KEY POINTS
- 2Q16 = LOCAL PRESSURE: The 2Q print was worse than we expected. P missed 2Q revenues, issued 3Q guidance with the top end below consensus, and cut 2016 vs. our expectation of a 2Q beat, 3Q guide below the mid-point, FY raised inline with the 2Q beat. The weakness was largely concentrated in Advertising Revenue across both National and Local; the latter decelerated 16 percentage-points to 26% y/y growth in 1Q16 from 42% in 4Q15. While we did see a healthy inflection in local salesforce productivity, it wasn’t enough to compensate for mgmt curbing its major local growth driver, which is headcount. P didn't hire any Local reps in 2Q16, which suggests that Local growth may continue to wane from here. The positive is that growth of its national salesforce reaccelerated to 21% y/y (from 17% in 1Q16). Btw, ignore mgmt’s q/q leverage comments; they're illogical comps given P's ad revenue seasonality (see RPM chart below).
- INTERACTIVE = PRIORITY: P reiterated its expected interactive launch timing multiple times during the call. But once again, we doubt the labels are in any rush to finalize a deal unless it is decidedly in their best interest. Mgmt offered an interesting perspective during the call, suggesting some interactive players are not monetizing at their $10 ASP given various promotions. Between that and the industry's gripe with Spotify’s free tier, we suspect that the labels will not offer P current market terms when the benefit of granting P interactive licenses is debatable at best, if not potentially dillutive. That said, we’re not sure P will have all the necessary deals in place to go live by 1Q17, at least on its preferred terms. But we do believe mgmt knows it needs to get at least some of these deals done before year end to appease the street, especially given softness within its core business and growing pressure to sell the company.
- P = CALL OPTION? The next time P reports will be in late October. Between now and then, it’s essentially headline season regarding the interactive launch, especially in the absence of any real fundamental catalysts. If P strikes a deal with any of the major labels, it will likely come with a press release, which should naturally drive the stock higher. P really only needs to announce one deal with any of the majors to fuel sentiment since the street would likely assume that the rest of the labels will follow suit. Between now and its next earnings release, P is effectively either a free warrant or a call option (depending on whether the stock trends up or down, respectively). On the other hand, if there isn’t any deal-related news flow heading into the release, we could always bail ahead of the print and sidestep the risk that P pushes out the timing of its interactive launch. P remains on our Long Bench for now, but we’re going to mull this one over during the weekend.
Let us know if you have any questions, or would like to discuss further.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
