Pandora Media, Inc. P.

N P US

EQUITY: AMERICAS INTERNET

Initiating with a Neutral Rating; $8 TP Instinet, LLC, Equity Research

10 July 2018
We’re “Optimistic,” but “Anyone Can Play Guitar”
Rating
Starts at Neutral
• Initiating coverage of Pandora with a Neutral rating and $8 target price. Target Price
USD 8.00
Starts at
While we recognize the new management team’s efforts to restore user
growth through partnerships and acquisitions, we remain on the sidelines for Closing price
USD 7.99
9 July 2018
now given the increasingly competitive market and the late entry of its
subscription service. Potential upside +0.1%
• We see total a TAM of $21bn by 2020. We define the addressable market
as the sum of the U.S. paid subscription music industry and U.S. radio
Research analysts
market. We believe Pandora’s acquisition of AdsWizz and efforts to boost
non-music content position it to benefit from secular tailwinds resulting from Americas Internet
the shift in listening time from broadcast radio to digital audio.
Mark Kelley - ILLC
• Growth of streaming music industry should help with label negotiations [email protected]
in the future. Global music industry revenues rose for the third year in a row +1 212-310-5415
in 2017, driven by strong streaming growth. We believe streaming growth is Ryan Bressner - ILLC
[email protected]
still in its infancy and expect the labels to cede some margin to the streaming
+1 212-310-5447
platforms as the global growth continues and streaming services become
more important distribution channels.
• Partnership with SIRI improves product offering and bargaining
position. Sirius XM Holdings (SIRI) is a solid strategic investor and we believe
a close partnership will be accretive to both entities. Access to SIRI’s exclusive
content will also aid Pandora’s efforts to improve non-music content.
• Valuation. Our $8 target price is based on an EV/Sales multiple of 1.4x our
2019E sales estimate, which equates to an EV/Sales to growth ratio of 0.20x,
and is the average of the content and streaming companies in our coverage
(NFLX, SPOT, P).

Year-end: Dec 2017A 2018E 2019E

Revenue ($mn) Actual Prev. Curr. Cons. Prev. Curr. Cons.
1Q 316A N/A 319A N/A N/A 359E 359E
2Q 377A N/A 371E 373E N/A 425E 416E
3Q 379A N/A 389E 394E N/A 441E 440E
4Q 395A N/A 440E 436E N/A 478E 484E
Year 1,467A N/A 1,518E 1,521E N/A 1,704E 1,689E
EV/Sales (x) 1.7 N/A 1.6 1.6 N/A 1.4 1.4
Source: Company data, Bloomberg, Instinet estimates

Key company data: See next page for company data and detailed price/index chart. Production Complete: 2018-07-10 20:16 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Key data on Pandora Media, Inc.

Rating Summary Income Statement
Stock Neutral Year-end: Dec; $mn 2017A 2018E 2019E 2020E
Sector Not rated Revenue 1,467 1,518 1,704 1,878
EBITDA -430 -216 -133 -92
EBITDA (adj.) -125 -87 -5 50
Relative performance chart
EBIT -493 -273 -198 -163
EBIT (adj.) -171 -139 -63 -15
Interest Expense 26 20 20 20
Income Tax -1 1 1 1
Net Income -559 -323 -248 -213
Net Income (adj.) -175 -113 -54 -23
GAAP EPS -2.29 -1.23 -0.89 -0.73
EPS (adj.) -0.72 -0.44 -0.20 -0.08
DPS 0.00 0.00 0.00 0.00

Summary Balance Sheet

$mn 2017A 2018E 2019E 2020E
Cash & Equivalents 501 399 316 269
PP&E 117 97 75 49
Total Assets 1,166 1,027 954 937
Long-term Debt 273 278 278 278
Total Debt 273 278 278 278
Net Debt -228 -120 -38 9
Source: Thomson Reuters, Instinet research
Total Liabilities 523 556 573 598
Shareholders' Equity 644 470 380 338
Performance as of 9 July 2018
Total Liabilities & Equity 1,166 1,027 954 937
(%) 1M 3M 12M
Absolute 4.6 68.6 -6.1
Summary Cash Flow Statement
Relative to S&P 500 Index 4.4 62.0 -20.9
$mn 2017A 2018E 2019E 2020E
Cash from Operations -209 -103 -41 -2
Market data Change in Working Capital -55 13 -15 -31
Current Stock Price ($) 7.99 Depreciation 63 57 65 71
Market Cap ($mn) 2,051.0 Cash from Investing 130 -89 -42 -46
52-week Low ($) 4.09 Capital Expenditures -16 -17 -21 -23
52-week High ($) 9.98 Cash from Financing 380 0 0 0
Shares Outstanding (mn) 256.70 Free Cash Flow -225 -120 -62 -24
Source: Thomson Reuters, Instinet research

