HiTech.Expert

Pandora’s IPO yesterday peaked at $26/share, giving them a brief valuation of $4 billion. The stock quickly deflated to a closing price of $17.50, moving that valuation to $2.8 billion. Even that is a fantastical and bubblicious number that will not stand up to scrutiny. Here is a back-of-the-envelope analysis based on the S-1 that investors should have made before throwing their money in the box: Best possible case of active users growth 80M users have tried Pandora 30M users converted to active users (listen at least 1x per week) That gives us a 37.5% conversion rate (30M/80M) Pandora is currently only available in the US (and expanding to foreign markets is very hard) The US has 240M people online (310M people * 77% internet penetration) Facebook is one of the most popular services in the US 146M users have tried Facebook in the US (who knows how many are active) If Pandora could become as popular as Facebook, they’ll reach another 66M users (146M - 80M) That will give them another 25M active users (66M * 37.5%) So the likely maximum Pandora’s userbase can grow in the US is 85%, or 55M active users Revenue extrapolation for 2010 Pandora has reported $77.8M in advertising revenue for the first 9 months of 2010. For the sake of analyzing per customer numbers on a yearly basis, let’s assume no additional growth for the last 3 months (although they most certainly will grow). So that’s $104M in advertising revenue for 2010 (($77.8M / 9 months) * 12 months). Best case scenario for net advertising profits Pandora made $3.46/user from advertising in 2010 ($104M revs / 30M active users) It paid $1.56/user in music royalties for 2010 ($45M / 30M active users) Thus, gross profit from advertising (before other costs like servers, bandwidth, staff, and marketing) was $2/user ($3.46 - $1.56) Music royalty cost may go down a little with additional scale, but that’s not a given (they paid 45% of revenues in royalties in ‘07, 81% in ‘08, 60% in ‘09, and now 50% in ‘10 — it was very high in ‘08/09 before the Copyright Royalty Board adjusted rates until 2015) But let’s be kind and assume reduced royalty costs of 40%, so the number drops to $1.24/user, which would increase gross profit per user to $2.21 ($3.46 - $1.24) So the most Pandora can make from advertising in gross advertising profits is $122M (55M active users * $2.21) Let’s say they reach fantastic economies of scale and their remaining costs only go up 50% even as their user base soars 85%. That means other costs will total 66M (44M * 1.5) So the best case scenario for advertising profits (assuming Facebook-like popularity) would be a net $56M ($122M gross profit - $66M costs) Best case scenario for net subscription profits Using the same assumption for 2010 as above, Pandora made $16M from subscriptions A subscription costs $36/yr, so that means they have 444K paying subscribers ($16M / $36) So their free-to-paid conversion rate is 1.5% (444K paying users / 30M active users) If they can keep up that conversion rate as they grow to Facebook popularity (highly unlikely), they’ll get a total of 821K paying subscribers That would net a total of $30M from subscriptions (we’ve already included costs of content and operation in the advertising analysis above, so let’s just assume it’s all profit) Adjusting the best case scenario for total profits Based on the quick analysis above, the best case scenario for growth in the US gives Pandora the potential for $86M/year in profits ($56M from advertising and $30M in subscriptions). Given that they’d have to become as popular as Facebook to get there, that’s beyond optimistic. So let’s just say if they become 2/3s as popular, they’d make $56M/yr. Still highly optimistic, but not as far removed from reality. But what if they go international? They could, but it would be incredibly tough and expensive. Not only would they face daunting competitors in Europe like Spotify, they’d also have to deal with a labyrinth of licensing issues. Add in the increased cost of marketing, overseas offices, and the hardship of international advertising sales (you don’t think it’s as profitable to sell ads in Portugal as it is in the US, do you?) and you’re left with an international expansion that is unlikely to materially increase Pandora’s worth as a business. So where does that leave the valuation? The best case scenario is to become a $56M/yr-in-profits business Let’s say they’ll be worth 12x P/E at that point (a generous number given that Apple is trading at a forward 12x P/E and have tremendous growth upside) That means Pandora’s market cap — by the time they hit all their best case scenario marks! — would be $672M ($56M * 12) Given the current number of outstanding shares, that means the price per share should be $4 ($672M market cap / 160M outstanding shares) That means $4/share is where the price should land after an awesome 85% growth in active users AND a decade of losses transformed into a delicious $56M/yr in profits. Now factor in that this best case scenario has big risks: they don’t become as popular, royalty costs go up, they get more competition, the users switch to mobile instead of computer with less profitable ads, and on and on. What exactly do you think is the fair price for the stock today?  Let me continue my generous streak and say that Pandora might be a reasonable gamble at $2/share, tops. That would still value a company that’s never seen a dollar of profit in its decade-long history at almost $320M (~160M outstanding shares at the moment). An astonishing, princely sum for a promise-of-a-perhaps profitable business in the future.

