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P: Shot Across the Bow

Takeaway: We expect a 2Q14 beat & raise, but we caution not to confuse this for the long-term story, which has a shorter runway than many believe.


This is the summary version of our current thoughts on P.  In short, we have a cautious view of P's long-term runway.  We believe listener hours for its core ad-supported product will see pressure as the runway for new user growth isn't long enough to compensate for its churning members.  We understand there are additional opportunities from both car & local advertising, but we're not sure it will be enough to produce the 30% growth that consensus is expecting for both 2015 & 2016.  We are NOT short yet, given upside we see to 2Q14 revenues and 2014 guidance, but we will be looking for an entry point on the short side as we move closer to 2015. Until then, we'll continue to round out our analysis, and provide updates along the way.  



  1. 2Q14 REVENUES LOOKING STRONG: P’s monthly disclosures are showing a significant increase in listener hours (despite a user growth slowdown) as the company comps the mobile listening cap that ran from 3/13 to 8/13.  Factor in a considerable increase in ad load (see below), and a 50% increase in sell-through rates on its audio ad inventory, and we can see 10% upside to 2Q14 metrics. 

  2. 3Q14/2014 GUIDANCE UPSIDE?: We're expecting P's prospects to fade as we move through 2014 as it comps out of both its mobile listener cap and increased ad load in August.  We're expecting a 2014 guidance raise, largely because of a 2Q14 beat.  And even though we see some upside to 3Q14 currently, management may play it safe on the 3Q guidance release.  In short, if P raises guidance, it may be uninspiring.  



  1. ACTIVE USERS TO DECLINE?: The question is when, but we expect low single-digit user growth to pressure investor sentiment before that occurs.  P has glaring retention issues.  Over the last +3 years (1Q11-1Q14), P has added at least 160M registered accounts, yet only gained 46M active accounts.  In turn, P’s churn (114M) has outpaced retention during this period.  But the bigger issue is its shrinking runway; with +250M registered accounts, and +160M added since 1Q11, the headroom for new account growth may not be large enough to offset its churning members for much longer.

  2. TUG OF WAR: P will need to continue increasing ad load to drive the 30% growth the street is expecting for both 2015 & 2016.  But rising ad load could exacerbate its retention issues.  P’s audio and video ads are intrusive; more ads could limit existing listener hours per user and/or incite even greater churn, especially in the wake of growing competitive threats.  If listener hours decline, one of two events occurs: P’s ad inventory declines alongside declining listener hours, or that increased inventory gets pushed on to its more active users, which will test their loyalty as well.  




Comping the Mobile Listener Cap in 2Q14 

P initiated a mobile listening cap for its free ad-supported service from 3/13-8/13. During this period, we estimate that ad-supported listener hour growth decelerated sharply, while per-user hours declined.  P's 2Q14 monthly disclosures suggest that trend appears to be reversing; total hours are accelerating despite slowing active user growth, as per-user hours are comping against the first full quarter of the mobile-listening cap.  


P: Shot Across the Bow - P   Ad supported hours 3


Ad RPMs Growth to Decelerate, But Increasing Ad Load Should Help

There is an inverse relationship between growth in RPMs (revenue per thousand minutes) and listener hours, suggesting a 2Q14 surge in listening hours may come with declining RPMs.  However, P increased its max ad load/hr in August 2013 (4 to 6), but more importantly, altered its ad feed (from 1 ad/15 min to 2 consecutive ads/20 min).  In short, some users are seeing considerable increases in ad loads, in some cases 100% higher. Management also stated that the sell-through rates on audio ads are up 50% y/y, so even though we expect a sharp deceleration in Ad RPMs, we still expect an increase y/y from the increased ad load.


P: Shot Across the Bow - P   RPM vs. Hours

P: Shot Across the Bow - P   Ad Load distribution



Upside in 2Q14 Will Wane Therafter

Surging growth in listener hours, and a likely y/y increase in RPMs, suggest meaningful upside to 2Q14.  We're expecting advertising revenue will accelerate in 2Q14, leading to total revenues of $235M (up 49% y/y) vs. consensus of $219 (up 38% y/y).  But after 2Q14, P will lose the y/y comp benefit of both its increased ad feed (August) and the listener cap (September).  Further, subscription revenue growth could see incremental pressure since P is no longer providing annual contracts (March 2014), which has created a mild uproar among existing subscribers (696 comments link).  Note its subscription price increase currently only applies to new members.


