Pandora's Ad Revenue Climbs But Not Enough to Turn a Profit

Revenue Hits $194.3 Million, Beats Estimates

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Pandora's internet radio app displayed on mobile.
Pandora's internet radio app displayed on mobile. Credit: Victor J. Blue/Bloomberg

While Pandora's advertising business continues to grow, it's not expanding quickly enough to offset the streaming radio service's content costs and turn a profit.

Pandora booked $194.3 million in total revenue for the first quarter of 2014, a 69% increase to beat analysts' estimates. However the company recorded a $28.9 million net loss, giving the streaming radio company another quarter in the red. In recent years Pandora has only turned a single-digit millions quarterly profit in the fourth quarter.

Pandora's advertising revenue rose by 45% to $140.6 million, driven by a surging mobile ad business. Revenue from mobile advertising climbed by 59% to $103.1 million, accounting for 73% of ad revenue and 53% of the company's overall revenue.

Boosting ad loads
The company's future revenue "growth is driven by advertising," CFO Mike Herring said during Thursday's earnings call. Advertising's share of total revenue dipped from its usual 80%-plus to 72% in the first quarter, thanks to a one-time revenue reserve related to its paid-subscription business, but should return to normal in quarters ahead.

Pandora has been testing new ways to boost ad revenue. Last year the company increased the number of ads running per hour from four to six. And in the fall it began pitching media buyers on new ad-targeting options based on user data. On Thursday Mr. Herring mentioned that the company has "started rolling out basic experiments with the welcome screen and sponsored listening" but did not offer details of either test. A Pandora spokeswoman was not immediately able to offer further information.

Raising prices
Pandora is looking to boost income from subscriptions. next quarter the price of its ad-free, paid subscription service will increase from $3.99 a month to $4.99 a month, and the company is eliminating the cheaper annual subscription, Mr. Herring said. Existing subscribers will stay at their current $3.99 monthly rate.

Pandora paid $108.3 million in content acquisition costs in the first quarter, a 26% increase. Mr. Herring described Pandora's content costs as "significant" but said the company has been able to grow its per-listener revenue to help relieve the burden of those costs.

Mobile advertising may be the company's leading moneymaker, but it still isn't as successful at making as much money per-listener as Pandora's desktop service. While Pandora recorded $52.75 in ad revenue for every thousand desktop listeners, it only brings in $29.46 for every thousand listeners on mobile and connected devices. Mr. Herring said Pandora pays $22.57 in licensing costs for every thousand listeners.

Marketing spending
Sales and marketing expenses also weighed down Pandora's earnings. Those costs increased by 63% to 61.9 million. In February Pandora CEO Brian McAndrews said the company was increasing its marketing spend.

On Thursday he gave a bit more detail on that. In the past Pandora has spent its marketing budget "just on SEM [search advertising]" and is now "investing in other ways." He didn't shed much light on those other ways, other than to say the company is "not doing Super Bowl commercials" but is running video and audio ads on its own service.

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