P: Walking the Plank (4Q14)

Takeaway: P gave itself some breathing room, but likely not enough. More importantly, the much bigger risks are approaching.

KEY POINTS

  1. 4Q14 WORSE THAN IT LOOKED: P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue from three industry groups with seasonally stronger 4Q ad spend; the question is why?  Also, P saw accelerating user growth in 4Q, but it was coming off a deflated 4Q13 comp; a quarter that we believe P experienced heightened attrition.
  2. BOUGHT SOME BREATHING ROOM, BUT: Management took the smarter route and rebased expectations, guiding to 2015 revenues of $1.16B at midpoint (vs. $1.20B for consensus).  However, management appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.
  3. THE BIGGER RISKS REMAIN: We continue to expect users to decline on a y/y basis in 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.

4Q14 WORSE THAN IT LOOKED

P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue; specifically from Retail, Telecom, and Consumer Electronic advertisers.  However advertising spend across these three groups is seasonally higher in the 4Q, so the question is why was P seeing pressure here? We're not sure if this is a sign of wavering demand, or a one-off instance, but a concern nonetheless. 

The bright spot from the quarter was its accelerating user growth.  However, the acceleration is coming off what we believe to be a deflated comp in 4Q13, which is when we suspect P experienced heightened level of attrition.  Back in August 2013, P altered its ad feed from 1 ad/15 minutes to 2 ads/20 minutes, and increased its max ad load at the same time.  In turn, P saw its sharpest y/y deceleration in active user growth in its reported history in 4Q13; likely a result of ad load pushing the user away.  So we wouldn't read into the 4Q14 acceleration

P: Walking the Plank (4Q14) - P   Active User Deceleration 4Q14

BOUGHT SOME BREATHING ROOM, BUT

Management took the smarter route and rebased expectations, guiding to 2015 revenues $1.16B at midpoint (vs. $1.20B for consensus).  However, management commentary during the call suggests that the company appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.

As we detail in the note below, we're expecting users to decline in 2015.  P has long history of heightened attrition, and our TAM analysis suggests P's remaining TAM will not be able to compensate for much longer.  

P: New Best Idea (Short)

12/22/14 03:56 PM EST

[click here]

Our scenario analysis below suggests that P would require a sharp acceleration in Ad RPMs to hit revenue guidance if it can't produce double-digit listener hour growth as management expects.  However, accelerating Ad RPMs would likely mean increasing sell-through on idle inventory (i.e. increasing ad load), which we believe would exasperate its retention issues further.  In short, P's core growth drivers are working again each other.

P: Walking the Plank (4Q14) - P   Ad Business Model 

P: Walking the Plank (4Q14) - P   2015 Scenario Analysis Guidance

THE BIGGER RISKS REMAIN

As we mentioned above, we continue to expect users to decline on a y/y basis during 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  We suspect that would crush investor sentiment whenever that occurs. 

Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.

P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]

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

Hesham Shaaban, CFA

@HedgeyeInternet