Pandora Media Inc. (P), the biggest online radio service, fell the most in more than eight months after forecasting third-quarter profit that will miss analysts’ estimates as the company invests to expand its sales staff.
Pandora dropped 13 percent to $18.91 at the close in New York for the biggest decline since Dec. 5, after issuing its forecast yesterday. The shares, which have more than doubled this year, led decliners in the Russell 1000 Index.
The company is investing in new technologies, products and sales staff to drive continued growth, Chief Executive Officer Joe Kennedy said in an interview after Pandora released second-quarter results. The number of active users surged 30 percent to 71.2 million during the period, the company said. A portion of Pandora’s revenue gains will be spent on expanding the business, Kennedy said.
“We want to take a healthy part of our margin growth and reinvest it back into the company,” Kennedy said.
Adjusted profit for the current period will be 3 cents to 6 cents a share, below the 8-cent average of analysts’ estimates, Oakland, California-based Pandora said in a statement. For the full year, results will range from break-even to profit of 5 cents excluding items. Analysts had estimated 5 cents.
Second-quarter sales advanced 55 percent to $157.4 million, beating the $156.6 million average of 17 analysts’ estimates compiled by Bloomberg. Excluding items, profit of 4 cents a share beat the 2-cent average estimate.
For the fiscal year ending in January, Pandora forecast revenue of $640 million to $655 million, including subscription reserves, greater than the $635.7 million forecast of analysts.
“Top line guidance is way above consensus,” Sameet Sinha, an analyst with B. Riley & Co., said in an e-mail. “The bottom line is below, as the company is investing.”
Pandora is removing a 40-hour monthly limit on mobile listening starting Sept. 1. The company has found better ways to blunt music costs, its biggest expense, without affecting users’ experience, Chief Financial Officer Mike Herring said on a conference call. There are enough ad sales to fill the excess listening hours resulting from removing the cap, he said.
Pandora is seeking to balance the rapid growth of mobile listeners, and the resulting increase in music royalties, with the company’s need to sell enough advertising to fill all those hours of streaming. In the period, Pandora paid $21.09 for every 1,000 hours of programming and averaged $41.73 in ad revenue on computers and mobile devices, the company said.
Advertising sales rose 44 percent to $128.5 million, missing the $133 million estimate of Scott Devitt, an analyst at Morgan Stanley. Pandora has sales offices in 29 local markets in the U.S. and has boosted its sales force by 73 percent from a year ago, Kennedy said.
The online service began competing directly with radio stations in May for the $15 billion U.S. local ad market, after Pandora started selling commercial time on two of the biggest systems used by marketers to buy ad time on terrestrial stations.
“We are seeing excellent traction,” Kennedy said. “‘Local radio ad dollars are a minority of our total but they are the fastest-growing portion of our revenue.’’
Subscription revenue, mostly from the $34-a-year commercial-free Pandora One service, more than doubled to $28.8 million, according to the statement. Devitt had forecast $22.1 million from subscriptions.
After items such as stock-based compensation costs, the second-quarter loss amounted to $7.79 million, or 4 cents a share, compared with a loss of $5.4 million, or 3 cents, a year earlier. Analysts had forecast a loss of $5.8 million, or 3 cents a share.
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