SiriusXM surges while Pandora misses a beat
Diverging earnings of the satellite and Internet radio companies suggest they aren't direct competitors.
By Antoine Gara
Shares in Pandora (P) are poised for a 20%-plus 2012 loss after the popular Internet radio service cut its full-year earnings late on Monday. In contrast, satellite radio giant SiriusXM (SIRI) is on track for a 50%-plus year-to-date gain.
At first glance, the divergent earnings and stock performance of Pandora and SiriusXM indicates satellite radio is winning out competitively to streaming radio, which can be accessed on desktops and by way of mobile devices. A closer look indicates Pandora and SiriusXM are far from direct competitors, and that the outperformance of the satellite radio giant has little to do with its technology.
SiriusXM's success hinges on strong performance in the new and used auto market and a realization that the company's nationwide news, talk and sports content are hard to replace, even if competition mounts among streaming music services.
Players like Pandora and Spotify are fighting for market share, meanwhile recent reports indicate Apple (AAPL) may soon launch a streaming music service. Still, that competition has done little to dent SiriusXM's a post-crisis stock run, which is continuing in 2012.
As Pandora shows signs of struggle by way of reduced earnings guidance and a revenue picture that's clouded by content costs, SiriusXM's nationwide non-music programming gives the company a moated value proposition to consumers that's increasingly playing out in automobile. The earnings contrast between the competing satellite and streaming services indicates they may, in fact, be far from direct competitors.
On Monday at the UBS Global Media Conference, SiriusXM chief financial officer David Frear highlighted that the company's improving financial picture hinges on how its non-music offerings are driving subscription growth, primarily in new and used automobiles. Meanwhile, the company's moat around auto subscribers is growing, as car makers continue to post record sales figures.
"You don't have to pay for an 80's channel," said Frear at the UBS conference, of the value proposition SiriusXM offers outside of satellite music streams. The CFO added its non-music content like Howard Stern, nationwide sports play-by-play and specialized content like CNBC and Bloomberg radio that are driving the company's paid subscriptions.
Strength in the auto market, meanwhile, gives the company confidence in its financial picture. At the Monday confidence, Frear affirmed SiriusXM's full-year 2012 guidance and detailed to investors how the company expects each new dollar in revenue to contribute roughly 70% to earnings before interest, taxes, depreciation and amortization (EBITDA) in coming quarters.
Frear said SiriusXM expects 40% EBITDA margins when the business matures and spent a significant part of the company's presentation talking about how the company could use growing cash flow for acquisitions or, in the absence of a compelling deal, stock buybacks.
In contrast, Pandora shares fell nearly 20% in after-hours trading on Monday, after the company beat third-quarter earnings estimates, but cut its full-year guidance sharply as a result of content costs and ad market headwinds.
The Oakland, Calif. company said its 2012 loss will be between 9 cents to 12 cents a share, nearly doubling previous estimates detailed in August. Pandora also cut its sales outlook to $422 million to $425 million from as much as $432 million, forecasted earlier in the year.
While subscribers grew 85% in the quarter and mobile ad sales rose over 100, those figures weren't enough to offset content costs. Royalties paid to music labels now represent 55% of the company's revenue and continue to hinder Pandora's overall profitability. Royalty costs and uncertain ad revenue create an uncertain financial picture for the company headed into 2013.
The earnings report didn't help. BTIG analyst Richard Greenfield took to Twitter to complain that Pandora wouldn't take analyst questions on its conference call Monday evening. "Pandora management chooses not to take our questions on their quarterly earnings call," wrote Greenfield on Twitter. He characterized the lack of a Q&A as "frustrating."
"[Despite] the incrementally positive underlying fundamentals showing mobile revenue growth in excess of content cost growth, [Pandora] shares are likely range bound until the new year," wrote Credit Suisse analyst Stephen Ju, of Pandora's third quarter and lowered guidance.
Pandora did show some positives in third-quarter earnings, including strong usage growth in November, continued acceleration in mobile ad revenue growth as desktop usage declined, according to Bank of America Merrill Lynch analyst Nat Schindler, who maintained a "buy" rating and $16 a share price target on the company in a note sent to clients.
As SiriusXM and Pandora head into 2013 with diverging earnings and stock performance, its time for investors to realize that both services aren't direct competitors.
A rising prospective paid user base for SiriusXM may translate to earnings, if subscribers continue to see reason to pay for non-music services. Meanwhile, Pandora may need to find new revenue streams to offset content costs.
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"You don't have to pay for an 80's channel,"
I'm glad that's not extra because they have one of the worst 80's music selections I have ever heard. I don't know what they are thinking. Their 70's channel is actually very good and I typically don't care for 70's that much. Their 80's station sounds like every 80's compilation album I've ever listened to in my life. You definately won't hear any "Wax" one hit wonders or old pre- 1988 Natalie Cole hits. What you will hear is tons and tons of Pat Benatar, Bon Jovi (and not the obscure stuff) as well as Men at Work (but only their well known hits, none of their lesser known hits). As it is, I'm glad I'm only on their free trial.
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