Other Metrics
Valuation 2017A 2018E 2019E 2020E
Year-end: Dec 2017A 2018E 2019E 2020E Y/Y Revenue Growth (%) 6 3 12 10
Dividend Yield (%) N/A N/A N/A N/A Y/Y EBIT Growth (%) N/A N/A N/A N/A
EV/EBITDA (GAAP) (x) N/A N/A N/A N/A EBIT Margin (%) -34 -18 -12 -9
EV/EBITDA (adj.) (x) N/A N/A N/A 48.7 Y/Y EBIT (adj.) Growth (%) N/A N/A N/A N/A
Net Debt/EBITDA (adj.) (x) N/A N/A N/A 0.2 EBIT (adj.) Margin (%) -12 -9 -4 -1
BVPS ($) 2.6 1.8 1.4 1.2 Y/Y EBITDA Growth (%) 67 -50 -38 -31
P/BV 3.0 4.5 5.8 6.9 EBITDA Margin (%) -29 -14 -8 -5
P/E (x) N/A N/A N/A N/A Y/Y EBITDA (adj.) Growth (%) 5 -30 -95 -1,170
P/E (adj.) (x) N/A N/A N/A N/A EBITDA (adj.) Margin (%) -9 -6 0 3
ROE (%) N/A N/A N/A N/A Y/Y Interest Expense Growth 8 -25 2 0
ROA (%) N/A N/A N/A N/A (%)
Free Cash Flow Yield (%) -11.6 -5.7 -2.8 -1.0 Y/Y EPS Growth (%) N/A N/A N/A N/A
Y/Y EPS (adj.) Growth (%) N/A N/A N/A N/A

Metrics for Internet Enterprise Value ($mn) 2,428 2,428 2,428 2,428
2017A 2018E 2019E 2020E Source: Company data, Instinet estimates

ARPU 19.64 20.23 22.96 25.33

Subscribers 5,480 6,430 7,730 8,980
Total Hours 21 19 19 19
Advertising Revenue ($mn) 1,075 1,077 1,181 1,258
Subscription Revenue ($mn) 316 441 523 620
Source: Company data, Instinet estimates

2
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Executive Summary
We’re “Optimistic,” but “Anyone Can Play Guitar”
We are initiating coverage of Pandora with a Neutral and a target price of $8.00. We
believe that Pandora’s new management team is making the right moves to reinvigorate
user growth with its recent partnerships (SNAP and AT&T) and that the acquisition of
AdsWizz is clearly a step in the right direction on the long-awaited ad tech stack that has
been in the works for a while. Despite these positives, we believe the company missed a
significant opportunity to capture the domestic streaming market with a later-than-
expected Premium launch that missed the Holiday window and during a time of
unprecedented streaming industry growth. As a result, Pandora appears not to be a part
of the current streaming option conversation (WSJ article) and we fear that brand
loyalties have been built with competing platforms, particularly with the younger
demographic. Pandora is a part of the greater streaming music industry, however, which
has become an increasingly important component of the recording industry and has
been the sole driver of growth over the last three years. We would expect Pandora and
others to garner more leverage at the negotiating table with the labels going forward.
SIRI is a great strategic investor, and we imagine Pandora and SIRI will work more
closely in the future—even as separate entities—likely in the form of shared content. To
arrive at our target price of $8.00, we use an EV/Sales multiple of 1.4x our 2019E sales
estimate, which equates to an EV/Sales to growth ratio of 0.20x, the average multiple of
the companies in our coverage that are working toward profitability (SPOT, SNAP, P).

