FBR Capital Downgrades Pandora (P) to Market Perform on Ad Shortfall and Higher Costs
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FBR Capital downgraded Pandora (NYSE: P) from Outperform to Market Perform with a price target of $12.00 amid the troubling combination of ad slowdown and guidance for higher spending.
Analyst Barton Crockett commented, "Ad growth was the main problem in 3Q16, slowing to 7% on only a 2% rise in RPM, versus 23% and 15% ad growth in 1Q16 and 2Q16, respectively, and our anticipation for 13% growth in 3Q16. This drove a $15 million shortfall in ad revenues and $10 million in EBITDA versus our estimates. Pandora blamed shortfalls in entertainment, telecom, and digital national advertising that emerged in 2Q16 and are seen persisting into 4Q16. Our talks at the reception following the report suggested pressure from Facebook and Snapchat, and suboptimal execution of upfront national ad sales and local ad sales force hiring."
He added, "We had thought that the guide for $120 million of spending for the on-demand launch in 2016 captured the opex impact. But Pandora said there is an additional $24 million per quarter of spending starting mainly in 4Q16. This appears to be tied in part to the cost of administering complicated licensing contracts with labels. We had already captured the additional $22 million per quarter in costs from the higher licensing fees for the direct deals with labels."
Shares of Pandora closed at $12.18 yesterday.
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