P Pandora Media, Inc.
Sector financial performance:
This company, which primarily operates internet music service available to listeners on internet –based devices and earning revenue from ad-supported (70% of total revenue), subscription (30%), and on-demand service, has been grouped into streaming music service sector in video &audio goods and service industry.
It seems that demand for ad-support radio stream of companies in this sector has been weak as indicated by decreasing listeners in the past three years, which probably has been the major reason that caused decline in ad revenue. However, it seems that the demand for paid subscription and on-demand stream has been strong as indicated by increasing number of subscribers (more than 40% in the past two years). With the increased price of subscription and shifting to premium plan, subscription revenue presents 40% and 60% annual growth in the past two years.
While subscribers continuingly increase quickly, it seems that the resulted increase in revenue of subscription cannot offset the decrease in ad revenue.
The growth in revenue has also been, according typical company’s data, outpaced by faster increasing costs including music content acquisition costs driven by increasing rate and operation related costs in the past three years. The typical company in this sector has a gross margin of 33% in 2018, with a SG&A as percentage of sales of about 46% and R&D as percentage of sales of 10%, and operating margin of 10%.
The typical enterprise price/sales ratio is 1.6(12 months trailing).
It seems that demand for ad-support radio stream of this company has been weak as indicated by decreasing listeners in the past three years, which may the reason that caused decrease in advertising revenue. However, it seems that the demand for paid subscription and on-demand stream has been strong as indicated by increasing number of subscribers (more than 40% in the past two years).
The first quarter of fiscal 2018 compared with 2017(ended Mar 31, 2018)
Advertising revenue decreased 4% driven by decrease in number of advertising sold offset by the raising price of new products.
Subscription revenue increased 61% due to increase of about 21% in number of paid subscribers and increase in price of on-demand subscription.
Fiscal 2017 compared with fiscal 2016
Advertising revenue increased 0.2% driven by the raising price with flat number of ad sold.
Subscription revenue increased 40% due to increase of about 25% in number of paid subscribers and increase in price of on-demand subscription.
Fiscal 2016 compared with fiscal 2015
Advertising revenue increased 15% driven by the raising price.
Subscription revenue increased 2% due to increase in number of subscribers.
Its gross margin has been down significantly to about 33% in 2018 (12 month trailing) due to increased content costs (raised contractual rate) and operating costs. With slightly improved SG&A as percentage of sales (46%), we have seen that its operating margin was largely down to -23% in 2018.
Currently this company has an enterprise price/sales ratio of about 1.5(12 month trailing). We think this stock may be undervalued compared considering the potential of increase in subscribers.
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