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Takeaway: P will need to show more to move this stock after its recent run on 2Q results and the headfake from the Register. That won't be easy

KEY POINTS

  1. WHAT A RUN: P is up over 30% since it's 2Q15 release and the Register's decision on Merlin admissability; collectively two events that don't really mean much.  Remember that P was trading at a 2-yr low on bombed-out sentiment pre-release, then the stock ripped on a ~1% revenue beat on 2Q results and 3Q guidance.  Then the Register ruled that Merlin was admissable, which many viewed as a preliminary Web IV victory for P without actually considering the Register's stated rationale for allowing Merlin, or the second part of its decision regarding Pureplay admissability as evidence to test for statutory influence (see 3rd note below).
  2. NOW WHAT? We see an asymmetric setup to the downside following P's recent run, and suspect P will need to guide high for 4Q (organically) or it will gap down. That will be a challenge on expectations for accelerating ad revenue growth (scenario analysis below), and sub revenue growth that is not fully considering the aniversary of the Pandora One price increase.  Further, we continue to expect active listeners to decline y/y sometime in 2H, but we're not sure if P's recent promotions will buoy that metric in 3Q; particularly its ad-free listening day in September (P's reported users as those in the last month of the quarter).  But even if we're wrong here, we don't expect the street to chase the print this close to the Web IV decision (≤ Dec 15th).
  3. WHAT WE'RE KEYING IN ON: Listener Hours and clarity around any settlement regarding pre-1972 recordings; both related to Web IV.  Regardng Listener Hours, the more P enters 2016 with, the more drastic (disrputive) measures it must take to reign in costs if Web IV goes against it.  Regarding the settlement, if P is actually settling for $90M as the NY Post suggests (link), then it will have less than $150M in cash following the Ticketfly acquisition.  That is a dangerously low cushion prior to any clarity on Web IV, suggesting that the decision behind Ticketfly is either reckless confidence on the outcome, or P is preparing to blow up its model ahead of an expected defeat, and needs another story to pitch the street before the decision is released.  

P: Thoughts into the Print (3Q15) - P   4Q15 Ad Scen 2

Let us know if you have any questions, or would like to discuss further.  See notes below regarding Web IV developments and the Ticketfly acquisition.

Hesham Shaaban, CFA


@HedgeyeInternet 

P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT

[click here]

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]