Fig. 1: Pandora – Instinet vs. Consensus

P Instinet vs. Consensus 2018 2019 2020

in ($M) except per share 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 2018E 2019E 2020E
Revenue
Instinet 319 371 389 440 359 425 441 478 395 460 481 542 1,518 1,704 1,878
Consensus 319 373 394 436 359 416 440 484 408 450 486 515 1,521 1,689 1,883
% difference 0% -1% -1% 1% 0% 2% 0% -1% -3% 2% -1% 5% 0% 1% 0%
$M Difference 0 (2) (6) 4 1 10 1 (6) (13) 10 (6) 27 (3) 15 (5)

Adjusted EBITDA
Instinet (73) (38) (7) 31 (71) (4) 23 48 (59) 1 29 79 (87) (5) 50
Consensus (73) (36) (6) 17 (57) (6) 16 43 (23) 16 37 36 (99) (17) 57
$M Difference 0 (2) (1) 14 (15) 1 7 5 (36) (16) (8) 43 12 12 (7)
Non-GAAP EPS
Instinet ($0.27) ($0.14) ($0.06) $0.03 ($0.22) ($0.06) $0.01 $0.07 ($0.18) ($0.05) $0.02 $0.13 ($0.44) ($0.20) ($0.08)
Consensus ($0.27) ($0.16) ($0.06) $0.02 ($0.25) ($0.08) ($0.01) $0.08 ($0.16) ($0.03) $0.03 $0.03 ($0.50) ($0.27) ($0.05)
$ difference ($0.00) $0.02 ($0.00) $0.01 $0.03 $0.02 $0.01 ($0.01) ($0.02) ($0.01) ($0.01) $0.10 $0.06 $0.07 ($0.03)
Source: Company data, FactSet, Instinet estimates

3
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Investment Case Points

We see a total opportunity of $21bn for Pandora by 2020.
With Pandora’s focus limited to the United States following the wind down of operations
in Australia and New Zealand, we believe the total revenue opportunity for Pandora is
likely to reach $21bn by 2020. Our estimate assumes 85 million U.S. paid subscribers in
2020 against Pandora annual ARPU of $69, for a total premium revenue opportunity of
$6bn. We model strong U.S. subscriber growth of a +34% CAGR over the next three
years (U.S paid subs grew +56% y/y in 2017) from 35.3 million paid subscribers in 2017
(RIAA estimate) to 87 million in 2020. On the ad-supported side, we take Magna’s
estimate of $12bn for the U.S. radio ad business in 2020 and add $3bn for the U.S.
digital audio market. As traditional radio continues to move online, we see Pandora as a
main beneficiary of this shift, especially as it begins to leverage its partnership with Sirius
XM to expand further into the automotive demographic and non-music content.

Fig. 2: Pandora TAM Analysis

Global Premium Model CAGR

($M) 2015 2016 2017 2018E 2019E 2020E 2017-2020
US Paid subscribers 10.8 22.6 35.3 49 67 85 34%
( x ) Pandora ARPU $51.43 $57.64 $68.56 $67.66 $69.00 6%
Total Subscriber TAM $1,162 $2,035 $3,388 $4,514 $5,892 43%
y/y 75% 67% 33% 31%

Global Advertising Model CAGR

($M) 2015 2016 2017 2018E 2019E 2020E 2017-2020
US Radio Advertising $14,439 $14,022 $13,700 $13,181 $12,630 $11,992 -4%
( Plus ) US Digital Audio Advertising $2,028 $2,371 $2,431 $2,572 $2,719 $2,845 5%
Total Advertising TAM $16,467 $16,393 $16,131 $15,753 $15,349 $14,837 -3%
y/y 0% -2% -2% -3% -3%

Pandora Addressable Market $17,555 $18,166 $19,141 $19,863 $20,729 4%

y/y 3% 5% 4% 4%
Source: Magna, RIAA, company data, Instinet estimates

Growth will be driven by Premium this year, but we are worried Pandora is a little
late to the party.
2017 saw another strong year in the streaming industry, with paid subscribers reaching
176 million globally (+57% from 112 million in 2016). Of this total, Pandora contributed
only 3%, or ~5 million subscribers (which includes Pandora PLUS). This pales in
comparison to the 71 million subscribers Spotify had globally at the end of 2017
(22 million in North America) and also behind Apple Music, Google Play and Amazon
Unlimited. While Pandora has had its ad-free paid tier for many years (which is called
PLUS now and used to be called Pandora ONE), the main component of its paid subs
strategy stems from its acquisition of Rdio at the end of 2015, which is the technological
foundation upon which the company built its Premium offering. We’re relatively positive
on the product itself—we’ve been using it since its introduction—but we don’t think the
majority of consumers in the U.S. are aware of the Premium offering. This may be a
function of mismatched marketing (which could be behind the company, as it announced
the hiring of Aimée Lapic as CMO at the end of last year), and an initial release that
missed a holiday launch by a few months. To be fair, the new management team cannot
fix past errors, but we do think the Premium offering missed a window of industry growth
that has likely created some brand loyalty in the interim.

