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P | Just the Bad (Business Update Call)

Takeaway: Today's announcement skewed slightly negative, but the key takeaway is that P's new cost structure favors the the sub model even more now.

KEY POINTS

  1. JUST THE BAD: In short, P was only able to offer us disappointing headline economics of its new deals without any real color on what it’s getting in return for offering these concessions.  That and it has only struck deals with 2 out of 3 major labels; there’s no timetable for when/if it will ink deals with Warner Music Group.  While we suspected P needed to give away a lot to get these deals done by year end, the headline economics were worse than we were expecting.  Most notably, P’s ad-supported content costs (Ad LPMs) are stepping up from a reported $30.65 in 1H16 to ~$33 moving forward.  In exchange, P will be receiving additional functionality on the ad-supported product that should also create more ad inventory.  Regarding the subscription model, P is expecting content costs in the range of 65% to 70% of revenue (consistent w/ Spotify), but that applies to the entire sub portfolio, which is also a step-up on its current offering that we estimate has content costs in the range of 50% to 55% of revenue.  Once again, P will be receiving additional sub functionality in return, but was unable to tell us what that will be.    
  2. SUB OR BUST? The ad-supported model is now even more expensive to run under these new terms, and while the additional functionality/ad inventory is a positive, monetizing that model has always proved difficult since it’s largely headcount (sales rep) dependent.  In short, the ad-supported model now just costs more without any guarantee of improved monetization.  That said, the economics of P’s model favors the subscription model even more now.  The question is how much mgmt will prioritize that model moving forward.  While the longer-term opportunity really depends on how aggressively P chooses to go to market with its expanded sub portfolio, a key tenet of our long thesis is that P really doesn't need that much conversion in the initial year post expansion to move the needle given how poorly the ad-supported model is monetized.  That said, we're comfortable staying long the initial year of the expansion, especially since we suspect take-out speculation/activist pressure to backstop any fundamental mishaps along the way.  

 

For more detail, see the note below and/or let us know if you would like a copy of our P Blackbook deck & replay.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet  

 

 

P | New Best Idea (Long)
08/16/16 03:54 PM EDT
[click here]

 

 

 

 


PCLN | Room Nights Trackers Update

Takeaway: We're running two separate trackers now. Both suggest accelerating 3Q room-nights growth, but we're on the sidelines till we get a 4Q read

KEY POINTS

  1. ARPU TRACKER REVIEW: Our original tracker is a proxy for room nights/stay, which is based on traveler destination.  The rationale is that the farther a consumer travels, the more likely they are to book a hotel (vs. visiting friends and relative aka VFR), and the longer they are likely to stay.  The reason why we weight room nights/stay over total stays is because the actions of PCLN’s considerable base of repeat customers should carry more weight than its next new user given PCLN’s scale, which on a room-nights basis would be over 2x that of the largest public hotel operator.  Put another way, PCLN’s repeat users will represent the bulk of its room nights in any given quarter, so their collective decision to extend/reduce their trips by a few days should disproportionately impact the growth trajectory from a second derivative basis (accelerating vs. decelerating trends).
  2. VOLUME TRACKER INTRODUCTION: While we see ARPU as the swing factor in most quarters, it isn’t a catch-all. ARPU cannot account for meaningful events/calendar shifts in booking volume such as what we saw in 2Q, where PCLN saw booking volume get pulled forward into 1Q from both leap day and the Euro Cup, and get pushed back to 3Q because of an earlier Ramadan, the Olympics, and potentially Brexit concerns.  While trivial individually, these events are collectively material since 2-3 percentage points of growth can make or break a quarter (second derivative).  For context, PCLN’s room-nights growth in 1Q16 was its strongest since 1Q14, while its 2Q16 growth rate was only a couple percentage points lower than 4Q15.  So while we expect ARPU to dominate the trend most quarters, we’re now running a transactional tracker (hotel stays) to hopefully catch the quarters when it fails.
  3. BOTH TRACKERS ACCELERATING: Granted, PCLN’s 3Q guidance already implied improving trends given the acceleration off its 2Q guide range (guidance to guidance), but it is still encouraging to see both trackers pointing directional higher roughly two months into the quarter. 
  4. NEXT UPDATE: The 4Q guide may be more important than 3Q results at this point, so the next update we’ll provide will be mid-way through Oct to provide a read on both 3Q results and 4Q to-date up until that point.  Stay tuned.

 

PCLN | Room Nights Trackers Update - PCLN   TRACKER CHART

PCLN | Room Nights Trackers Update - PCLN   Outbound Travel Chart

PCLN | Room Nights Trackers Update - PCLN   EVENTS 1

 

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet   

 

Todd Jordan
Managing Director


@HedgeyeSnakeye

 

Sean Jenkins
Analyst

 

 


INVITE | P Best Idea Long | Call TODAY at 1pm EDT

Takeaway: We will host a conference call TODAY at 1pm EDT to present P as a new Best Idea Long. Dialing Instructions below.

INVITE | P Best Idea Long | Call TODAY at 1pm EDT - P   Best Idea Long Image

KEY POINTS OF DISCUSSION

  1. AD MODEL IS SO POORLY MONETIZED THAT: P’s ad-supported model hasn't produce any real operating leverage/cash flow to date, and is now more expensive to run post Web IV.  P’s 2Q results reinforce our long-standing view that revenue growth is tied to its salesforce growth, meaning the ad model may never get off the ground. That said...
  2. VERY LITTLE SUB CONVERSION GOES A LONG WAY: The sub model is far more lucrative from both a revenue and margin perspective.  The stark difference b/w the two models means the expanded sub launch is a massive growth opportunity, particularly in the initial years, maybe more depending on how aggressively P commits to it.
  3. P = CALL OPTION: Basically a hedged bet: mgmt either executes on its sub expansion (new deals + revenue) or is forced to entertain acquisition offers if can’t do so, which should buoy the stock at a minimum.  The former offers more upside, but the stock should end up much higher either way by this time next year, if not sooner.

