Why Pandora Buyout Optimism May Already Be Cooling

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Pandora Media Inc. (NYSE: P) might feel lucky after its earnings report. It is sometimes the case that internal workings and poor fundamentals of a company get overlooked because of outside developments. The financial picture for Pandora is that the online music streaming company has struggled to get past a money-losing business model for years now. The outside news that may have saved the day is that Pandora has a board change, has an outside investment commitment from KKR and may be a target of a buyout.

What all of this added up to is a mixed reaction, and it is often better to judge a big piece of news by the continued reaction in the following days rather than by the initial reaction to the news. After all, short sellers often create whip-around trading moves as they rush to cover shorts or as they pile on more short sale orders in the aftermath of news. Some analysts are just not convinced a buyout is really coming for Pandora.

After reporting a miss of first-quarter revenue estimates, Pandora lowered its second-quarter revenue expectations and trimmed its annual guidance for 2017. This probably sounded familiar to many of Pandora’s long-term investors. What kept the wheels from falling off the cart here was that Pandora also announced that it is exploring strategic options that could include a sale of the company, but it also has secured a $150 million investment from private equity firm KKR & Co. L.P. (NYSE: KKR).

Pandora also has announced major changes to its board of directors, which would be aimed at appeasing Keith Meister of Corvex Management and his activist campaign against the internet music company. KKR partner Richard Sarnoff is joining Pandora’s board of directors.

Corvex may have been one issue and a sale potential is of course another, but KKR’s market cap was last seen north of $15 billion. That means this $150 million investment is barely a 1% incremental effort versus the entire value of Pandora, while Pandora still has a full market value of almost $2.5 billion.

Pandora broke out its first-quarter metrics on growth of revenue, subscriptions and ticketing. Total consolidated revenue was up 6% to $316.0 million, with advertising revenue up 1% to $223.3 million. Total subscribers increased from 3.93 million a year ago to 4.71 million, and subscription and other revenue was up 19% to $64.9 million. Ticketing service revenue was $27.8 million, a 25% year-over-year increase.

Where metrics remain stale for Pandora are in earnings. The company said that its net loss was $132.3 million on a GAAP basis, versus a net loss of $115.1 million in the same quarter last year. Its adjusted EBITDA was a loss of $71.3 million, compared to a loss of $57.4 million in the same quarter last year.

Then there are the internal listener metrics, both of which declined. Total listener hours were 5.21 billion for the first quarter of 2017, compared to 5.52 billion for the same period of the prior year. Active listeners were 76.7 million at the end of the first quarter of 2017, compared to 79.4 million for the same period of the prior year.

Pandora ended the first quarter with $203.0 million in cash and investments, down from $243.3 million at the end of the prior quarter. Cash used in operating activities was $36.0 million for the first quarter of 2017, versus $13.1 million in the same period of the prior year.