P | Covering Short

Takeaway: Bombed-out sentiment + no immediate catalysts = Cover. Question now is mgmt's commitment to diversifying its model


  1. BOMBED-OUT SENTIMENT: The Web IV expectation heading into the ruling amongst the sell-side was primarily calling for down to flat rates.  But we now realize that the actual buy-side expectation into the ruling was more aligned with our expectation (+.20c) than the sell-side’s since Web IV rates came in about 15% higher than 2015 rates, and the stock rallied.  But the rally was fairly muted, closing up 14% off a near two-year low on lower volume than its last earnings release; it lost roughly half of those gains the following day.  In short, we now realize that buy-side sentiment was bombed out into the ruling, and hasn’t really improved since. 
  2. NO IMMEDIATE CATALYST: We suspect mgmt sandbagged 4Q15 guidance to bring down 2016 estimates.  Consensus is now looking for revenue growth of only 23%.  The Ticketfly acquisition should provide incremental revenue growth of roughly 5%-6% based on the limited info mgmt has provided.  Net-net, consensus is only looking organic revenue growth in 2016 of ~17%, which is roughly half the rate at which P has onboarded sales reps YTD in 2015.  While we still expect Active Listeners to decline on y/y basis, potentially as early as 4Q15 (see notes below for supporting analysis), we can’t pinpoint the exact quarter when that happens.  
  3. HAS THE STORY CHANGED? Our thesis heading into the Web IV ruling was that P’s ad-supported model couldn’t survive the outcome.  We suspect P came to same conclusion following final arguments, and hastily took steps to diversify its model.  In the following months, P acquired both Ticketfly and Rdio’s assets, and extended multiple olive branches to the major labels in the pre-1972 settlement and publishing deals with Warner and Sony.  More importantly, P has continued to strike additional deals with the industry despite a favorable Web IV ruling, suggesting P may actually be committed to working toward direct/interactive licenses, and pushing into the higher ARPU/margin subscription market.  If that is the case, then P could be a different story.  


Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA




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