Pandora Media (P:SELL) Slowing user growth and increased Pandora One churn will make future revenue growth more challenging.

Q1:14 HIGHLIGHTS

• Revenues were slightly ahead of our forecast and up more than 56.5% YOY on a non-GAAP basis due to a 94% increase in non-GAAP subscription revenues.
• Gross margin of 36.6% was below our estimate of 38.0% as a result of higher content licensing costs, offset by improved mobile monetization from increased ad loads and higher pricing.
• GAAP EPS was two cents below our estimate, while pro-forma EPS of $(0.13) was below consensus of $(0.08), but a penny ahead of our estimate thanks to higher than projected stock-based compensation.
• Listener hours increased almost 13% YOY in the quarter, and active users of 75.3 million were up more than 8%.
• We expect a premium valuation will be difficult to maintain in the face of continued losses and increased competition.
• We reiterate our SELL rating and maintain our $17 price target.

RISKS

• Pandora may improve its mobile monetization faster than anticipated, in particular by gaining share in the market for radio advertising.
• The company may successfully penetrate the automobile market where almost 50% of radio listing in the U.S. takes place.