KEY POINTS
- 1Q17 = UGH: We thought this was our print, was anything but. P missed on pretty much everything outside of Ticketfly on both the print and the guide. Advertising revenues were up 1% y/y, with the national segment declining -2% y/y and Local Ad growth decelerating by 15 percentage points. Sub revenues missed on inline subs. Ad-supported listeners declined by ~5% y/y. The 2Q EBITDA guide missed by nearly the same amount as the actual guide. Worse, mgmt chose to kick the can on its paid subscriber & EBITDA profitability targets for the year, deferring to 2H pick up the slack instead just rebasing expectations, which would have been the better approach.
- WHAT WE THINK HAPPENED: Mgmt attributed the ad revenue weakness primarily to headcount reductions and lower hours; we believe the former was the primary culprit given the deceleration in Ad RPM growth, which should have accelerated off declining hours. The major disappointment was the sub segment. P’s ending 4Q subs were enough to get P over the line for 1Q sub revenue, which means churn likely picked up materially in 1Q. We would have thought the free 6-month Premium trial would have boosted subs/mitigated churn this quarter, but the 500K Premium trialer metric that mgmt disclosed was even more concerning since there really isn’t any reason why that metric shouldn’t have better approximated something closer to its Plus sub base.
- CLOSING LONG: The model transition is not playing out as we had expected, and we suspect it will remain a slow and volatile ride for the time being. The model transition only works if mgmt is willing to commit to it, but it appears mgmt doesn’t have the willingness and/or ability to do so since it can’t risk the near-term fallout (e.g. intermittent declines in listeners) with the street’s hand on its throat. Granted, the wheels are in motion toward a take-out with the KKR investment/board shakeup, but there’s no telling when that happens, and we don’t feel like hanging around in position where that is the only real upside.
Let us know if you have any question or would like to discuss further.
