S14-5 Analyze common-size income statements (Learning Objectives 1, 2, & 3) Pand
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S14-5 Analyze common-size income statements (Learning Objectives 1, 2, & 3) Pandora Internet Radio by Pandora Media is a streaming music service. Its free advertisng-supported radio service was first launched in 2005. Pandora users streamed 20.03 billion hours of Internet radio during 2014. In December 2014, there were 81.5 million active users of Pandora, making it the largest streaming music service currently. Pandora has a database of over 1,oo0,000 songs from over 125,000 artists. Pandora offers its streaming music through two services: 1. Free Service: This option allows the listener access to the music by including advertisements. Pandora One: This option is a paid subscription model without any advertisements; it also allows users to have more daily skips and longer listening times 2. While Pandora currently has plenty of cash from its investors, it has yet to generate profit since its inception. Pandora is facing increasing competition for source-.uch as Apple Music (approximately 6.5 million subscribers in 2015), Spotify (approximately 20 million paid subscribers in 2015), and other streaming services. In addition, Pandora's costs in some areas are increasing When Pandora released its earnings for the third quarter of 2015, earnings were less than expected by investors and Pandora's stock price fell sharply. Following are excerpts from Pandora's statement of operations, both in dollars and in common-size formats. These excerpts are condensed for educational use only.) Pandora Media,Inc Excerpt from Condensed Consolidated Statements of Operations- in DOLLARS (in thousands, except per share amounts) UNAUDITED Three months ended September 30, 2014 Ptember 3o Advertising 194,293 10 Subscription and other 11 Total revenue 12 Cost of revenue Cost of revenue Content acquisition co 15,453 14Cost of revenue-Other 15 Total cost of revenue 16 Gross profit 17 Operating expenses 19 Sales and marketing 20 General and administrat 21 Total operating ex 22 107,286 285,595 114,844 Loss from operations 150,463 24 Source: Pandora Medio, Inc,3rd Quarter 2015, Financial Results Pandora Media, Inc. Excerpt from Condensed Consolidated Statements of Operations- COMMON-SIZE (in thousands, except per share amounts)-UNAUDITED Three months ended September 30 Nine months ended September 30 2015 2014 Revenues Advertising 10 Subscription and other 11 Total revenue 12 Cost of revenue 13 Cost of revenue-Content acquisition costs 14 Cost of revenue-Other 15 Total cost of revenue 16 Gross profit 17 Operating expenses 18 Product development 19 Sales and marketing 20 General and administrative 21 Total operating expenses 22 Loss from operations 24 Source: Pandora Media, Inc, 3rd Quarter 2015, Financial ResultsExplanation / Answer
Req.1
In the 3rd quarter of 2015 as compared to 2014 the revenue has increased from 194,293 to 254,656. Indicating a (254,656-19,4293)/194,293 = 31% increase. However the loss from operations increased from -2,019 to -85,862. The operating expenses increased by
In the 9 months ended of 2015 as compared to 2014 the revenue has increased from 512,251 to 664,316 indicating an increase of (664,316-512,251)/512,251 = 29.68%. However, the loss from operations increased from -42,743 to -150,463. The operating expenses in this period increased by (453,230-320,073)/320,073 = 40.6%.The cost of revenue increased by (525,119 – 375,472)/375,472 = 39.9%.
Hence, in both the 3rd quarter and nine months of 2015 as compared to 2014, although revenue is increasing, loss from operations is increasing as well. For nine months’ data, revenue increased 29.68% but operating expenses increased 40.6%. Cost of revenue also increased by 39.9%. The rate of increase is higher for operating expenses than Cost of revenue
Req 2.
As stated above, expenses increased faster than revenue and hence there is a higher loss in 2015.
Hence,
Expenses increased at a greater rate than Revenue. Both cost of Revenue and operating expenses increased faster than Revenue.
Req 3.
The gross profit percentage and the Loss from operations percentage decrease. Because there is a Loss from operations the rate increase for Expenses is higher than the rate of increase for revenue.
Req 4.
In the nine months data all operating expenses in the 9months 2015 as compared to 2014. Both the Advertising Revenue and Subscription and other revenue increase in the same period
Req 5.
The statement in dollars is more beneficial because it enables calculation of the rate of indicidual items in absolute terms as well as relative terms. We are able to calculate the rate at which both Revenues and Expenses is changing.
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