PANDORA'S IPO COMES OUT FAST, ENDS AT $17.42 OR +8.9% OVER ITS IPO PRICE, BUT DROPS 4 POINTS ON THURS, STOCK OVERPRICED SAY ANALYSTS

 

Pandora Media Inc.'s decade-long effort to redefine radio took a small step forward with a closely watched initial public offering. But the IPO lacked some of the sizzle of recent debuts by its Internet peers as questions remain about the company's ability to turn a profit.

 

Pandora's shares, priced at $16, opened 25% higher Wednesday and briefly touched $26 in their first trading session. By the end of the day, however, the stock surrendered much of those gains amid a broader market selloff. Pandora was at $17.42, up 8.9%, at 4 p.m. on the New York Stock Exchange, leaving the company with a market value of nearly $2.8 billion.

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The company broke the first-day pop pattern seen in other Internet players that have gone public recently.  Other recent notable IPO's that popped out of the gate on their IPO day include:  

• Yandex NV - The Russian search engine gained 55% on its debut. 
• LinkedIn Corp - The professional social networking site doubled its price during its IPO.

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As more of its listeners transition from computers to mobile devices such as smartphones and tablet computers, the company is betting it can turn losses into profits by taking advantage of the growing mobile-advertising market.

While Pandora claims more than 90 million registered users, most listen to a free version that comes with ads. Users currently pay an annual fee of $36.00 for a service without ads, but such fees totaled just $7.4 million of Pandora's $51 million in first-quarter revenue.

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Pandora's Upgrade To Premium Service Page 

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Says Joseph Kennedy, Pandora's CEO, in an interview,  

"Radio has been ad-supported for almost a century.  We embrace that as the dominant business model."

But that strategy faces challenges. Few if any companies have been able to create profitable, ad-supported music services on the Internet. For one thing, Pandora and other Internet radio services—unlike conventional stations—must pay royalties to record labels as well as to music publishers.

Ad rates for Internet radio are also typically much lower than terrestrial radio. And so far, analysts note, advertisers have been willing to pay more to reach online users accessing services on PCs than from mobile users.

Says John Aiken, an analyst at Investment Technology Group,

"The key thing to watch here is to see if advertisers are going to be willing to pay as much for a mobile ad as for a PC-based ad." 

The company faces other uncertainties, including potentially higher royalty rates. Pandora estimates the costs of licensing sound recordings alone amounted to 53% of its revenue in the most recent quarter. Those rates have been negotiated through 2015, but the company's prospectus notes that "there is no guarantee" that subsequent rates will allow the company to reach sustained profitability.

Complicating matters down the road for Pandora, the current royalty arrangement is "non-precedential," according to a person familiar with the arrangements with music labels. That means when Pandora and the record industry enter negotiations to set new rates for 2016 and beyond, the current set up can't be introduced as evidence for what the new rates should be. That could lead to a higher royalty rate for Pandora.

Mr. Kennedy said he is confident Pandora can work out agreements on royalty payments once the rates come up for renegotiation. He says,

"We trust that process and look forward to participating in it."

Some analysts see a number of ways Pandora can boost its revenue to offset royalty expenses. Among other things, the company is seeking to boost the hours people use the service—which more than doubled to 1.7 billion hours in the quarter ended in April. That increases the amount of ads the company can place on its service.

Pandora also could try to boost the amount it charges for ads or increase the frequency of ads, though the latter approach can risk turning off users. Said Michael McGuire, an analyst with Gartner.

"That is a line they will forever walk." 

Alternatively, Pandora could try to give users better incentives to upgrade to paid services. But few if any companies that rely on subscriptions as their main revenue source have been able to attract as many users as Pandora. The company said it had 34 million "active" users at the end of April.

One important opportunity for the company is in boosting the use of its service to cars, where many Americans spend most of their time listening to radio. It currently has agreements with six major auto companies to incorporate Pandora into their vehicles.