The mobile communications operator Ukrainian Mobile Communications rendering services under the MTS brand finished 2010 with a net profit of UAH 752 million. Ukrainian News learned this from a statement by the operator. In 2010 the operator increased its net revenues by 4.1% to UAH 8.511 million, comparing with 2009. The company notes that growth in revenues and control over the cost-efficiency helped to ensure high profitability of the company's business. MTS's OIBDA (Operating Income Before Depreciation and Amortization) rose by 7.4% to UAH 3,955 billion and margin went up by 1.5 p.p. having amounted 46.5%, compared with 2009. As Ukrainian News earlier reported, the company finished 2009 with a net profit of UAH 640.3 million, and decreased its net revenues by 4.9% or UAH 421.5 million, comparing with 2008, to UAH 8,172.7 million. MTS's OIBDA amounted to UAH 3,681.3 million in 2009. 100% of the shares in the Ukrainian Mobile Communications belong to the MTS company (Russia).

The Astelit cellular mobile telephone company, which provides mobile telephone services under the life:) brand name, finished 2010 with losses of USD 101 million. In 2010, the company's net revenues in the hryvnia equivalent shrank by 3.36% or UAH 11.8 million, compared with 2009, to UAH 339.3 million. EBITDA (earnings before interest, taxes, depreciation, and amortization) of the company made up USD 64.5 million in 2010. Its capital expenditures (CAPEX) in 2010 made up of USD 66.5 million. Oleksandr Barinov, CEO of Astelit, said the reduction in the revenues of the company accounted for closure of a non-profitable branch on transit of of international traffic and the lower rates of interconnect. At the same time Barinov pointed to the EBITDA of the company for 2010, as EBITDA tripled over 2009. He assessed this as an achievement of the company's management through a complex of measures on trimming expenses, including restructure of tariffs to cut the expenses for interconnect. He said the company expects its financial indexes to grow in 2011 through realization of a strategy focusing on regional approach to its clients, effective management and development of data transmission services. As Ukrainian News earlier reported, the Astelit finished the October-December period with USD 30.9 million in the red. Astelit reported a loss of USD 111.8 million for the year 2009, when its net revenues reduced by USD 87.6 million or 19.9% to USD 351.1 million compared with 2008.

International bank institutions Credit Suisse First Boston and Deutsche Bank have waived claims for Kyiv-based Ukrtelecom, the largest Ukrainian telecommunication company, to provide early redemption of debt of USD 222.22 million, chairman of the State Property Fund Oleksandr Riabchenko told the press. At the same time, Riabchenko added that claims of creditors were rather related to improvement of credit conditions than to obtain early redemption of the loan. Riabchenko also said that the amount of loan attracted in 2005 was USD 500 million, of which USD 222.222 million remain not repaid. As Ukrainian News earlier reported, in late 2010, the creditors demanded early redemption of USD 222.22 million expecting for reshuffling of Ukrtelecom's owner. Ukrtelecom has held talks with creditors and the latter mitigated terms of the credit. The State Property Fund is forecasting that an agreement on sale of 92.79% of the shares in the Ukrtelecom telecommunications company to the ESU company (Kyiv), which is a subsidiary of the EPIC investment and financial consortium (Austria) will be concluded by February 25 (inclusive).

Ukrtelecom, the largest telecommunications company in Ukraine, ended the period of October-December 2010 with losses of UAH 196.112 million. The company announced this in a statement, a text of which Ukrainian News has obtained. The company's net revenues decreased by UAH 222.42 million or 11.72% to UAH 1,675.283 million in the fourth quarter, compared with the corresponding period of 2009. Ukrtelecom ended 2010 with losses of UAH 258.757 million, having reduced net revenues by UAH 115.452 million or 1.68% to UAH 6,749.304 million compared with 2009. As Ukrainian News earlier reported, Ukrtelecom ended the period of July-September with losses of UAH 110.628 million, having decreased by UAH 1.394 million or 0.1% to UAH 1,671.558 million in the third quarter, compared with the corresponding period of 2009. The company ended 2009 at a loss of UAH 456.4 million. Its net revenues during this period increased by UAH 225.202 million or 3.39% to UAH 6,870.931 million, compared with 2008. Ukrtelecom has a 78.5% share of the fixed-line telephone market in Ukraine and provides services to 9.9 million subscribers.