our model was slightly ahead of management’s guided range at $30.3M.
5) Share Count: Our 2016 share count estimate includes the impact of the Ticketfly acquisition (increase of 11.6M shares). We have not made adjustments to the share count for the convertible note offering announced in December, since shares are trading well below the conversion price of $16.42.
Earnings & Valuation Assumptions Ahead of the Release:
Based on the assumptions above, our 4Q15 model-based, non-GAAP diluted EPS estimate is $0.07 which in-line with the consensus estimate and is slightly ahead of management’s implied EPS guidance due to the slightly higher revenue forecast.
Given that Pandora is operating near the breakeven point, a Next Twelve Month (NTM) Price-Earnings Ratio (PE) approach would not be meaningful. Instead our market multiple valuation is based on the 2017 consensus EPS estimate, excluding the value of net cash. Ahead of the release shares are trading at about 19x the estimate.
Our Discounted Cash Flow (DCF) valuation of $9 per share is based on a Beta, Equity Risk Premium (ERP), and WACC of 0.80, 5.1%, and 5.6% respectively, and a terminal growth rate of 2%.
Using a 50%/50% weighting of our market multiple and (DCF) valuation approaches, our final price target ahead of the release is $9 per share. Keep in mind that our multiple and primary DCF inputs will be held constant after this week’s release to isolate the impact of the new earnings results on share valuation.
Sources: Company reports, SEC filings, and investor presentations.
1) Revenue/Gross Margin: For the fourth quarter we brought our revenue estimate up from the midpoint of Management’s guidance of $328M to the consensus estimate of $336M. In December, we brought our full-year 2016 gross margin estimates down to reflect the impact of the Copyright Royalty Board’s (CRB) Web IV ruling on royalty rates which were about 15% higher than Pandora’s 2015 per-performance rate.
2) Operating Margin: For each of the three opex items (Product Development Costs, Sales & Marketing, and General & Administrative expense) we are assuming a sequential decrease as a percentage of revenue, which is consistent with historic seasonality in the fourth quarter.
3) Convertible Notes: We included the expected proceeds from the convertible note issuance of $292.7M, net of the capped call costs of $37.5M, in our December Balance Sheet and Cash Flow Statement. At an interest rate of 1.75%, this transaction results in a reduction of the Weighted Average Cost of Capital (WACC) in the DCF valuation summary section of our model.
4) Non-GAAP Adjustments: Management guided stock-based compensation for the fourth quarter to $32M. We left amortization of intangibles in-line with the third quarter, and we added a $7.3M charge related to the pre-1972 royalties, which was included in management’s guidance last quarter. The resulting non-GAAP EBITDA in our model was slightly ahead of management’s guided range at $30.3M.
5) Share Count: Our 2016 share count estimate includes the impact of the Ticketfly acquisition (increase of 11.6M shares). We have not made adjustments to the share count for the convertible note offering announced in December, since shares are trading well below the conversion price of $16.42.
Earnings & Valuation Assumptions Ahead of the Release:
Based on the assumptions above, our 4Q15 model-based, non-GAAP diluted EPS estimate is $0.07 which in-line with the consensus estimate and is slightly ahead of management’s implied EPS guidance due to the slightly higher revenue forecast.
Given that Pandora is operating near the breakeven point, a Next Twelve Month (NTM) Price-Earnings Ratio (PE) approach would not be meaningful. Instead our market multiple valuation is based on the 2017 consensus EPS estimate, excluding the value of net cash. Ahead of the release shares are trading at about 19x the estimate.
Our Discounted Cash Flow (DCF) valuation of $9 per share is based on a Beta, Equity Risk Premium (ERP), and WACC of 0.80, 5.1%, and 5.6% respectively, and a terminal growth rate of 2%.
Using a 50%/50% weighting of our market multiple and (DCF) valuation approaches, our final price target ahead of the release is $9 per share. Keep in mind that our multiple and primary DCF inputs will be held constant after this week’s release to isolate the impact of the new earnings results on share valuation.
Sources: Company reports, SEC filings, and investor presentations.
