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Takeaway: P had everything working for them in 2Q14, which amounted to decelerating revenue growth...It only gets tougher from here

NOTE SUMMARY

  1. THE GOOD: P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  Total listener hours accelerated sharply (up 29% y/y vs. 13% in 1Q14), largely driven by surging per-listener usage.  P increased 2014 revenue guidance increased by $15M to $895M-$915.  
  2. THE BAD: Inline Revenues translates to a marked deceleration in revenue growth, which is a concern on a 33%-100% increase in ad load, on what could be its peak growth in listening hours for the year.  The road get tougher from here as P comps past both the listener cap and ad load increase.  Further, the guidance raise was likely fueled by seasonal political ad spend.
  3. THE UGLY: The longer-term story.  The dichotomy between user growth and monetization (ad load) will become more evident from here.  There is limited headroom on both fronts; declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Increasing ad load will only exacerbate the issue, especially with growing competitive threats competing for a share of P's 77% internet radio market share.

THE GOOD

P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  P delivered continued strength in mobile advertising, with revenues growing 54% y/y (vs. 59% in 1Q14) on our estimate of a 40% y/y increase in mobile ad-supported listener hours.  Listener hours on a per-user basis accelerated sharply in 2Q, up 20% y/y (vs. flat in 1Q14), with total ad-supported hours up 23% (vs. -2% in 1Q14).  P raised its 2014 guidance by $15M to $895-$915

P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad hours 2Q14

THE BAD

Inline revenues is actually a disappointment when considering everything P had going for them this quarter.  2Q14 is the first, and only full comp, on the mobile listening cap that led to per-user listening hour declines last year, in turn, the surge in 2Q14.  Further, P's redesigned ad feed (2 double-ads every 20 minutes vs. 1 ad every 15 minutes prior), cumulatively increased ad load by 33%-100%.

Combined increasing ad load on surging hours led to a deceleration in advertising revenue growth: 39% in 2Q14, which had the extra benefit of surging listener hours, vs. 45% in 1Q14, which only carried the increased ad load.  Moving forward, P will comp out of both tailwinds next quarter, so it only get tougher from here.

P did increase revenue guidance (up $15M), but much of that is fueled by the biennial ad spend around elections.  Management stated that political ad spending had been in the "high single-digit millions" in prior years, and that it should be higher this year.  

P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad Load distribution

THE UGLY

User growth slowed into the high-single digits for the first time.  That was largely telegraphed by P's monthly releases, but still drew a few questions during its earnings call.

In the link below, we speak about the headwind to P's user growth moving forward. Declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Further, we expect P's stated strategy of progressively increasing its as load will exacerbate this issue given a growing wave of competitive threats looks to capture some of P's ~77% market share in internet radio.

There is more work to be done here, largely breaking down P's TAM, which includes the proportion of its total accounts that may duplicate user accounts.  We have started doing some survey work, and will be publishing a note shortly.  Stay tuned.

P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Attrition

For more detail on our longer-term thesis, see note below.  If you have any question, or would like to discuss in more detail, let us know

P: Shot Across the Bow

07/23/14 10:27 AM EDT

http://app.hedgeye.com/feed_items/36887

Hesham Shaaban, CFA

@HedgeyeInternet