Pandora: Even New Board Members Can't Solve Their Puzzle, Says Pac Crest

Shares of Internet radio purveyor Pandora Media (P) are up 9 cents, or 1%, at $8.37, on the combination this morning of positive analyst remarks and also a report its CEO, Tim Westergren, is planning to step down.

Recode's Peter Kafkayesterday wrote that Westergren, who's been in the top spot since last year, intends to step down once a replacement is named, citing unnamed sources, but without citing a reason for his departure.

This report, of course, follows the company having reached a deal on June 9th to receive $480 million in financing from satellite radio operators SiriusXM (SIRI).

In research today, Pacific Crest's Andy Hargreaves raised his rating on the shares to Sector Weight from Underweight, arguing that the nomination of three board members as part of that deal will bring such much needed financial discipline:

We expect the Sirius-appointed board members to push for a moderated cash burn rate, in part to protect Sirius' $480 million of principal. Lowering the burn rate may also lower subscriber growth forecasts, but we would view this trade-off positively as it would reduce the odds of insolvency and extend Pandora's time frame to try to find a sustainable model.

Hargreaves doesn't, however, think the long-term prospects will change for the company given the structure of industry,

We do not believe changes to Pandora's board, management, or capital structure can affect what we view as the largest challenges to the business: monopoly-like suppliers and intense competition from larger players. The strong positioning of suppliers has contributed to a 15% annualized increase in ad-supported LPM (cost per thousand hours) over the last five years, which, along with the entrance into on-demand, has driven music gross margins (excluding TicketFly) down to approximately 36% in 2017 from 45% in 2014. The strong position of Pandora's suppliers is very unlikely to change, which is likely to continue pressuring profitability well into the future. In Pandora's ad-supported business, the Company has the potential to abandon direct deals and revert to the CRB rate-setting process in the future. However, the CRB is likely to use the deals Pandora recently struck as primary evidence of market rates. Consequently, we do not believe future CRB rates will provide meaningful relief from the rates Pandora currently pays through direct deals.

In addition, Hargreaves thinks competition from Spotify and Apple (AAPL) and others is not going away: "these competitors are not likely to go away, which suggests that the pressure for users and overall time spent will increase rather than dissipating."

In addition, this morning Barton Crockett with FBR & Co., who has an Outperform rating on the shares, added the stock to the firm's " Alpha Generator List," writing that those new board members will improve the company's prospects in its advertising-supported business, and that the same cost-cutting Hargreaves talks about "limits downside risk," according to a summary of the note provided by TheFlyontheWall.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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