Pandora, Spotify Earnings Show Confidence in Subscriber Growth

Two of music streaming’s publicly traded companies, SiriusXM-owned Pandora (NASDAQ: SIRI) and Spotify (NYSE: SPOT), released third-quarter earnings results three days apart, replete with confidence in a marketplace still brimming with subscriber demand.

Steady earnings on both fronts reflect a marketplace seizing, not squeezing, monetization opportunities from technical and user engagement innovation, raising the subscriber ceiling higher than analysts once predicted.

SiriusXM added 210,000 subscribers to its satellite radio service last quarter, while Pandora added just 33,000 paid subscribers. The company attributed the loss to the completion of a one-year paid promotional subscription trial with T-Mobile, retiring approximately 700,000 paid promotional trials.

By contrast, Spotify added five million paid users in the same three months.

Unlike Spotify, Pandora is also an Internet radio service that reaches only a U.S. consumer audience. Once a troubled company prior to SiriusXM acquisition, the company is now a key revenue driver.

“Total revenue of $2.0 billion increased 37% compared to the prior year period, boosted by the acquisition of Pandora Media on February 1, 2019,” said SiriusXM in its report.

Pandora: Technical Efficiency

Despite Pandora’s lower-than-expected subscriber numbers, the company’s ad revenue reached a record $315 million, growing 8% over the third quarter of 2018. Ad revenue was driven by strong third quarter monetization of $85 per thousand hours, growing 10% over the third quarter 2018.

Pandora drove revenue growth from traditional audio advertising, boosted by video programmatic and engagement-based video, as well as the expansion of off-platform efforts and fees generated on the AdsWizz platform.

Total revenue for Pandora grew 7% to $447 million in the quarter, aided in part by a 5% increase in subscriber revenue to $132 million.

Interestingly, Pandora’s total ad-supported listening hours were down. Monthly Active Users (MAUs) were 63.1 million at the end of the third quarter, down from 68.8 million in the prior year period. Total ad supported listener hours were 3.32 billion in the period, down from 3.59 billion in the third quarter of 2018.

Still, gross profit grew 19%, driven primarily by lower revenue share and royalties and customer service and billing expenses as a percentage of revenue. Pandora finished the third quarter with a total of 6.3 million subscribers, including a paid promotional subscriber base of 45,000.

“This was on the back of a roughly 302,000 rise in the count for self-pay subscribers to a total of 29.6 million. This is a key operating metric for a company that depends heavily on paid subscriptions. Pandora also saw a rise in same, by around 33,000 to land at almost 6.3 million.”

The Motley Fool analyst Eric Volkman

Spotify: Engagement Innovation

In Spotify’s world, total subscribers of 248 million rose around 30% YoY (year-over-year) for the third quarter, beating analysts’ expectations. Premium subscriptions, which accounted for 90% of its total sales, rose 31% YoY and hit 113 million paid subscribers. Ad-supported subscribers increased 29% YoY to 141 million in the third quarter.

Spotify said its subscriber growth is mainly due to podcasts. Increased podcast hours led to higher engagement and conversion of paid users. Product innovation also boosted Spotify’s MAU growth in the third quarter. The company witnessed a higher retention rate among new users, which drove the subscriber base.

“We continue to see exponential growth in podcast hours streamed (up approximately 39% Q/Q) and early indications that podcast engagement is driving a virtuous cycle of increased overall engagement and significantly increased conversion of free to paid users,” said Spotify in its earnings report.

“A portion of the faster MAU growth is a result of our continued product innovation driving improvements in long-term retention,” it said. “Our belief is that a better onboarding experience leads to increased engagement, which leads to better retention, conversion, satisfaction, and ultimately, lifetime value. Expect us to continue to innovate like this in the future.”

“Stock was surge a relief rally given that the company posted a mixed report. The highlight is that Spotify had 248 million monthly active users (MAUs) in the last quarter, coming in above estimates and the high end of the company’s own forecast, but he said that most of that beat came from the rest of world markets that tend to have materially lower conversation rates than the U.S. and Europe.”

Evercore ISI analyst Kevin Rippey