Analysts had predicted a good reception for the offering. For one thing, relatively few shares of Pandora's stock are available—just 9% of the company's shares—and investors had bid up other Web IPOs.

Several analysts said Pandora's stock price was inflated, with Morningstar Inc. giving it a fair value of $6 a share and GreenCrest Capital putting it at $7 to $8 a share. Neither company participated in underwriting or trading the IPO.

Pandora's valuation could also come under pressure as shares of more Web-based companies become available; Groupon Inc. has filed to go public and others, including Zynga Inc. and Facebook Inc., are often mentioned as candidates to do so.

Anupam K. Palit, a senior equity analyst at GreenCrest, characterized Pandora's valuation as "extraordinarily demanding" for a company that is not yet profitable. "A year to 18 months from now, they will be trading in a different environment, where other options such as Groupon, Facebook and Zynga could draw investors' dollars away," he said.

COMMENTARY:  With all the hubub surrounding LinkedIn's (NYSE:LNKD) IPO and Groupon's recent filing for an IPO,  I totally forgot about Pandora.  I love internet radio, especially Pandora, have been using their service for years.  I especially love listening to music from different cultures and their stations are second to none.

Pandora Media (P) had a successful IPO with its shares rising as high as $26 on their initial day of trading on the NYSE, opening at $20 and closing down at $17.42. The stock saw trading at a volume of over 42 million shares.

A few IPO statistics:

• P's initial public offering on Tuesday was priced at $16 a share, topping the recently raised pricing range of $10 to $12.  
• The Company raised $235 million in gross proceeds, selling 14.7 million shares.  
• Pandora has 159.73 million shares outstanding.  
• Pandora's market capitalization at the end of its IPO day was $2.78 billion.
• Pandora's PE ratio based on its market capitalization after the IPO was 30.85.  

Pandora's unique Music Genome Project and its playlist generating algorithms enable it to deliver personalized radio to its listeners. When a listener enters a single song, artist or genre to start a station, a process it calls seeding, the Music Genome Project together with its playlist generating algorithms, allows it to instantly generate a station.  I love Jazz and Brazilian bossa nova.  

Pandora's business model:

Pandora's IPO Financial Statements per their S-1 Registration Statement:

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Pandora's Fiancial Statement Summary:

• Profitability - Pandora has yet to be profitable.  The company reported net losses of $13.988 million, $28.288 million and $16.753 respectively for the fiscal years ending January 31, 2008, 2009 and 2010.  For the nine months ending October 31, 2010, Pandora basically broke-even with a small net loss of $328,000.
• Revenues - Pandora has consistently been able to increase revenues, but it wasn't until the fiscal year ending January 31, 2010 that revenues, primarily from advertising, really started to take off in spite of the Great Recession.  Pandora reported gross revenues of $13.299 million, $19.333 million and $55.189 million for the fiscal years ending January 31, 2008, 2009 and 2010 respectively. Pandora reported gross revenues of $90.123 million for the nine months ending October 31, 2010.
• Advertising Revenues - Pandora chief source of income is from advertising and has consistently reported increases in advertising revenues.   Pandora reported advertising revenues of $13.314 million, $18.247 million and $50.147 million for the fiscal years ending January 31, 2008, 2009 and 2010 respectively.  Pandora reported advertising revenues of $77.852 million for the nine months ending October 31, 2010.
• Subscription Revenues - Pandora's other key source of revenues is from premium subscription services and since January 31, 2010 has dramatically increased revenues from premium scription services.  Pandora reported subscription revenues of $985,000, $1.086 million and $5.042 million for the fiscal years ending January 31, 2008, 2009 and 2010 respectively.  Pandora reported subscription revenues of $12.271 million for the nine months ending October 31, 2010.  Padora's revenues from subscription services represent 15.76% of total revenues at the end of the nine months ending October 31, 2010, compared to 5% at the end of fiscal year ending January 31, 2010.
• Financial Condition - Here a few of the important numbers:  
  • Working Capital - Pandora reported  a working capital deficit of $3.114 million for the fiscal year ending January 31, 2009, a working capital surplus of $18.929 million for the fiscal year ending January 31, 2010, and a working capital surplus of $37.198 million for the nine months ending October 31, 2010.   
  • Stockholder's Accumulated Operating Deficits - Pandora reported an accumulated deficit from operations of 87.772 million for the fiscal year ending January 31, 2010 and an accumulated deficit from operation of $83.880 million for the nine months ending October 31, 2010.  
  • Borrowings - Pandora has had to borrow in order to finance its operations. Pandora reported total borrowed debt of $2.997 million and $4.340 million for the fiscal years ending January 31, 2009 and January 31, 2010 respectively.  Debt totalling $14.501 million was converted into redeemable convertible preferred stock during the fiscal year ending January 31, 2010.  Pandora reported total borrowed debt of $7.763 million for the nine months ending October 31, 2010.
  • Issuance of Preferred Stock - Pandora also financed its operations through the issuance of redeemable convertible preferred stock. Pandora reported redeemable convertible preferred stock in the amount of $34.124 million for the fiscal year ending January 31, 2010.   Pandora reported redeemable convertible preferred stock in the amount of $22.206 million for the nine months ending October 31, 2010. 

