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Takeaway: We suspect P is expecting a Web IV defeat (Points 2&3), and is trying to smooth things over with the labels/artists before that happens

KEY POINTS

  1. UGLY PRINT: P wound up missing 3Q revenues after guiding 1% ahead of street expectations on the last print.  P’s 4Q revenue guidance missed consensus estimates by 7%.  For context, P’s 2015 revenue guidance is now near the low end of its initial 2015 revenue guidance, which it had raised twice this year.  P also missed Listener Hours and Active Listener expectations, with the latter decelerating from 4% to 2% y/y growth.  Note that P’s Active Listener metrics are based on the last month of the quarter, which is when it hosted its ad-free listener day that drew a record 30M users for a non-holiday; no telling what that would have been otherwise.  We continue to expect users to decline on a y/y basis by 4Q15.  Either way, the print doesn't matter (see below).
  2. RECKLESS OR DEFEATED? The $90M pre-1972 recordings settlement was confirmed; $60M is payable this quarter.  So after Ticketfly closes, P will only have $157M in cash prior ahead of the Web IV decision, with another $30M due in quarterly installments in 2016.  That is a dangerously low cushion prior to any clarity on Web IV, especially since small missteps in execution could lead to very big differences in cash burn, if not insolvency (see slides below).  That said, the decision behind the Ticketfly is either reckless confidence on Web IV, or P is preparing to blow up its model ahead of an expected defeat, and needs another story to pitch the street when it does.  
  3. CAN WE STILL BE FRIENDS? (WEB IV): The pre-1972 recordings settlement reinforces our view that P is expecting a Web IV defeat since it also covers the 2016 period, and it is pricing in a considerable rate increase.  P is paying $60M for its pre-1972 recording streams prior to 4Q15; it will be paying another $30M for the 5-qtr period ending 2016.  After weighting the $60M settlement for quarterly listener hours from 2010-2015, we estimate that P is paying a quarterly rate of $4.1M in 2015.  That will bump up $6.0M for the next 5 quarters, which translates to a 46% increase.  We’re not sure if there is a listener hour growth assumption in that rate, but after producing 3% in 3Q15, and guiding to the same in 4Q15; we doubt it’s much (if any).

P: Can We Still Be Friends? (3Q15) - P   pre 1972

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 2

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 1

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 3

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]