Social Media Stock Tracker: Negative Pressure from Pandora

WEEKLY STOCK PERFORMANCE The social media sector was down an average of 4% this week as it was negatively impacted by Pandora’s Q3 report (as detailed below) and Q4 concerns for AAPL. There was downward pressure on FB shares despite its potential addition to the NASDAQ 100 index next week, which should promote further institutional purchases through rebalancing. GRPN shares surged on Friday on renewed takeover speculation even though there were no fundamental developments. CHANGE SINCE NOV 16CHANGE SINCE NOV 16 GRPN ZNGA YHOO LNKD OPEN YELP FB GOOG 13.0 % 3.7 % 2.3 % 1.4 % 0.9 % 0.7 %(1.8%) (2.0%) ANGI BIDU SINA P JIVE MM RENN WEBM (4.6%) (7.2%) (7.9%) (8.6%) (8.9%) (8.9%) (9.6%) (26.4%) COMMENTARY Commentary: Pandora – Understanding Q3 Earnings Pandora announced its Q3 results and although the company beat consensus estimates on revenue ($120m vs. $117m) and earnings (non-GAAP EPS of $0.05 vs. $0.01), the stock suffered on lower Q4 guidance. Pandora shares are down 16% since its earnings announcement and 20% since January 1, 2012. Pandora’s low Q4 revenue guidance ($120m-$123m vs. $130m consensus) was significant and the company stated that it is a result of caution on near-term spending from advertisers due to macroeconomic concerns such as the fiscal cliff, as well as the typical seasonal weakness in January (Pandora’s fiscal year ends January 31). Though ad revenue showed steady growth at 19% q/q and 61% y/y, Pandora has not demonstrated that its ad revenues can definitively outpace cost growth, which is a core challenge since its content costs grow linearly with usage and music content prices increase by ~8% per year according to its SoundExchange royalty agreement. On Trailing Twelve Months (TTM) basis, content costs were 60% of total revenues. The Importance of mobile RPM RPM is defined as advertising revenue earned per 1000 ad supported listener hours and is an important metric, particularly mobile RPM. Since content costs are the same on mobile and desktop, increasing total RPM is the key to Pandora’s leverage, and more specifically, increasing mobile RPM is the fundamental goal since mobile represented 77% of total listener hours in Q3. However, the continued hyper-transition to mobile has negatively affected Pandora’s ad revenues, since mobile monetization is dramatically lower than desktop ($21.56 vs. $55.18 of mobile ad RPM on a TTM basis). On a positive note, Pandora’s quarterly mobile ad RPM grew 13% to $25.59 from $22.74 a year ago. However, mobile RPM growth has been stagnant in general over the past year (it decreased by 6% in Q2 and is only up 8% over the past five quarters) and further, the desktop ad RPM is also decreasing (down 14% in Q3, down 18% in Q2) as increased listener hours have not been offset by increased advertising sales. The core issue is that blended ad RPM hasn’t really moved in the last two quarters on a TTM basis ($29.20-$29.21) and small incremental increases on mobile just isn’t enough to drive the stock up when combined with downward pressure on desktop ad RPMs. Conclusion To be bullish on this stock at this time, you have to believe that Pandora will be able to grow its mobile RPMs more rapidly than it has demonstrated in the past. Is this possible? It hasn’t been so far, but in my numerous discussions with Pandora management over the past year, the company stressed that the challenge is to achieve greater direct sell-through rates on mobile (which are about a third of desktop sell-through rates) rather than focusing on increase mobile ad prices. Further, a bull should believe that Pandora will be able to maintain its competitive position (market share, listener hours, or active users) in the face of dangerous rivals such as Spotify, AAPL, AMZN, MSFT, and a host of dynamic digital music startups with innovative social features. In particular, it could be very damaging if AAPL can finalize licensing agreements with the major music labels and successfully launch a streaming service and we note that there has been a steady decline in the growth of monthly listener hours this year (102% in February vs. 59% in November). In the near term, it is unlikely that there will be a decrease in rising content costs for the company, as the proposed Internet Radio Fairness Act currently has only lukewarm support at best and streaming rates are currently miniscule for artists compared to song downloads. WEEKLY DEVELOPMENTS IN SOCIAL & INTERNET Facebook DEAL Media speculation continued on a potential acquisition of MSFT’s Atlas Solutions, an ad-serving platform which could allow the company to scale out a display ad network (FB launched a mobile ad network earlier this year) DEAL Despite media rumors that FB would acquire WhatsApp, a developer focused on direct mobile messages, the deal did not materialize. WhatsApp is an interesting target, with 100m daily active users and top paid app status in over 100 countries PRODUCT In a related move, FB’s Messenger for Android now allows signups with only a phone number (without requiring a Facebook account) PRODUCT Instagram disabled the ability to properly display its images in tweets (the image is now cropped) in an effort to push users to Instagram’s site directly TECHNICAL FB implemented changes to its development platform by auto-generating developer documentation from its source code LEGAL An Austrian student group that previously filed 22 separate complaints against FB, plans to challenge FB’s European privacy changes in court based on the results of an audit carried out by the Irish Data Protection Commissioner LEGAL In a modification to a previous $20m settlement over using subscribers’ names without permission, FB agreed to allow users to claim a $10 payment, with leftover funds to be paid to privacy advocacy groups. A hearing in June will consider final approval of the settlement DATA The company noted that there are now over 350 apps on Facebook.com that each have more than 1m monthly active