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RAIN 2/14: RAIN sifts through newly-unearthed Pandora details from IPO filing

Posted on: 02/14/2011

Late Friday, Pandora filed for an initial public offering (IPO) of $100 million (RAIN coverage here). The move makes the service — now apparently adding a new registered user “every second” — “unique among Internet-music companies…none has gone public since Napster went bankrupt in 2002,” writes Bloomberg.

The move also opens up once-private financial information about the company. Today RAIN dives into Pandora’s SEC filing (found here) to uncover new information about the Internet radio titan.

PANDORA MAY HAVE TURNED DOWN A HALF- BILLION-DOLLAR ACQUISITION OFFER LAST SUMMER

According to a one-paragraph note deep within its 163-page Form S-1 filing, in July of last year Pandora received an offer from an unaffiliated third party, called “Party A” in the document, to purchase shares of the company at a price of $3.138 per share.

The New York Times seems to corroborate this finding, reporting that in recent months Pandora mulled over “the possible sale of the company” (more here).

If this offer was based on the existence of 152 million shares of common and preferred stock outstanding plus 34 million shares’ worth of exercisable warrants and options, it would have valued Pandora at the time at $584 million.

Admittedly, the filing does not explicitly state that Party A’s intent was to make an acquisition of the entire company, although the fact that it was willing to purchase both common and preferred stock at the same price may imply that.

According to the S-1 filing, “We did not pursue this transaction.”

However, a month later, a group of existing shareholders that held rights of first refusal over secondary transactions purchased 2.5 million shares of stock from a group of employees — including CEO Joe Kennedy, founder Tim Westergren, and CTO Tom Conrad — at that $3.138 price per share.

The sale of 2.5 million shares represented about 20% of their combined holdings; Kennedy received $2.5 million, Westergren $2 million, and Conrad $1.4 million. Currently, Kennedy still owns about 4.2 million shares (2.7% of the company), Westergren 3.6 million (2.4%), and Conrad 2.3 million (1.5%).

PANDORA PROFITABLE IN 3 OF LAST 4 FISCAL QUARTERS

While many publications are focusing on the fact that Pandora posted a net loss of $328,000 in the first nine months of 2010, the company has actually been profitable for the last 3 out of 4 fiscal quarters. In fact, Pandora has been profitable throughout Q2 and Q3 of 2010, according to their SEC filing. A loss of $3 million Q1 2010 accounts for the overall net loss of $328,000.

In roughly 2006 (i.e., the company’s fiscal year that ended 1/31/07), Pandora had $4.2 million in revenues against expenses from operations of $17 million. In 2007, revenues more than tripled to $14.3 million — against expenses of $29 million. In 2008, revenues grew to $19.3 million against expenses of $46.7 million. In 2009, revenues leapt to $55.2 million, against expenses of $70 million (for more details, see chart below).

For the first three fiscal quarters of 2010, revenues were $90 million (against expenses of $89.3 million). Quarterly results trends (pg. 54) suggest that Pandora’s full 2010 revenues — if one estimates that their Q4 revenues were around $45 million — may have leapt again to about $133 million against expenses of perhaps slightly under that — more than double their revenue in 2009 (for more, see chart below).

Tom Taylor reports in his Radio-Info newsletter that Pandora’s ad revenues — $77.9 million in the first nine months of 2010, triple that in the same period in 2009 — “may have already surpassed Sirius XM.”

Not surprisingly, royalties took the biggest bite out of Pandora’s revenues, reaching $45.4 million in the first nine months of 2010. That’s “twice what Pandora spent on them in the same period a year earlier,” according to CNN. Digital Music News reports (here) that Pandora has paid over $100 million in music royalties since 2007 — a number that “would have been much higher had it not been for negotiated, retroactive rate reductions affecting the years 2006-2010.”

OTHER FINDINGS: NON-MUSIC PROGRAMMING, MARKETING BUDGET, SUBSCRIPTION SURPRISE

  • Pandora writes in their IPO filing that it thinks “there is an opportunity over the long term to offer sports, talk, news and other forms of content in addition to music.” This non-music content currently gives AM/FM radio an advantage over Pandora, the company later notes.

    The company also writes that it’s planning to expand globally and into new platforms like cars and other coming devices.

  • Surprisingly (to us, at least), the S-1 reveals subscription revenues (either the $36/year Pandora One premium subscription or the $.99/month charge to listen to more than 40 hours per account per month) leapt from an average of $900K per quarter during the first three months of 2009 to about $2 million the next quarter and then averaged about $4 million during each of the first three quarters of 2010, comprising 13% of the company’s revenues during that period.
  • Pandora’s Tim Westergren has repeatedly led observers to believe (like in this interview) that “Pandora’s growth was, and continues to be almost entirely by word of mouth.”

    The S-1 reveals, however, that the company has indeed had a marketing budget. Parsing a note on page 52, one can conclude that the company must have spent at least $1.3 million on marketing expenses in calendar year 2007 (to be precise, in Pandora’s fiscal year ending 1/31/08) and at least $2.8 million in calendar year 2008.

    These were not insignificant investments, as they comprised, at minimum, almost 10% of company revenues in calendar year 2007 and almost 15% of revenues in calendar year 2008.

  • Repeatedly in their filing, Pandora states that, “we have more than a 50% share of all Internet radio listening time among the top 20 stations and networks in the United States, according to a November 2010 report by Ando Media” (emphasis ours).

    This isn’t precisely accurate, as some major stations and networks — NPR, Last.fm and virtually all non-U.S. webcasters — are not Ando clients and thus not a part of Ando Media’s monthly ratings reports.



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