Pandora MICC

8/10/2019 Pandora MICC

1/22

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

Mutual InvestmentClub of Cornell

Strictly Private and Confidential

TMT Sector: Short Pandora (NYSE: P)

Wednesday 11/19/14


2/22

2 Mutual InvestmentClub of Cornell

Investment ThesisRecommend Short with Price Target $8.88

Competition : Pandora will not be able to maintain its user base with emergingtechnology behemoths and other competitors entering the market

Business Model: Pandora has consistently reported negative earnings since theirroyalty, advertising and other expenses absorb all revenue

Valuation : Pandora will not be able to follow through on its high growth expectationespecially with the upcoming catalysts

2

1

3

What the market thinks?

Leader in User Base Monetization Initiatives Superior Product

Pandora will no longer be able to sustain its position as the music streaming market leader andwithout the ability to monetize or grow revenue, Pandora has lost its value


3/22


Company OverviewFirst Mover Advantage

Pandoras Beginnings Started in 2000 First to offer online musicstreaming radio

Developed Music Genrecategorization algorithm

1

Pandoras Advantages Music Genome Project Uses Preferences to Create Radio Playlists 1m+ Songs Available Available on Desktop, Mobile, Car, TV & Game Consoles Built-in user base due to first mover advantage

2

Pandoras Drawbacks Limited number of skips Music algorithm is no longer unique, not scalable Lacks offline playback Small library compared to iTunes Radio & Spotify, Musician Boycotts

3

B u s i n e s s

M o d e l


4/22


Price ChartHighly Sensitive Share Price

1 Pandora has seen a long term share price decline after even the in-car Pandora Radio featurewas unable to push Pandora into profitability

2 Earnings estimates and user base growth percentages are consistently below expectations

3 Short % of Float is increasing in line with share price fluctuations with a current 10% rate

B u s i n e s s

M o d e l

S h o r t %

o f F l o a t


5/22


Business ModelSources and Uses of Revenue

Pandora One Premium subscription No Advertisements More (but not unlimited)skips

Higher Sound Quality

Advertising 47% National Ads, 53%Local Ads Ads per hour:

- 5.5 Audio- 7.5 Display- 1.2 Video

Revenue

Spending

Premium Margin AdvertisementMargin

Mobile Desktop

53% 50%

46%

68% B u s i n e s s

M o d e l


6/22


Pandora Monetization BreakdownLocal Advertising & Subscriptions

Source: Bloomberg

Initiative

LocalizedAdvertising

SubscriptionServices

10.5% 2 year CAGR 9.6% 2 year CAGR

5.7% year CAGR

Revenue and Cost BreakdownQ4 FY12 Q3 FY14 (Millions of USD)

4.5% year CAGR in LPM

1

2 Subscription revenue is no longer growing

72

97

128 135

162141

177 194

9 18 26

34 3854

42 45

21

38 44 4753 62

66 72

Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14

Advertising Revenue

Subscription and other revenue

Marketing and Sales Costs

CostsRevenue

Pandoras local advertising campaign is increasing ad revenue while proportionatelyincreasing marketing and sales costs

B u s i n e s s

M o d e l


7/22


Pandoras Long Term Drivers In recognition of the declining value of Pandora, here are the drivers they identified


8/22


Outcomes of these InitiativesPandora has tried many avenues to bring value to its business

Innovative and Scalable Products? Smaller library Alarm Clock and Sleep Timer has seen

minimal usageExpand Distribution Car Feature- Only 4 million have used in car

featureIncrease Content Offering Comedy Genome Project 2,500 tracksInternational Expansion Pandora faces high royalty costs overseas

Limited by DMCA to US, Australia, and NewZealand

Increase ad inventory Purchased terrestrial radio stations to

benefit from lower royalty costs Acquisition of South Dakota station

resulted in failureIncrease Paid Listening Only 4% are paid listeners compared to

others ~25% Paid listening increases content costs Cheaper than most other competitors but

weaker value/price propositionLocal advertising Associated with many costs

Content Additions

Pandora has tried to make their product moreappealing through new features

Monetization

Pandora is trying various methods to increase profitability

So what remains for Pandora?


9/22


Inferiority of Music LibrarySmaller music library leads to more repetitions and a negative experience

1

2015

27

0

10

20

30

Pandora Spotify iHeart Radio iTunes Radio

Music library size comparisonIn millions of songs Source: Techlicious

1 Pandora has significantly fewer songsin database, resulting in higher rate of

repeating songs

2 Pandoras founders deem many songsunworthy of their professionals manhours

3 Reliance on manual musicclassification by professionals can

cause Pandora to permanently lag inlibrary size

20-30Min to classify one song 400+ Musical tags to identify 700+ Man-years1 With 400+ musical tags to consider, it takes Pandora 20-30 minutes to

classify each song currently, or 722 man-years to match library size withSpotifys

How fast can Pandora expand its music library? C o m p e t i t

i o n


10/22


Are Users Sticky?Pandoras user satisfaction has been decreasing over time .

