Pandora Falls as Spending to Promote Service Cuts Outlook

Pandora Media Inc. tumbled the most in more than a year after telling investors it will spend aggressively on marketing to defend its lead in online radio, a move that will dent profit.

For the current second quarter, Pandora forecasts break-even to 3 cents a share in profit, according to a statement yesterday from the Oakland, California-based company. That’s less than the 5-cent average of 26 analysts’ estimates.

Pandora is spending more to attract and keep listeners. First-quarter marketing outlays increased 63 percent to $61.9 million, the company said, roughly in line with its growing revenue. Content costs grew 26 percent to $108.3 million.

“We have said we invest aggressively in the front half as we are building sales teams,” Chief Financial Officer Michael Herring said in a telephone interview. “Our investment curve is higher than the Street expected. It is a lot of work to provide the best music service available.”

Pandora fell 17 percent to $23.51 at the close in New York, for the steepest one-day drop since December 2012. The stock is down 12 percent this year.

Pandora is poised to benefit from higher advertising on its mobile and desktop products, with users tuning in to the service more often and listening longer, according to Michael Pachter, an analyst at Wedbush Securities in Los Angeles who recommends buying the stock.

First Quarter

The net loss for the first quarter narrowed to $28.9 million, or 14 cents a share, from $38.7 million, or 22 cents, a year earlier, Pandora said. Sales advanced 69 percent to $194.3 million. Non-GAAP revenue was $180.1 million, up 54 percent. Analysts had estimated $174.9 million, on average.

The company makes money from ad sales and ad-free subscriptions. Prices for the paid service will rise in May to $4.99 a month for new users, from $3.99, Pandora said last month.

Audience data released yesterday showed listener hours grew 12 percent to 4.8 billion in the first quarter from a year earlier. Active listeners rose 8 percent to 75.3 million.

Ad revenue for Internet music and radio companies is projected to grow 35 percent this year to $1.2 billion, according to researcher SNL Kagan, and reach $2 billion by 2017.

Pandora faces a copyright infringement lawsuit in New York State Supreme Court from major record labels accusing the company of failing to pay for music recorded before 1972.

The company had been fighting the American Society of Composers, Authors and Publishers for lower fees. If it has to pay to license pre-1972 music, it might have to remove the recordings from its service, Pandora said in a filing this year with the U.S. Securities and Exchange Commission.

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