4
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 3: 2017 Paid Subscription Global Market Share

In millions

Spotify
14M
Apple Music
20M Pandora

6M 71M Google Play

3M 176M Amazon Music Unlimited
Total
16M Tidal

7M Deezer
5M Tencent
33M
Other

Source: IFPI, company data, Instinet research

The competitive landscape consists of some of the best-capitalized technology

companies in the world who offer streaming primarily as a means to attract new
consumers into a broader ecosystem or to maintain the loyalty of the customer base they
already have (a loss leader rather than a core offering), as well as Spotify, which is the
market leader. In the intensely competitive streaming space, Pandora has been a late
adopter of the paid on-demand model, with Pandora Premium launching in March 2017;
its family plan wasn’t available until May 2018 (well after everyone else offered them).
Spotify and Apple Music’s offerings have been available for years and they have used
their market-leading positions to continue to take share. Apple, Google and Amazon pre-
install their services onto their hardware offerings, providing a leg up on expanding their
respective user bases. We are also concerned about changing consumer behaviors and
perceptions—Pandora has increasingly been left out of the conversation around
streaming music in favor of Spotify, Apple, YouTube and Amazon. For example, a
recent Wall Street Journal article compared the various streaming offerings and the only
mention of Pandora was a comment from the author: the popular Pandora isn’t on my list
because everything it offers—radio and on-demand streaming—is done better
elsewhere. Below we highlight the main components of competing products.

Fig. 4: Streaming Music Service Comparison

2017 Subscribers
Subscription Service Subs (M) Entry Price Family Plan Trial Period Max Sound Quality (kBps) Songs
Spotify 71M $9.99 $14.99 - up to 6 30 Days 320 35mn+
Apple Music 33M $9.99 $14.99 - up to 6 3 Months 256 45mn+
Pandora 5M $4.99 $14.99 - up to 6 60 Days 192 40mn+
Google Play 7M $9.99 $14.99 - up to 6 30 Days 320 40mn+
Amazon Music Unlimited 16M $7.99 $14.99 - up to 6 30 Days 256 40mn+
Tidal 3M $9.99 $14.99 - up to 6 30 Days 320 55mn+
Deezer 6M $9.99 $14.99 - up to 6 30 Days 320 53mn+
Youtube Music ~ $9.99 $14.99 - up to 6 3 Months 128 40mn+
Source: Company data, Instinet research

While we have painted a fairly negative backdrop thus far, we don’t think it is all gloom
and doom. The relatively new Pandora management team appears to be working at a
faster pace than their predecessors and appear to be making meaningful progress on
consumer growth and retention with several key partnerships—we note that Pandora’s
integration with the new Snap Kit API and bundling with AT&T’s unlimited plan present
unique opportunities to promote Pandora’s brand in front of Snap’s and AT&T’s large
audiences and, in the case of Snapchat, a younger audience who are less likely to
already be Pandora users. We view partnerships with equipment manufacturers
(including mobile devices, smart speakers, and automotive) and large internet brands as

5
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

the best way to bring Pandora’s service to large audiences as it seeks to play catch-up in
this competitive market.

In addition, Pandora app download trends have continued to decline at a steady pace
since peaking in 2016. Spotify’s downloads in the U.S. have also trended downward in
this time period, but to a lesser degree. The domestic slowdown is likely due to both the
increasing penetration of streaming music services in the U.S. market and the rising
challenge of SPOT, AAPL, AMZN and YouTube. Management has outlined their belief
that they need to own the U.S. market before going global, but we think this strategy
places a ceiling on growth, as resources are devoted to an extremely competitive and
maturing domestic environment rather than the international market, which is still
experiencing secular growth.

Fig. 5: App Downloads Point to Slowing Growth

App Downloads

5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
5/1/2016 11/1/2016 5/1/2017 11/1/2017 5/1/2018

Pandora App Downloads Spotify App Downloads

Source: Sensor Tower, Instinet research

We see the advertising business continuing to be a major driver.