0%

50%

100%

3 years

Percentage of Very Satisfied Respondents from 2010 -2014

Length of Time as Pandora User

Users grow tired ofPandoras repetitivealgorithms over time.

Dissatisfied usersfinally have the chanceto switch to betteremerging alternatives.

10%16%

29%22%

2011 2012 2013 2014

Percent of American Respondents HavingUsed Pandora in the Last Week

C o m p e t i t

i o n


11/22


Pandora VS Competitors : Product ComparisonCompetitors dwarf what Pandora boasted

C o m p e t i t

i o n


12/22


New EntrantsOver the past 9 months, Pandoras active user count has grown only 300k

40% of users usePandora on Appleproducts.

Apple products alreadyequipped with iTunes Radio

will lead to growing user base

is the worlds biggestmusic streaming service.

Introduction of by a well known brand with amega music library will create

competition in music

streaming industry

Higher value propositionthan Pandora

New entries into the market will steal Pandora users and offer servicesthat Pandora can not compete with

Key Take-Away

C o m p e t i t

i o n


13/22


Competitive AnalysisPandoras inferior value proposition reflects in its paid subscriber base .

3.35

10

Pandora Deezer Spotify

4%

29%25%

Pandora Deezer Spotify

Millions of Paid Subscribers Percentage of Paid Subscribers

46% of streamingsubscribers have eitherchurned or plan tochurn.

Pandora paid subscribers willleave for other services whichoffer stronger valuepropositions.

C o m p e t i t

i o n


14/22


Competitive AnalysisThe music streaming industry is overcrowded and hyper-competitive.

`

Market Reach

Monthly Price $4.99 $9.99 $8.25 4.99, 9.99 $7.92 N/A N/A

Radio?

Offline?

Profitability

Songs? 1 million 20 million 1 million 35 million 10 million 20 million 27 million

Active Users 76.4 million 50 million N/A 16 million 11.5 million 97 million 19.4 million

YOY User Growth 7.8% 72.2% N/A 60.0% 15.0% 27.6% [no info]

1

2

Most technology behemoths dont need profitability from music streaming product, only amean to bring users onto their platform

Although Pandora is one of the leaders in user base, competitors are quickly rising

C o m p e t i t

i o n


15/22


Potential Acquirers of PandoraAn acquisition of Pandora is highly unlikely

1 Most companies likely to enter music streaming market have either acquired aservice or created in-house technology

2 Using revenue as a measure for takeover value, Pandora is not a great value at the

current share price

Google Play MusicStreaming

YouTube Music Key

iTunes Radio Beats Music Streaming

Key Events Potential Acquirers

Partnered with Spotify,Deezer, Rdio to developmusic database

Value Proposition

Pandora would be acquiredfor its user base which was

a better value in 2012 Using past multiples as

proxies for acquisition price,puts Pandoras roughestimation of $11-14 a share

2012 TodayEV/User 27.63 50.19EV/Listener Hrs. 0.46 0.77

V a l u a t i o n


16/22


Key Past EventsExponential increase in competition has caught institutional investors off guard

2011: Pandoragoes public

Source: Company press releases

C o m p e

t i t i v e

L a n

d s c a p e

K e y

E v e n t s

2000 2010 2012

2000: PandoraLaunches

CEO Kennedyannounces step down

Q1 2013: Firstrecord ofdecrease inuser base

iHeart Radio

LaunchesSpotifyenters theUS

GooglePlaylaunches

iTunes Radiolaunches

2014: AmazonPrime Radiolaunches

V a l u a t i o n

// 2014


17/22


Upcoming Catalysts

T M T S e c t o r

Nov 2014 Feb 2015 April 2015Jan 2015

We predict these events will catalyze Pandora price correction

Ruling on Pandoravs. publisherslawsuit

iTunes Radio app forAndroid released,Amazon Echo takes offduring holiday season

2014 10K 2015 Q1QuarterlyreportYoutube MusicKey launches

V a l u a t i o n

Dec 2014

Historically, Pandora hasfallen on competitorsincrease in user base

1 We anticipate quarterly earnings to report a decline in user base as previous 3 havedone analysts will correct user base assumptions steep price corrections

