Pandora Media Earnings Model Update
Author: John Moschella CFA, CPA Published: February 21, 2016 at 6:00pm Category: Earnings Review
New Ticket Service and On-Demand Business: We have added two new segments to our Pandora Media Model: one to capture the Ticketfly business, and the second for the new on-demand music service. For Ticketfly management guided 2016 revenue between $80M and $90M, with total expenses expected to match revenue at $80M to $90M. We set the gross margin for the Ticket Service business equal to that of the fourth quarter (30%), and set the Opex-to-Revenue ratio to approximately 30%, which meets management’s guidance of a breakeven operating margin.
For the new on-demand music service management guided the 2016 investment to $120M, which we spread evenly through the year. We have not included any incremental earnings from this business in our model until 2017.
New Model Valuation Methodology
Since Pandora is not expected to be profitable in the near term, our previous Price-Earnings multiple- based valuation approach is no longer meaningful. Instead we have shifted to a forward Price-EBITDA ratio based valuation. For this calculation we value shares based on a multiple applied to the consensus 2017 non-GAAP EBITDA estimate, which is currently $58.4M. Shares are trading at approximately 27x this EBITDA estimate (excluding the value of net cash per share of about $0.59).
We have also incorporated an estimation of the M&A value of the company, given the recent talks that management could potentially be looking for an acquirer. We have estimated an acquisition premium of 25% with a 20% probability of a deal materializing over the next year.
We weight our valuation based on our estimated probability of a deal (20%) and probability of no deal (80%). If additional details are released about potential suitors we will increase the probability, which will then result in an increased valuation.
Recalibration to Latest Consensus Estimates
We have recalibrated our model to meet the latest consensus estimates. For Pandora we focus on the top-line revenue estimate, adjusted EBITDA, and non-GAAP diluted EPS. The consensus revenue estimate for 1Q16 and full-year 2016 is in-line with management’s latest guidance, so we set our model to meet that estimate by changing the growth rate for listener hours. For the majority of 2016 we left the Revenue Per Thousand Listener Hours (RMPs) consistent with prior year’s seasonally adjusted increases for both the Computer and Mobile platforms.
Our 2016 quarterly gross margin estimates are much lower than 2015 to reflect the impact of higher royalty fees based on the CRB’s decision on rates, which was published earlier this year (click for details).
We set our 1Q15 and full-year 2016 estimates for income tax, depreciation & amortization, and stock-based compensation equal to management’s guidance. Overall our resulting non-GAAP EBITDA was in-line with management’s guidance; However, the resulting non-GAAP EPS did vary to some extent from the consensus estimate. This is now less important since we are valuing shares based on an EBITDA multiple.
Management’s Guidance
First Quarter 2016:
Sources: Company reports, SEC filings, investor presentations. Management’s guidance from 4Q15 call.
For the new on-demand music service management guided the 2016 investment to $120M, which we spread evenly through the year. We have not included any incremental earnings from this business in our model until 2017.
New Model Valuation Methodology
Since Pandora is not expected to be profitable in the near term, our previous Price-Earnings multiple- based valuation approach is no longer meaningful. Instead we have shifted to a forward Price-EBITDA ratio based valuation. For this calculation we value shares based on a multiple applied to the consensus 2017 non-GAAP EBITDA estimate, which is currently $58.4M. Shares are trading at approximately 27x this EBITDA estimate (excluding the value of net cash per share of about $0.59).
We have also incorporated an estimation of the M&A value of the company, given the recent talks that management could potentially be looking for an acquirer. We have estimated an acquisition premium of 25% with a 20% probability of a deal materializing over the next year.
We weight our valuation based on our estimated probability of a deal (20%) and probability of no deal (80%). If additional details are released about potential suitors we will increase the probability, which will then result in an increased valuation.
Recalibration to Latest Consensus Estimates
We have recalibrated our model to meet the latest consensus estimates. For Pandora we focus on the top-line revenue estimate, adjusted EBITDA, and non-GAAP diluted EPS. The consensus revenue estimate for 1Q16 and full-year 2016 is in-line with management’s latest guidance, so we set our model to meet that estimate by changing the growth rate for listener hours. For the majority of 2016 we left the Revenue Per Thousand Listener Hours (RMPs) consistent with prior year’s seasonally adjusted increases for both the Computer and Mobile platforms.
Our 2016 quarterly gross margin estimates are much lower than 2015 to reflect the impact of higher royalty fees based on the CRB’s decision on rates, which was published earlier this year (click for details).
We set our 1Q15 and full-year 2016 estimates for income tax, depreciation & amortization, and stock-based compensation equal to management’s guidance. Overall our resulting non-GAAP EBITDA was in-line with management’s guidance; However, the resulting non-GAAP EPS did vary to some extent from the consensus estimate. This is now less important since we are valuing shares based on an EBITDA multiple.
Management’s Guidance
First Quarter 2016:
- Revenue $280M to $290M
- Adjusted EBITDA loss between $75M and $65M
- Stock-based compensation expense of $38M
- Depreciation & amortization expense of $14M
- Provisions for income taxes of $0.5M
- Basic shares outstanding 227M
- Revenue $1.40B to $1.42B
- Adjusted EBITDA loss between $80M and $60M
- Stock-based compensation expense of $164M
- Depreciation & amortization expense of $62M
- Provisions for income taxes of $2.0M
- Basic shares outstanding 231M
- Ticketfly revenue between $80M and $90M
- Ticketfly cost of revenue and expenses between $80M and $90M
- New on-demand music service investment $120M
- Core internet radio business revenue $2.4B
- New music service revenue $1.3B
- Live events and sponsorships revenue $0.3B
- Core internet radio business non-GAAP gross margin of 60%
- Core internet radio business non-GAAP operating margin of 20%
- Total non-GAAP operating margin of 13%
- Long-term non-GAAP operating margin target (beyond 2020) 15%+
Sources: Company reports, SEC filings, investor presentations. Management’s guidance from 4Q15 call.
