Pandora Media (P) is set to report third quarter fiscal 2018 earnings results after the closing bell Monday.
In the three months that ended September, Wall Street expect Pandora to report a per-share loss of 11 cents on revenue of $401.29 million. This compares to the year-ago quarter when the loss came to 6 cents per share on revenue of $378.64 million. For the full year, ending December, the loss of 54 cents per share would improve from 72 cents a year ago, while full-year revenue of $1.55 billion would rise 5.7% year over year.
The Oakland, Calif.-based company continues to struggle with profitability, pressured not only by high content acquisition costs, but also from increased competition with internet music powers such as Apple (AAPL) and Spotify (SPOT). And to say nothing about competing music services from Google’s (GOOG , GOOGL) YouTube and Amazon (AMZN) Prime Music. Pandora’s 80 million active listeners, however, makes it an appealing asset for Sirius XM (SIRI) despite its struggles.
It’s been roughly six weeks since the satellite radio provider announced a $3.5 billion acquisition bid for Pandora — a deal that valued the latter at $10.14 per share. Pandora stock, however, hasn’t come close to that valuation, trading at $8.67 per share as of Friday, putting the stock at about 15% below the M&A price. It would seem the market doesn’t believe the music streaming giant is worth that price or there could be skepticism that the deal will ever go through.
Analysts will ask why the deal makes sense. For starters, Sirius's subscription-based business model has a proven track record of generating tons of free cash flow which can put Pandora — which has struggled with profitability — on firmer financial footing. At the same time, acquiring Pandora’s 80 million active listeners gives Sirius more leverage with market leaders Apple and Spotify. Not to mention, this would help both companies better absorb the high content acquisition costs that has pressured their respective bottom lines.
In any event, Pandora on Monday will get an opportunity to convince investors why the deal makes sense. Monday’s financial results and the company’s outlook for 2019 (with or without Sirius) could go a long way towards regaining the Street’s trust. One of the main topics that will be closely-watched will be the company’s Premium on-demand service, which has not been able to attract enough subscribers to cover the large minimum payment guarantees it made to music labels.
As such, the Premium service — owing to its high content costs and the fact that 70% of revenue is paid to the music labels — has been a drain on the company’s bottom line, not the profit producer it was expected to be. Any noticeable improvement with the service, for which it charges $10 a month, can send the shares soaring.