 P: Shot Across the Bow - P   HRM vs.




Churn Appears to be a Recurring Theme

We can’t calculate P’s churn rate explicitly because the company stopped providing metrics for actual registered users in 2Q11.  Before that period, the math was pretty clear; following that period, we have to take a cumulative view of what has happened over the past +3 years, which we detail in the chart below.  P’s churn (114M) has outpaced its retention (46M) during this period.  Some users have multiple accounts, which could be partly to blame, but likely not enough to explain such high levels of churn (unless each of those active users averaged ~3.5 individual accounts).  Churn has gone under the wire since new account growth (registrations) has outpaced its churn, but that cannot continue indefinitely.  


P: Shot Across the Bow - P   Attrition 


Less Room for New Account Growth = Churn To Become More Evident

P has over 250M registered accounts, but there is definitely some double-counting of users (multiple accounts) in its account metrics since there are only 245M people in the US ages 10-69, which is likely its target market.  But remember that over 160M of its +250M accounts registered in 1Q11-1Q14.  So the better question is how many duplicate accounts were created during this period? The impetus to having multiple accounts is likely tied to P's listener caps, which only existed for 15 of the 39 months in this period., So while multiple accounts are definitely a driver, we question if its a material percentage; particularly in the more recent periods. But we still have work to do here, since answering this question is the key to breaking down P's realistic headroom, and whether the runway for new account growth can continue to compensate for churn.  Stay tuned.  



Rising Ad Load Will Exasperate Retention/Listener Issues

We estimate that ad-supported hours per/user declined marginally y/y on relatively clean comps in 4Q13 and 1Q14 (despite the easier comp from 1Q13 from one-month of the cap). We suspect P's adjusted ad feed (2 consecutive ads every 20 min from 1 ad every 15 min prior) may be partly responsible.  For example, we estimate the average ad-supported user listens ~40 minutes daily.  If turn, P has actually doubled the ad load for those users (4 ads in 40 minutes today vs. 2 ads prior).  This isn't as much of an issue now, but casts doubts as to whether P can stick to its stated strategy of gradually increasing ad load...without pressuring listener hours at the same time, which appears to be the case over the last 2 quarters.  Its important to remember that P's ads are intrusive, and the Pandora user as isn't captive as it once was given growing competition for listener hours from emerging threats.  


P: Shot Across the Bow - P   Ad hours decline 



Once again, this is the summary version of our current thoughts on P.  As always, we will be publishing additional notes with incremental data and analysis in the coming weeks & months.  In the interim, let us know if you have questions, or would like to discuss in more detail.



Hesham Shaaban, CFA



Consensus estimates, management commentary, and questions for management in preparation for the earnings release/call tomorrow.




  • Total revenues:  $557 million
  • EBITDA: $156 million
  • EPS $0.48



  1. Has Belterra Park met your expectations so far?

  2. July trends?

  3. Missouri has outperformed the other regional markets in Q2 and in July. What may be driving that?

  4. Update on ASCA synergy target?

  5. When will all these 'non-recurring' charges stop, as they unfairly benefit margins?

  6. Thoughts on the new competition in December: Golden Nugget Lake Charles?

  7. Given the recently announced charge which included new severance expenses, is the corporate expense saving of $20 million still valid - or should this estimate be revised higher?
  8. Describe the nature of the severance expenses - # of FTEs and roles?




Business trends

  • Trip frequency continues to decline with people visiting less often, while spend per trip actually increased 6% YoY 

Belterra Park

  • This is in a very competitive part of the country
  • Construction budget remains at $209 million

Promotional spending

  • Have seen in some of our markets, not specifically in the Cincinnati market but in some of our markets, increased promotional activity in the first quarter

Marketing expenses

  • Reinvestment declined both in terms of dollars and as a % of gaming revenue, down 120bps YoY.  These reductions were primarily driven by three things.  First, an expanding database at L'Auberge Baton Rouge has allowed us to market more efficiently to our guests.  Marketing reinvestment as a percentage of GGR declined 380 bps versus quarter one 2013. This marketing efficiency helped drive a 72% growth in EBITDA YoY.
  • [Customer reinvestment curve] Early in the process of understanding exactly where that sweet spot of marketing reinvestment should be and the loyalty program plays a big factor in that in terms of the traction that it generates, particularly at the Ameristar properties, where it is a very new program with the guest.

