- THESIS REFRESH: We covered our P short back in January following heightened bearish sell-side sentiment off the Web IV announcement. P is now on our Long Bench; we believe it has more upside than downside from here since it diversifying away from the ad-supported model. But we're concerned about execution; particularly on interactive. P currently has limited if any leverage in negotiations, especially since it has publicly set expectations around the timing of its interactive rollout. Our other concern is on the core business, specifically around a slowdown in Local Advertising, especially if it is coupled with delays in striking interactive deals. Collectively that could push the speculative bulls out of the name. Regarding the 2Q print, we expect a small top-line beat with the mid-point of the 3Q guide coming in below consensus and full-year guidance raised inline with the 2Q beat. But we suspect the print will matter less than its underlying drivers (e.g. Local Ad Revenue growth) and the trajectory of P's longer-term story; collectively what we're focusing on below.
- LOCAL CONCERNS: P's Local Revenue growth reaccelerated last quarter (42% vs. 34% in 4Q15), a big positive at face value since it appears to be driven by a surge salesforce productivity (1Q local reps up 12% y/y vs. 39% in 4Q15). But the more realistic way to assess productivity is on a lag since it’s not likely that P’s new reps are producing at full capacity when being hired intra-quarter. On that basis, P only saw marginal improvement in productivity in 1Q, extending a stretch of waning productivity. Mgmt has curbed the rate of Local Rep hiring recently, which is a concern since headcount has historically been its largest source of Local Revenue growth. Looking out to 2H16 Ad revenue estimates, we see 3Q16 as stretch, and have to take a big leap of faith on productivity gains to get to 4Q16 estimates, especially since National salesforce productivity has been largely declining on a y/y basis.
- INTERACTIVE TIMING? P expects to sign direct licenses with each of the major labels by 4Q16 and go to market in 1Q17. However, we can't assume that timing will go exactly to plan. From the perspective of the labels, we have to wonder if they are in any rush to get a deal done with P that isn't decidedly in their best interest. There are at least 2-3 established interactive providers today; letting P in may not accomplish much more than adding a new interactive vendor to sell what is currently a largely commoditized product. In turn, that could just incite more pricing pressure within the industry, which would directly impact the labels' interactive revenue, without any guarantee of a lift in interactive subscribers. We get that P has 80M current users that it could target, but they can already sign on with any interactive provider today since P doesn't have a moat around its users. Also keep in mind that interactive isn't one deal, but three separate deals it will need to hammer out with each of the labels. In short, P may not be able finalize its deals by year end, at least at current market terms.
- WHAT WE’RE KEYING IN ON: First, salesforce hiring, particularly on the local side since that has historically been P’s largest source Local Ad revenue growth, and may be a leading indicator for revenue growth over the coming quarters. Mgmt suggested that is has roughly “155, 160 [local] sales people, or so” at a June 16th event, which suggests mgmt has curbed hiring (ended with 154 locals reps in each of the last 2 quarters). Second, 2Q16 local sales rep productivity to see if there is a material inflection in the trend. Third, anecdotal commentary on the timing on any interactive deals; specifically a change in tone. For context, mgmt appeared to have had a progressively waning confidence level around the Web IV outcome at the end its prepared remarks in the last 3 earnings calls leading up the CRB decision; we're wondering if we will hear something comparable regarding interactive timing.
Let us know if you have any questions, or would like to discuss further.