Pandora Media Inc. plummeted the most since going public in June 2011 after issuing a sales forecast that fell short of analysts' estimates and recording charges of $81.8 million to settle legal disputes with the music industry.
The shares dropped 35 percent to close at $12.39 in New York after being down as much as 40 percent intraday.
The Oakland, Calif.-based Internet radio company is facing stiff competition from Spotify Ltd. and Apple Inc. while battling record labels and music publishers over how much it pays to play their songs. Sales this quarter will be $325 million to $330 million, Pandora reported Thursday, less than the $351.5 million average of estimates compiled by Bloomberg.
"We now see competitive actions sapping growth from Pandora's model, as the 'cost of admission' to direct talks with labels is getting pricey," analysts at Piper Jaffray Cos., who downgraded the stock to neutral, wrote in a note Friday. "While we still think a direct deal could happen, at present we lack the details to appropriately model it at this stage."
Pandora late Thursday reported third-quarter revenue of $311.6 million, shy of the $312.8 million average of 28 analysts' estimates compiled by Bloomberg. Profit excluding certain items totaled 10 cents, meeting projections.
Listener hours rose to 5.14 billion, up 3 percent from a year earlier, Pandora said.
"Deceleration in active users was driven largely by Apple, and while management highlighted that the impact was relatively muted all things considered, investors are likely to extrapolate the impact, as the magnitude of the launch (Apple spending $100 million, heavy press coverage) has taken its toll on Pandora," analysts at Nomura wrote in a note Friday, maintaining a neutral rating on the stock.
Along with third-quarter results, Pandora reported costs of $57.9 million to settle a dispute with record labels over royalties for pre-1972 recordings. The company also suspended efforts to obtain the lower royalty rates that conventional radio stations enjoy, resulting in a charge of $23.9 million, according to a statement.
Pandora will shoulder the costs of the two concessions to remove obstacles to the expansion and improvement of its service, which has been posting net losses due to the expense of licensing music. The settlements give Pandora time to seek a long-term resolution to disputes with labels and music publishers that own the rights to songs.
"We pursued this settlement in order to move the conversation forward and continue to foster a better, collaborative relationship with the labels," Chief Executive Officer Brian McAndrews said in a statement.
Music owners say they are insufficiently compensated for their artists' work. The settlement over pre-1972 songs runs through 2016, while Pandora also halted its pursuit of lower royalty rates from the Radio Music License Committee.
The company is also awaiting a decision from a U.S. rate court that will decide how much it must pay record labels. Content costs amount to Pandora's biggest expense.
On Oct. 7, Pandora agreed to acquire the online ticketing business Ticketfly Inc. in a deal valued at about $450 million. The transaction included about $225 million in cash and 11.6 million of Pandora common shares, the Internet radio service said in a filing that day.
Business on 10/24/2015