Pandora Q3 profit climbs, despite slower listener growth

Pandora Media on Thursday reported higher sales and profit in the third quarter, while growth in the number of people listening to the Internet's largest radio service continued its apparent slowdown.

Underlying profit nearly doubled to 9 cents a share, more than expected, and revenue jumped 42 percent to its highest level yet. Pandora also predicted the current quarter would have better results than Wall Street was anticipating, but investors continued their pattern of overlooking the company's improving profitability to zero in on worries about its audience.

Shares fell $1.53, or 6.6 percent, to $21.59 in after-hours trading. Shares had been up about 2 percent before the market's close, but the stock has been sliding since the spring, down 41 percent since hitting an all-time high in March.

Mike Herring, Pandora's financial chief, said in an interview the latest results were gratifying evidence that its attention to advertising improvements are paying off, adding that the audience metrics that Pandora focuses on internally -- like loyalty -- were improving even if the growth in number of listeners can't keep up with past, higher rates because its audience is simply becoming so large.

So far this year, Pandora's focus on its advertising engine has been bearing fruit in terms of how efficiently it can use its ad time to make money. The investment in advertising has been improving Pandora's underlying profit power, especially as more and more of its listening comes from people tuning in from mobile devices, where monetization had been weaker. But intensifying competition in streaming music has investors' ears finely tuned to any signs that rivals are drowning out Pandora and luring audience away.

Listener-hour growth was up 25 percent in the latest period, and active listeners were up 5.2 percent.

In active listeners, that represents more apparent slowing. Because Pandora shifted its reporting calendar this year, an apples-to-apples comparison of growth rate is difficult. In the third quarter of last year, which spanned different months, active listeners rose 20 percent. In the second quarter, which is exposed to seasonal variations, active listeners were up 7.5 percent.

Herring said hours per user were up 22 percent compared with 18 percent a year earlier. "That's about building our loyal group, that's the group that we build the business upon," he said. He added the company believes it can drive its audience north of 100 million users over the next three years. Active listeners were 76.5 million at the end of the latest period.

In the latest three-month period, Pandora posted a loss of $2 million, or a penny a share, compared with a wider loss of $4.1 million, or 2 cents a share, a year earlier. Stripping out unusual items, its per-share profit was 9 cents, an increase from 5 cents a year earlier. Revenue rose 42 percent to $239.6 million.

In July, Pandora predicted 5 cents to 8 cents per-share profit on revenue of $235 million to $240 million, while analysts most recently expected a profit of 8 cents on $238 million in revenue.

Looking ahead, Pandora predicted that the fourth quarter would have 17 cents to 19 cents in per-share profit on revenue of $273 million to $278 million, while the consensus estimate by analysts was for a profit of 17 cents a share on $273 million in revenue.

Pandora also raised its full-year outlook, now projecting 19 cents to 21 cents per share and revenue between $912 million and $917 million. That's up from July's increased projection for per-share profit of 16 cents to 19 cents and revenue of $895 million to $915 million.

Update, 2:24 p.m. PT: Adds comments from chief financial officer, further details.