St. Louis

  • River City property generated all-time high revenues in March
  • Ameristar St. Charles had the benefit of an entire quarter with the new hotel yield system.  Early results are positive with a 5% increase in RevPAR and healthy increases in hotel cash revenue. 
  • Combined, both properties increased market share by over 200 basis points during the quarter.


  • Margins in the Midwest segment expanded despite a 7% year-over-year decrease in net revenues.


  • Enjoyed a solid performance from L'Auberge, Lake Charles...and achieved another record quarter in Baton Rouge in terms of the cash flow in 1Q

2Q non-recurring loyalty program charge

  • Entire cost of these benefits has been charged upfront in our second quarter this year and will have no impact on the actual cash expenditures related to the program and how the program is administered. PNK expects this non-recurring accounting charge will be approximately $5 million in aggregate in 2Q
    • (7/11/14) PNK expects $8-10m in unusual expense items. The unusual expense items relate to the rollout out of the Company's my choice player loyalty program at its Ameristar branded properties,
      Colorado lobbying expenses, and severance expense.

ASCA Synergies

  • Have implemented $53 million of annualized synergies through the end of 1Q.  This represents primarily cost related synergies and it does include about $11 million of cost avoidance, primarily driven by healthcare benefit cost.
  • Expect to generate meaningful synergies beyond that what has already been implemented

New Orleans hotel

  • Hotel construction continues to make progress and that project remains on budget and expected to open this summer.

Corp expense

  • Good run rate of $20m

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Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow




  • Total revenues:  $1,538 million
  • Adjusted EBITDA:  $319 million
  • EPS:  $0.75/share 




Q2 2014:

  • Adjusted EBITDA $310-$320 million
  • RevPAR SS Company Operated Hotels 5%-7%, in constant and actual dollars.
  • RevPAR SS Owned Hotels Worldwide 4%-6%, in constant and actual dollars.
  • SVO earnings $40-$45 million
  • Management, Franchise Fees & Other Income 8%-10% increase
  • D&A $75 million
  • Interest Expense $30 million
  • Effective tax rate 32.5%                  
  • EPS before special items $0.73 to $0.76

FY 2014

  • REVPAR at Same-Store Company-Operated Hotels Worldwide of +5% to +7% in constant dollars (approximately 25 basis points lower in actual dollars at current exchange rates).
  • REVPAR at Same-Store Owned Hotels Worldwide of +4% to +6% in constant dollars (approximately 50 basis points lower in actual dollars at current exchange rates).
  • Margins at Same-Store Owned Hotels Worldwide increase 75 to 125 basis points.
  • Management fees, franchise fees and other income increase approximately 8% to 10%.
  • Earnings from the Company’s vacation ownership and residential business of approximately $160 million to $170 million.
  • Selling, general and administrative expenses increase approximately 3% to 5%.
  • Full year owned earnings are negatively impacted by approximately $30 million due to 2013 and year to date 2014 asset sales, and a leased hotel that will be converted to a managed hotel in 2014.
  • EBITDA in the range of $1.2B to $1.23B
  • Depreciation and amortization is expected to be approximately $310 million.
  • Interest expense is expected to be approximately $115 million.
  • Effective tax rate approximately 32.5%, and cash taxes from operating earnings are expected to be approximately $160 million.
  • EPS before special items is expected to be approximately $2.76 to $2.83 (based on the assumptions above).
  • Full year capital expenditures (excluding vacation ownership and residential inventory) are expected to be approximately $200 million for maintenance, renovation and technology. In addition, in-flight investment projects and prior commitments for joint ventures and other investments are expected to total approximately $200 million.
  • Vacation ownership is expected to generate approximately $300 million in positive cash flow, including proceeds from the securitization of receivables the company anticipates completing in the second half of 2014.



  1. Update on share repurchase in Q2 and Q3?
  2. Update on CFO search?
  3. If the Lodging sector is only in the 5th inning, why have insiders been selling stock?
  4. Views on assets sales given strength in transaction market as well as hotel REIT share performance - one off vs portfolio transactions
  5. Where are inflation pressures negatively impacting margins?
  6. ROI on renovations from last 2 years
  7. Can US REVPAR momentum be sustained into 2H 2014?
  8. What drove the Q2 RevPAR acceleration?
  9. Are global tensions impacting bookings?