2 Other catalysts include competitions success that will expose flaws in Pandorasability to sustain user base growth


18/22


Our base case valuation implies an intrinsic share value of $8.88

T M

T S e c t o r

Valuation

707580859095

100105110

2013A 2014E 2015E 2016E 2017E 2018E

U s e r s

( i n m

i l l i o n s

)

Pandora ProjectedRegistered Users

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

2013A 2014E 2015E 2016E 2017E

Audio CPMProjected Growth

$400$600$800

$1,000$1,200$1,400$1,600$1,800

2013A 2014E 2015E 2016E 2017E 2018E

Pandora Projected Revenues

Key Assumptions1. User base will increase in the short-term and flattenpost-2018.2. CPM rates will increase from localized targeting butthen taper.3. Content acquisition costs fluctuate marginally.

Market Cap 4480

Beta 1.58Expected market return 8Rf 2.58

Cost of Equity 11.1436

WACC 11%


19/22


ValuationA sensitivity analysis reveals many concerns about Pandoras intrinsic value.

T M

T S e c t o r

If any one of these threeoccur, Pandorasintrinsic stock valuedrops to approximately$2.

Key Take-Away

Pandora is highly vulnerable to three distinct risks any of which could materializewithin the next 6 months

1 Content acquisition costs increase to58% of revenues after a loss in thecourtroom.

2 User Base grows at current stagnantrate

3 Pandoras CPM Rate remainsconstant


20/22

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

Mutual InvestmentClub of Cornell

Strictly Private and Confidential

Appendix


21/22


DCF Revenue Drivers

Assumptions/Drivers2013A 2014E 2015E 2016E 2017E 2018E

Registered Users 76,200,000 79,500,000 83,000,000 86,000,000 89,000,000 90,000,000Y/Y Growth % 4% 4% 4% 3% 1%

Hours / Monthly Active User 235.7 262.5 269.4 278.6 287.3Y/Y Growth % 11% 3% 3% 3%

Total Listener Hours (in thousands) 18,738,150 21,787,500 23,168,400 24,795,400 25,857,000Y/Y Growth % 16% 6% 7% 4%

Total RPM (non-GAAP) $45.37 $51.18 $55.77 $59.85 $62.46Y/Y Growth % 13% 9% 7% 4%

Advertising Revenues $850,149,865.50 $1,115,084,250.00 $1,292,101,668.00 $1,484,004,690.00 $1,615,028,220.00Y/Y Growth % 31% 16% 15% 9%

Subscription Services and Other Revs $174,100,000.00 $216,600,000.00 $234,000,000.00 $250,000,000.00 $266,700,000.00Y/Y Growth % 24% 8% 7% 7%

Total Revenues $637,893,000.00 $1,024,249,865.50 $1,331,684,250.00 $1,526,101,668.00 $1,734,004,690.00 $1,881,728,220.00Y/Y Growth % 61% 30% 15% 14% 9%

Content Costs as % of Revenue 54% 49% 47% 54% 52% 51%

WACC / Discount Rate 11%Terminal Growth Rate 3%Terminal EBITDA Multiple 14

Terminal Value - Multiple $1,250.66Terminal Value - Perpetuity Growth $1,096.97Firm Value $1,848.29Shares Outstanding 208

Share Price $8.88


22/22


($ in millions) 2013A 2014E 2015E 2016E 2017E 2018E

Revenue 638 1,024 1,332 1,526 1,734 1,882% yoy Growth 61% 30% 15% 14% 9%

Content Costs 343 505 623 829 902 962Other Operating Expenses 54 102 133 152 173 187

Total Operating Expenses 284 607 756 981 1,074 1,149Gross Margin 56% 41% 43% 36% 38% 39%

D&A 7 17 17 19 22 24Sales, General, and Administrative Items

Product Development 40 48 66 78 87 95% yoy Growth 20% 38% 18% 11% 10%

Sales and Marketing 183 205 220 220 210 175% yoy Growth 12% 7% 0% -5% -17%General and Administrative 75 121 157 180 204 222

% yoy Growth 61% 30% 15% 14% 9%Total SG&A 298 374 443 478 501 492

% yoy Growth 25% 19% 8% 5% -2%Pre-Tax Income -162 27 116 48 137 217Taxes 0 0 0 0 0 0Net Income -162 27 116 48 137 217

Adustments to cash flowsDA 7 17 17 19 22 24Capex -23 -31 -33 -33 -33 -33D&A-Capex Differential -16 -14 -16 -14 -11 -9

Net Cash Flows To Common -178 13 100 35 126 208

FCF PV 13 90 28 92 136

Documents

Pandora MICC