users, and that there are nearly 200k mobile apps that are integrated with FB, including 9 of the top 10 grossing iPhone apps Amazon DATA The company noted that app downloads in its Appstore grew by more than 500% over the previous year, although AMZN did not provide any baseline sales numbers AOL DEAL The company’s Advertising.com business acquired Buysight, a provider of online ad services based on ad retargeting, for an undisclosed amount Apple PRODUCT Discover Card added Passbook integration which will feature cashback rewards with retail partners that can be redeemed with scannable QR codes at the point-of-sale PRODUCT AAPL broadened the geographies covered by its iTunes store by adding 56 countries (ex. Russia, India) Canalys DATA A new study by Canalys showed that 24 of the 25 top grossing developers in the leading app stores are gaming companies and that 25 leading developers accounted for ~50% of total app store revenue during the first 20 days of November Flurry DATA A new study showed that consumers are spending 127 minutes per day in mobile apps, up 35% y/y compared to a decline in desktop by 2.4% Foursquare PRODUCT The company rolled out a new feature that allows businesses to add events to their venues Google DATA The company notes that Google+ now has 135m monthly active users, up from 100m in September, although we have not seen evidence to support significantly increased usage directly in the social network PRODUCT The company rolled out an update to its YouTube app for the iPad which features enhanced AirPlay support, faster video startup, and improved accessibility with VoiceOver PRODUCT The Gmail app was updated to support multiple accounts, attachments, and more desktop-like features PRODUCT GOOG’s iPad search results will now also display a horizontal carousel of local results at the top of the page PRODUCT GOOG launched the Android version of Snapseed, its mobile photo app, after acquiring the company in September PRODUCT The free version of Google Apps for Business was discontinued but existing users will be grandfathered in GREE PEOPLE The Japanese social gaming company is laying off an undisclosed number of US-based employees after a recent slow down and the shutdown of OpenFeint, a mobile gaming company GREE purchased for $104m in 2011 Netflix PRODUCT In a major announcement, NFLX licensed Disney content on an exclusive basis beginning 2016 although direct-to-video releases will be available in 2013. Although financial terms were undisclosed, media reports speculate annual payments of up to $300m, but the company noted that it would not raise prices finance this new content, fueling worries of a potential future capital raise LEGAL The company received a Wells notice from the SEC (a warning that the SEC is considering an investigation) over Facebook post by its CEO in July that celebrated streaming hour records. It seems reasonably likely that the SEC will rule that this violated RegFD and may eventually fine NFLX in order to dampen any material social media disclosures by companies in the future Nielson DATA A new report showed that consumers continue to spend more time on social networks than anything else (~20% of total desktop time and 30% of total mobile time) and mobile app usage accounts for more than a third of total social networking time, which is an increase of 76% y/y Spotify PRODUCT Spotify presented a beta version of its new web player that featured tight app integration and a focus on improved music discovery DATA The company noted that it now has 20m active users and 5m paying subscribers (1m in the US) Yahoo DEAL YHOO acquired OntheAir, a developer with a focus on group video chats and webcasts, for an undisclosed amount. It is likely that YHOO will integrate these capabilities with Yahoo Messenger to better compete with Google+'s Hangouts LEGAL A Mexican court ruled that YHOO owed $2.7b to Worldwide Directories and Ideas Interactivas in a staggering verdict for breach of contract related to a yellow pages listing service. YHOO intends to vigorously appeal, but it appears that so far, the market does not believe that the ruling will stand as is Yelp LEGAL A woman was sued for $750k by a contractor for defamation after a negative YELP review Zynga STRATEGY ZNGA filed a license application in Nevada to enter into real money gambling, which would be a significant growth avenue for the company, although the process is estimated to take between 1-2 years DEAL A new partnership with Synacor will put ZNGA games and ZNGA virtual currency on pay-TV portal homepages with Synacor’s customers which include Verizon and Time Warner Cable PEOPLE Resignations continue, as Roy Sehgal, the creator of Café World, and Steve Schreck, a GM of Hidden Chronicles, both left the company Disclaimer The user acknowledges that he/she is not relying on any content or information contained in the foregoing report for any financial, tax, legal, accounting, or other business matters, and will rely on the advice of its own professionals and advisors for such matters. The user acknowledges that the above reports are for informative and/or entertainment purposes only and the mention or reference of any company does not imply an investment recommendation. The user acknowledges that under no circumstances is any content of the reports to be construed as an offer, solicitation, or recommendation to buy, sell, or solicit the purchase or sale of any securities of the companies mentioned. The user acknowledges that the information contained in the reports is obtained from sources believed to be reliable, but its accuracy and completeness, and that of the opinions based thereon, are not guaranteed. WebMediaBrands and the author will not be liable for any economic loss that may be sustained based upon the reliance of any material published in the reports.

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Social Media Stock Tracker: Negative Pressure from Pandora

Nathan Drona

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