High Level

  • The global economy generally and the lodging recovery, in particular, continue to bounce along, with once again some markets doing better and others doing worse.
  • This year has begun pretty much along the same trend line.
  • Across mature markets, namely North America, Japan and Europe, growth in demand showed a steady improvement on last year and conditions are set to stay along that same trajectory.


  • 2014 owned hotel margin improvement - due to hotels coming off renovation and adapting staffing levels

Lodging cycle:

  • Driving growth is very strong corporate demand.
  • Corporate business, both transient and group, is robust and shows no signs of slowing down.
  • The corporate traveler is back on the road trying to drive sales growth.


  • Transient revenues have been growing at an 8% to 9% clip each quarter, powered by corporate and high-end leisure travel
  • Transient business is robust, growing 8% in 2013


  • Corporate groups are the healthiest of all the group business
  • The U.S. may be a third group, two-thirds non-group; and non-U.S. is probably more like a quarter group and 75% non-group, so clearly group is more important in the U.S. and U.S. group also tends to have longer lead times.
  • Negotiated corporate rates are up in the mid-single digits for 2014
  • Group business is pacing up in the mid-single digits

North America:

  • At this point, expect late cycle market dynamics in North America with REVPAR growth predominantly coming through higher rates
  • Occupancies, once again, were pushed to record highs.
  • North American REVPAR growth to continue to pace in the upper half of our outlook range of 5% to 7%.


  • Europe remains stable, but sluggish.
  • Hopeful Europe may surprise to the upside in 2014. That may yet happen, but it did not in Q1. And so far, Q2 looks to be more of the same
  • Need better rate gains in Europe which is predicated on somewhat more robust demand. Until that happens, Europe growth will stay in the 2% to 4% range.

Middle East

  • (Nomura Conference) based on recent visits to the Middle East, the region feels more optimistic than in 2006 and 2007.  HOT ran at 82% occupancy in Dubai in 2009.

China/Southeast Asia:

  • China's, will see some fits and starts. While the Chinese economy has many years left to grow, China will need to make significant structural changes along the way to facilitate the economic growth.
  • China remains a relatively low occupancy market. So, Starwood's growth will be driven more by occupancy than rising rates.
  • Wages have also been rising faster for some time now, so staffing levels are being adjusted to maintain margins. 

Latin America:

  • Latin America behaves like a diverse collection of countries. What's emerging now is a two-tier region.
  • Latin America, Mexico continues to boom.
  • Mexican resorts are very popular destinations again.


  • SG&A growth in the second quarter as reported may be higher than you might expect, since we will be lapping the recognition last year of $7 million in state tax incentives, derived from our headquarters move to Stamford.
  • Have a recurring annual benefit in the $3 million to $4 million range, which will most likely be recognized in Q3 this year.

Share buyback/dividends:

  • For 2014, work hard to continue returning cash to shareholders via - ordinary dividends, special dividends, and share repurchases
  • Four planned special dividends associated with the $500 million in cash from the completion of the Bal Harbour project.
  • A $614 million buyback authorization to be used as opportunities present themselves. During 2013, repurchased 4.9mm shares for $316mm
  • The use of that cash would first have been put towards reducing debt, while there isn't a whole lot of that left to do - not likely more debt reduction is needed.

 Asset sales:

  • The market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals.
  • Have a significant number of assets on the market in North America, Europe, and Asia and intention is to get transactions completed on acceptable terms as fast as possible.
  • Marketing a group of 6 North American hotels as well as a large number of international hotels.


  • Currently SPG accounts for over 50% of the occupancy at hotels on a global basis.
  • SPG members tend to pay a higher ADR than non-SPG members.
  • SPG member have higher food and beverage attachment.


  • Aloft will get to somewhere around 100 hotels next year
  • Goal: get to 80% from fees and 20% from owned portfolio and vacation ownership/other by 2016
  • About $3.3 billion in cash generation over the next three years, plus asset sales of $2-3 billion 
  • Pipeline: 450 hotels, 105,000 rooms
  • Focused on the three pillars of development strategy; right place, right property, and right partner.

Retail Callouts (7/23): TGT, DKS, KSS, APP

Takeaway: Target Canada asking for vendor support...another sign that Canada isn't working. DKS parting ways with 400+ PGA pros.



