11/17/15 08:35 AM EST

P | Changing Its Tune (Strategic Update Call)

Hesham Shaaban

Takeaway: P basically conceded that its recent actions are hedges against Web IV, but also implied that a big risk to our short thesis isn't imminent

KEY POINTS

CHANGING ITS TUNE: P hosted a call yesterday following the annonucement of its planned acquisition of certain Rdio assets, but the purpose of the call was to discuss the direction of the company moving forward. P is diversifying away from its ad-supported model through ticketing and a harder push in the subscription market. Mgmt also essentially admitted that the acquisitions of both Ticketfly and Rdio's assets are hedges against the Web IV outcome. In short, P is trying to pitch another story to the street before the WebIV decision is out.
DIRECT DEALS AREN'T IMMINENT: P also suggested that it aiming to enter the interactive market (e.g. Spotify), but doesn't expect it will be able to offer an interactive product until late 2016. That likely also means that a direct non-interactive license isn't imminent either; mitigating a big risk to our short thesis of P announcing a direct license agreement alongside the Web IV decision (or shortly after). That said, P will likely be saddled with what we expect to be considerable increase in statutory royalty rates for at least the first half of 2016. There's also no guarantee P will get favorable terms on any direct deal (or even deals with each of the majors) given that P has waited till the 11th hour to try to smooth things over with the labels following a historically contentious relationship.
BUT STILL MISGUIDED? P suggested that it doesn't plan to scale back its Local Radio Advertising push in the event of an adverse Web IV decision. Maybe P is waiting for the Web IV decision before publicly conceding that it will be deemphasizing its ad-supported model. Given that P's viability in a post Web IV world will be dependent on its cash reserves, we're not exactly sure how P is actually planning to sustain that effort after committing 80% of its current cash to acquisitions and the pre-1972 settlement, while onboarding Rdio's employees at the same time. Collectively, these actions suggest P is expecting a Web IV defeat, and is preparing to blow up its model. P has committed too much capital to assume its recent actions are just a hedge.

See charts and notes below for supporting detail/analysis on P's model and Web IV. Let's us know if you have any questions or would like to discuss further.

Hesham Shaaban, CFA

@HedgeyeInternet