Why Pandora Investors Need To Know SoundExchange

FBR & Co. commented on Pandora Media Inc P Tuesday to rebut "the argument that earnings in a SoundExchange victory could support the shares."

Analysts Barton Crockett and Howard Ma noted that SoundExchange was "seeking fees from Pandora equal to the greater of $0.25 to $0.29 per 100 songs, or 55 percent of revenues."

"Whatever one believes about Pandora's ability to drive up ad RPMs, by limiting usage, this formulation provides a serious headwind to margin potential," according to the analysts.

According to data presented at Pandora’s recent investor day, after accounting for expenses and the SoundExchange proposal, a margin of 5 percent remained. Adding publishing and other content rights costs would consume the remaining margin.

Pandora would have to drive better operating efficiencies than those than it outlined if SoundExchange won, however, it "is currently moving in the opposite direction, with sales and marketing at 30 percent of revenues in 2014," according to Crockett.

Over the next 12 months, the analysts saw "meaningful risk that rates could be reset to debilitating levels, with the punitive SoundExchange proposal appearing credible."

The firm maintained an Underperform rating on the stock with an $11 price target.

Related Link: Pandora Defends Its Royalty Payments In 10 Points

Pandora Media Inc recently traded at $16.10, down 2.37 percent.