Wall Street analysts who follow Pandora (P) had expected that the world's largest Internet radio service would be profitable for the fourth quarter, at least when costs such as taxes and depreciation are taken out of the mix.
But that wasn't to be.
The Oakland, Calif. music streaming service on Tuesday said it expects a loss of $39 million to $51 million for the current quarter even before some costs, as opposed to projections of a profit of $15.6 million.
Pandora shares after hours continued the downward trend of much of the past three weeks, falling 7.2% to $11.30. The stock fell 4.8% in Tuesday trading after closing Monday at $12.80. Shares closed at $14.77 as recently as Oct. 5.
The less-than-comforting numbers for Pandora came as CEO Tim Westergren offered investors and the more than 80 million listeners of its free, ad-supported service some teasers about Pandora Premium, an on-demand platform that will launch on Dec. 6, allowing it to compete more directly with privately-held Spotify and Apple (AAPL - Get Report) Music.
"We're going to reinvent the on-demand listening experience, the same way we invented the curated radio experience," Westergren said at an analyst gathering in San Francisco.
Pandora Premium is expected to be priced at $10 per month and will allow subscribers to rewind, skip and listen to songs when not connected to the Internet. Pandora last month revamped Pandora Plus, a $5 per month ad-free radio service, which the company said has signed-up 250,000 subscribers who used to be listeners of its free service.
The question for Pandora is whether its on-demand service can reverse a third quarter decline in active listeners, which dropped to 77.9 million from 78.1 million during the same period a year ago. Fewer listeners to its ad-supported service translated into slowing growth, a sign that users may have abandoned Pandora for on-demand services.
And indeed Westergren acknowledged that trend, referring to it as "Increasing promiscuity" by listeners who use Pandora's free service but subscriber to a competing on-demand platform.
Its a long-awaited step for Pandora which has had an often-tense relationship with the music industry over the course of its more than 10 years in existence. Up until signing comprehensive licensing contracts with major record labels, musicians had charged that they weren't being paid enough for the streaming of their music.
But in the wake of a December decision by the U.S. Royalty Board that set new streaming rates, Pandora has increasingly found common ground with an industry that views subscription-based streaming as its clearest path to offset the sharp decline in recent years of CD sales and music downloads.
Pandora, though, still must contend with comparisons to Spotify, which has a total of 100 million users of which 40 million subscribe to its $10 per month on-demand platform, and Apple Music, which is priced at $10 per month, and said in July it had 17 million paying subscribers. Westergren said Pandora Premium will reach 11 million subscribers in 2020.
Pandora sales in the third quarter rose 13% to $351.9 million was up 13% year over year, while total listening hours totaled 5.4 billion, a 5% increase from the same period a year ago.
Revenue for the fourth quarter, the company said, would fall into the range of $362 million to $374 million, short of the average analyst forecast of $392.1 million. For the full year, Pandora anticipates generating sales of $1.35 billion to $1.37 billion, compared with analysts' projection of $1.385 billion to $1.405 billion.