Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Pandora said late Thursday that its business is going gangbusters -- so wonderfully, in fact, that it needs to fire 7 percent of its main workforce in the U.S. 

The good news is the online radio service is doing better financially than it told investors to expect. Revenue is higher than predicted, at least in part because the company is willing to cram in more commercial breaks between songs. And there's a good reason for Pandora's eagerness for higher advertising sales at the risk of annoying its users with ads: It needs the money. 

Running Pandora Media Inc.'s business in the 12 months ended Sept. 30 burned through $301 million in cash, counting what the company spent on computers and other resources to stream songs to its listeners. And the company at Sept. 30 held about $258 million in cash and relatively liquid financial instruments. At its current rate of cash burn, then, the company will exhaust its reserves of ready cash in about 10 months. 

Feel the Cash Burn
Pandora has posted negative free cash flow -- that is, operating cash minus capital spending -- for eight of the last 11 quarters
Source: Bloomberg

That does not mean Pandora will run out of money. The employee layoffs will save roughly $40 million in operating costs this year, Canaccord Genuity analysts estimate. Pandora can also raise money by selling more shares or borrowing, as it did in September by tapping $90 million from an existing credit line. Getting more capital would mean higher interest payments on debt or stock sales that would dilute the holdings of Pandora's existing stockholders. 

Regardless, Pandora's moves to improve its financial standing should be a friendly red flag to traders who pushed up Pandora's stock price by 7 percent on Friday. Pandora is essentially rebooting its digital music product this year and has other ambitious plans to push into new areas such as concert ticket sales. Yet its product agenda remains a mismatch with the company's not-so-sturdy financial condition. 

The company is preparing a new subscription music service that operates more like Spotify, which allows users to select any song they wish to hear. Pandora runs now largely like a radio station, selecting which songs people hear. 

Bleeding cash is not an ideal position for a company trying to shake up its product offerings while competing against Apple Inc., Alphabet Inc. and Amazon.com Inc. for listeners. Those tech giants, plus streaming music market leader Spotify Ltd., also have designs to dominate digital music, and all but Spotify don't care if they turn a profit in music. To find people willing to pay for Pandora's new service, the company will have to find money to spend on marketing. 

Sounds Good
Pandora shares have climbed about 24% in the last year as the company prepared new products and as investors hoped for a possible acquisition
Source: Bloomberg

Pandora said on Thursday that it was being savvy about how it lures new subscribers without overspending on marketing and that it was finding more ways to automate advertising sales. The company also said its "commitment to cost discipline" -- i.e., its willingness to fire people and pinch pennies in nonessential areas -- would allow it to devote funds to new products. Using a customized measure of earnings, Pandora said it expects to do better than the losses forecast by Wall Street analysts. The company still doesn't expect to be profitable under conventional accounting standards.

The best hope to cure Pandora's ills is a sale. And that's why Pandora's stock moves up mostly at any hints a sale might be coming.

Satellite radio company Sirius XM Holdings Inc. is the most frequently rumored acquirer, although Sirius executives have been wishy-washy on the idea in public. Sirius Chairman Greg Maffei said at a private dinner this week that his company was interested in buying Pandora "at the right price," the New York Post reported. "At the right price" is the key phrase. Maffei -- like his boss John Malone -- is adept at the power dynamics in corporate dealmaking. He can wait and see whether Pandora grows weaker, and cheaper. 

It's true that Pandora is used to dealing with financial stresses. The company has posted an operating loss for 14 out of the 17 quarters since it went public in 2011. What is different now is the company is facing stiffer competition than ever while it tries to dig out of a cash hole. The static is starting to drown out Pandora's tunes. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net