Pandora listed 19 major stockholders in its S-1 Registration Statement.  Six stockholders were venture capital firms.   13 were Pandora executive officers and corporate directors.   The executive officers and corporate directors maintain majority ownership with 66.66% of total shares.

		Beneficial Ownership Prior to the Offering(1)								Shares Being Offered				Beneficial Ownership After the Offering
Beneficial owner		Number				Percent								Number of Shares Beneficially Owned				Percent
Greater than 5% Stockholders and Selling Stockholders:
Entities affiliated with Crosslink Capital(2)			34,964,928				23.03
Entities affiliated with Walden Venture Capital(3)			28,218,309				18.59
Entities affiliated with Greylock Partners(4)			21,450,675				14.13
Labrador Ventures V-B, L.P(5)			12,905,162				8.50
The Hearst Corporation(6)			8,734,506				5.75
Entities affiliated with GGV Capital(7)			7,853,341				5.17
Directors and Named Executive Officers:
Joseph Kennedy(8)			4,229,267				2.71
Steven Cakebread			—				*
Thomas Conrad(9)			2,283,718				1.48
Delida Costin			—				*
John Trimble(10)			689,583				*
Peter Chernin(11)			1,205,414				*
James M. P. Feuille(2)			34,964,928				23.03
Peter Gotcher(12)			1,595,380				1.05
Robert Kavner(13)			1,091,054				*
Larry Marcus(3)			28,218,309				18.59
Barry McCarthy			504,777				*
David Sze(4)			21,450,675				14.13
Tim Westergren(14)			3,644,991				2.39
Directors and Officers as a Group (13 persons)			101,273,746				66.60

Pandora appears to be well managed, doing much better than most internet radio sites, and doing all the right things to reach profitability.  Based on its near breakeven results for the nine month ending October 31, 2010,  and you project its revenues and expenses through the year ending December 31, 2010, Pandora might make a profit or could be well on its way to profitability in 2011.  

The fact that Pandora lost 4 points or 23.96% off its Wednesday ending stock price of $17.42, and ended the day at $13.26, is certainly cause for alarm, and sign of buyers remorse.  This does make you wonder why investor's bought it in the first place.  However, with an additional $235 million in the corporate coffers from its successful IPO, it has plenty of cash to last it over two years if it didn't generate any revenues for the next two years.  Somehow, I have a feeling that Pandora has the makings of a winner provided that the music labels don't go crazy and try to pull to much in royalties after 2012.

Courtesy of an article dated June 16, 2011 appearing in The Wall Street Journal Technology, MicroStockProfitStock.com's press release dated June 16, 2011 appearing in BenZinga and the Pandora Media Inc S-1 Registration Statement