 

 

Participating Dialing Instructions

Toll Free:

Toll:

UK: 0

Confirmation Number: 13643964

Subscriber: CLICK HERE to access event details.


INVITE | P Best Idea Long | Call Thursday at 1pm EDT

Takeaway: We will host a conference call Thursday August 25th at 1pm EDT to present P as a new Best Idea Long.

 

INVITE | P Best Idea Long | Call Thursday at 1pm EDT - P   Best Idea Long Image

KEY POINTS OF DISCUSSION

  1. AD MODEL IS SO POORLY MONETIZED THAT: P’s ad-supported model hasn't produce any real operating leverage/cash flow to date, and is now more expensive to run post Web IV.  P’s 2Q results reinforce our long-standing view that revenue growth is tied to its salesforce growth, meaning the ad model may never get off the ground.
  2. VERY LITTLE SUB CONVERSION GOES A LONG WAY: The sub model is far more lucrative from both a revenue and margin perspective.  The stark difference b/w the two models means the expanded sub launch is a massive growth opportunity, particularly in the initial years, maybe more depending on how aggressively P commits to it.
  3. P = CALL OPTION: Basically a hedged bet: mgmt either executes on its sub expansion (new deals + revenue) or is forced to entertain acquisition offers if can’t do so, which should buoy the stock at a minimum.  The former offers more upside, but the stock should end up much higher either way by this time next year, if not sooner.

 Attendance on this call is limited. Ping  for more information.


EVENT | Pandora Media (P) Best Idea Long

Thursday, August 25th at 1:00PM ET

Watch a replay below:

CLICK HERE to access an audio-only replay. 

CLICK HERE to access the associated slides. 

 

 

 

 


P | New Best Idea (Long)

Takeaway: We're buying into what we hope will be a bigger model transition, but if P doesn't execute, growing take-out pressure should buoy the stock

SUMMARY: We're not fans of P's ad-supported model, but mgmt's recent/recurring comments around up-selling its users along the demand curve suggest P may see the ad model as more of a funnel rather than a longer-term opportunity, even though mgmt would never publicly admit to it.  We're hoping P's interactive foray is part of a concerted push to prioritize the sub model, but the longer-term sub opportunity really depends on how aggressively P plans to pursue it.  However, we're going long the initial-year ramp of its interactive/expanded subscription launch, with expected headlines around direct license agreements likely propelling the stock higher in the interim.  But if P can't get its interactive deals in place in order to launch by 4Q16/1Q17, we expect increasing take-out pressure and/or speculation to buoy the stock, if not force P to entertain offers.  We're adding P as a Best Idea Long with an expected holding period through 2017.  We will be hosting a call Thursday, August 25th at 1pm EDT to run through our analysis in more detail.

  

KEY POINTS

  1. BIG OPPORTUNITY VS. WEAK CORE: The two themes here are ARPU and distribution costs; collectively where the ad-supported model struggles.  Regarding ARPU, P plans to offer new sub products at varying price points; very little sub conversion at pretty much any price point will go a very long way vs. P’s paltry ad-supported ARPU (TTM average of $1.12/month), especially in the initial year(s) following its expanded launch.  Regarding distribution costs, the sub commission rate (aka Apple Tax) tops out at 30%, but Apple just reduced the rate to 15% after the initial year.  Further, the commission only applies to in-app purchases; P's effective commission rate over the LTM is ~20%, so P can work around the tax.  P's ad-supported model on the other hand still hasn't achieved any leverage, and its 2Q results basically confirm that its revenue growth is tied to its salesforce growth (2nd note below).  P also paid out ~27% of its Ad revenue in Sales & Marketing expense over the LTM (ex commissions, direct marketing, and SBC).  In short, we're not buying the longer-term sub opportunity, but the initial-year upside of comping against the ad-supported model, which is so poorly monetized that very little sub conversion would really move the needle (1st note below).
  2. P = CALL OPTION: P reiterated its expected interactive launch date multiple times during its last call, suggesting that mgmt realizes it needs to go to market on schedule to appease the street; especially given growing pressure to sell the company amidst softening core fundamentals.  If P hopes to go market by late 4Q16/1Q17, we suspect it needs to strike at least one deal with one of the three majors before 3Q results.  Any deal announced with any of the major labels will likely drive the stock higher, especially since the street would likely assume that the rest will follow suit.  But there is a risk that the stock sells off if mgmt can’t get any deals done by the 3Q release and/or it pushes out its expected interactive launch date when it reports.  But if that happens, we expect certain activists to step up the pressure to sell the company, and any associated headlines should help put a floor into the stock.  Further, mgmt doesn’t really have many tools to fight off an activist effort; there are no super-voting class B shares, and mgmt doesn’t own enough of the common stock to have any real say.  So if the interactive opportunity doesn’t come to fruition as quickly as expected, we suspect the activist sell-camp may find growing support, and P may be forced to the table.  

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet  

 

 

P | Fixing the Story
04/06/16 08:47 AM EDT
[click here]

 

P | Call Option? (2Q16)
07/22/16 08:05 AM EDT
[click here]

 


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