Wednesday (7/23)

  • HBI - Earnings Call: 4:30pm
  • SKX - Earnings Call: 4:30pm


Thursday (7/24)

  • CRI - Earnings Call: 8:30am
  • UA - Earnings Call: 8:30pm
  • DECK - Earnings Call: 4:30pm
  • AMZN - Earnings Call: 5:00pm




TGT - Target Canada asks suppliers for cost break to share in its struggles



  • "Target Canada is pushing its suppliers to give it a 2-per-cent cost break to help the U.S. discounter turn around its struggling Canadian operations and win an increasingly tough retail battle."
  • "In a recent letter to its suppliers, obtained by The Globe and Mail, Target Corp. said it is setting up the Target Canada Business Development Fund (BDF) by collecting 'an incremental 2 per cent accrual against receipts at cost' from its vendors, starting in March of 2015."


Takeaway: Yet another sign that TGT Canada simply is not working.  While it's not unusual for a retailer to ask for vendor support, this sounds broad-based, which is notable. Some vendors will simply say 'No', because they can (Coke and P&G). Others will end up paying 5% instead of the requested 2%. While this is bad for TGT, it sounds like the right move. To make any more significant changes (i.e. closing stores) would be a severe mistake without a new CEO.  We still think that there's an inverse correlation between how low earnings will go over the near-term and intermediate-term and how high quality the new CEO is. A great CEO (which TGT can afford) will invest the billions of dollars needed to take this company back to its former glory when it was one of the most respected retailers in the country. Now, after seven years of strategic missteps, it sits in the middle of the worst possible competitive set -- WMT, dollar stores, department stores, grocery stores, and Amazon. 


A weak CEO will simply prolong the pain by not making the (costly) changes needed. 


In the end, we don't think you can win with TGT. Either a bad CEO sustains a path of mediocrity. Or a great CEO takes down earnings over a 2-3 year time period by a buck or more in hopes of a payout in years 4-5. 


DKS - Dick's Lays Off More Than 400 PGA Golf Instructors



  • "Dick's Sporting Goods Inc. is cutting hundreds of jobs in its golf division as fewer Americans hit the links."
  • "A spokeswoman for the PGA of America said more than 400 of its members who were employed as golf instructors at Dick's were notified Tuesday that they would be laid off. The organization, which counts more than 28,000 members overall, said it would offer career counseling and employment services to its affected members."


Takeaway:  Big move by DKS here. Yes, the golf business is underperforming, but this change in strategy eliminates what DKS has touted as a huge competitive advantage over its competition in a category that represents a little less than 20% of its consolidated revenue. Saving a penny or two in EPS can't possibly be worth the reputational spanking that it is no longer an authentic golf store. Truth be told, no real golfer shops at Dicks anyway. But the average Joe Golfer likes thinking (right or wrong) that it's a place Pro Golfers respect. 




KSS - Disney & Kohl’s to unveil ‘D-Signed’ fashion brand



  • "Disney Consumer Products and Kohl’s announced they’re bringing the newest iteration of the tween lifestyle brand 'D-Signed' exclusively to Kohl’s. Offering a 'mix & match' assortment of apparel that gives girls the opportunity to create their own styles, the 'D-Signed' brand continues to be inspired by the fun fashions featured on Disney Channel shows. The hit tween brand will launch with the popular 'Girl Meets World' collection and is available at Kohl’s stores nationwide and online at this summer."


APP - Moves at American Apparel



  • "American Apparel Inc. is expected to name five new directors to its board in the next day or so, according to a source familiar with the situation. Once the company makes the appropriate regulatory filing, it will take 10 days for the board to be officially reconstituted and begin weighing the fate of former chief executive officer Dov Charney, which could be determined in mid-August."


FTC Reaches Settlement in Made in USA Labeling Case



  • "The Federal Trade Commission said Tuesday it has reached a settlement with Made in USA Brand LLC, which the commission charged deceived consumers by allowing brands to purchase a seal claiming their products were made in the U.S., without independently verifying the claim or disclosing that companies had certified themselves."
  • "The FTC said in a complaint that Made in USA Brand LLC charged brands and companies $250 to $2,000 for a one-year license to use the Made in USA certification mark, but 'had no procedures in place to determine whether marketers complied with the FTC’s Made in USA standard.'"


WAG - Walgreens rolls out Balance Rewards program



  • "Walgreens announced the new Balance Rewards for healthy choices initiatives, which is aimed at helping participants modify behavior risk factors associated with the nation's most pressing public health issues. The initiative marks the first community pharmacy program that includes training based on the methodology of psychologist Dr. B.J. Fogg."

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