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Pandora swings to Q2 profit; stung by cramped growth in listeners

The Internet's biggest radio service swung to a solid profit, but crimped earnings guidance coupled with dribbling active-listener growth stoked a share sell-off.

Hyundai Pandora interface
Pandora integration into a Hyundai dashboard. Hyundai

Pandora Media, the operator of the biggest Internet radio service, Thursday swung to a better-than-expected profit in the second quarter, but shares slumped as the company's earnings outlook kept a moderate tempo for the current period.

Shares fell $2.62, or 9.1 percent, to $26.13 in after-hours trading. Investors had been optimistic during the day before the numbers, pushing shares up more than 4 percent before the close. The stock has risen by more than half in the last year.

Pandora's recent focus has been on increasing its advertising prowess, investing on sales force and ad capabilities. That investment has meant its earnings guidance has been more sedate than Wall Street expectations lately, but the company preaches the eventual payoff of getting higher value from the ads Pandora broadcasts.

Intensifying competition in Pandora's universe has also turned up the volume on any hints that growth in listeners may be slowing. The company continues to lead the market, but giants like Apple, Amazon, and Google added streaming services in the last year, while upstarts like Spotify have taken hold of streaming music in some overseas markets as Pandora's licensing model has kept it planted predominantly in the US.

Listener-hour growth was 29 percent in the latest period, and active listeners were up 7.5 percent at the end of the quarter. Active listeners had been up 8 percent at the end of April and 9 percent at the end of May, which means the active listener growth slowed in the final month of the quarter. But because of shifts in Pandora's reporting calendar and seasonality, an apples-to-apples comparison of growth rate is difficult. In the second quarter of last year, which spanned different months, listener hours were up 18 percent and active listeners rose 30 percent. Listener growth was 12 percent in the first quarter .

Chief Financial Officer Mike Herring said listener engagement was high, at more than 21 hours per user per month, which is key to Pandora's ability to improve its top line.

"We've never had an hours problem, they continue to grow," he said in an interview with CNET News, noting that the company surpassed 5 billion listener hours for the first time.

A positive effect of more and more competitors stepping onto Pandora's turf is that the company is noticing more digital advertising budgets increasing the piece of the pie allocated to streaming. "It's a much easier sell from the mobile advertising side of the business," he said. But Pandora isn't seeing much effect from competition on its own users.

In the latest three-month period, Pandora posted a loss of $11.7 million, or 6 cents a share, compared with a loss of $6.9 million, or 4 cents a share, a year earlier. Stripping out unusual items, its per-share profit was 4 cents. Revenue rose 43 percent to $219 million; revenue excluding unusual items was essentially the same, rising to $218.9 million.

In April, the company projected that its bottom line would range from breakeven to a profit of 3 cents a share on revenue of $213 million to $218 million. The consensus estimate of analysts was for a 3-cents profit on $219 million in revenue.

Pandora has predicted 5 cents to 8 cents per-share profit for the third quarter on revenue of $235 million to $240 million. Analysts were expecting a profit of 8 cents a share on $235 million in revenue. Pandora also raised its full-year outlook, now projecting 16 cents to 19 cents and revenue between $895 million and $915 million, up from its previous estimate for per-share profit of 14 cents to 18 cents and revenue of $880 million to $900 million.

Updated at 4:35 pm PT: Adds interview with financial chief.

Updated at 10:20 am PT, July 25: Adds full-year outlook and consensus analyst estimate for second quarter.