Despite Premium contributing the majority of the company’s growth this year, we believe
advertising will continue to be the largest contributor to Pandora’s revenue, although at a
smaller share than its current 67% of revenue. Our current model assumes advertising
revenue will grow in the mid-single-digits through 2020, but we believe advertising offers
the most upside to our estimates. The current ad formats offered are audio, video,
display, sponsorship, brand station and experiential event. Ads can be bought through
both direct and programmatic channels depending on the format. According to Power
Digital, Pandora’s basic packages start at about $1,500 a month and have an average
CPM of $5-7 for visual ads, $8-12 for audio ads and $15-25 for video ads. Pandora has a
sophisticated method of analytics, as it customizes playlists for listeners based on
previous selections. This makes its platform favorable for ad campaigns with a highly
targeted audience and a smaller budget.

6
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 6: Pandora Advertising Options

Format Platforms Availability

Audio Mobile, tablet, desktop, web, connected home/car Direct sale or programmatic
Display (Banner) Mobile, tablet & web Direct sale
Video Mobile, tablet & web Direct sale or programmatic
Native & Sponsorships Mobile, tablet & web Direct sale
Brand Stations Mobile, tablet & web Direct sale
Experiential Events Live Direct sale
Source: pandoraforbrands.com, Instinet research

While advertising has been core to Pandora’s business since its founding, it has been
struggling with a user base that has been flat to down and has been late to introduce the
programmatic and measurement capabilities that advertisers want. CEO Roger Lynch
called out this missing link in his first earnings call, stating that Pandora’s manual sales
process and lack of a self-service option had led to some advertisers to stop buying on
the platform. Spotify beat Pandora to self-serve last fall by launching Ad Studio into beta,
which represented the first self-serve audio advertising platform in the industry. To
address this gap, Pandora bought audio ad tech platform AdsWizz for $145mn in May of
2018. The hope is that this acquisition will help Pandora keep advertisers engaged,
maximize ad revenue, and increase share in the local audio advertising market. To date,
local advertising revenue has averaged about thirty percent of total advertising revenue,
with growth beyond this limited by the lack of a self-serve platform. Local advertisers
typically have smaller budgets than national marketers, and as such struggle to meet
minimum spend requirements. We believe the integration of AdsWizz’s platform will
improve customer adoption and enhance Pandora’s attractiveness to local advertisers
through lower cost thresholds and more customization.
Streaming is becoming more important to the global music industry, which should
help with label negotiations in the future.
In 2017, the global music industry grew 8% y/y to $17bn, its third consecutive year of
annual growth. However, global revenues still remain well below the 1999 peak of $25bn
achieved before the rise of digital piracy contributed to 15 years of declines. Driven by
streaming growth, digital revenue now accounts for more than half of total revenue and
streaming has become the largest revenue driver for the first time, with significant growth
ahead. In the U.S., streaming revenue grew to $6bn, or 65% of U.S. recorded (ex-live
performance) industry revenue of $9bn in 2017.

Fig. 7: Global Recorded Music Industry Revenue

In $bn
Total Revenue ($B)

$25B

Streaming has become the biggest

$20B driver of industry growth with a
5-year CAGR of 46% through 2017

$15B

$1B $1B
$1B $7B
$2B $3B $5B
$10B

$3B
$5B

$0B
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Synchronization Revenues Performance Rights Streaming Digital (Downloads) Physical

Source: IFPI Global Music Report 2018 – Annual State of the Industry, Instinet research

7
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

We expect the increasing importance of streaming platforms to the overall industry as

offering the potential for Pandora to negotiate better terms with the labels going forward.
Pandora’s total content acquisition costs (CAC) amounted to 55% of total revenue in
2017, and our current model has it rising to 60% in 2020. This increase is largely due to
an increased shift to on-demand streaming, which commands a higher CAC. Pandora’s
2017 gross margins were 34%, and we model modest improvement to 36% by 2020.
Positive impact from expanded offerings of podcasts.
Pandora expects to add non-music content to its platform, which not only adds content
that consumers clearly want, but could also be margin-accretive. Data shows that the
number of podcast users has steadily increased over the last decade. The Infinite Dial
Study in 2018 by Edison Research and Triton Digital found that 26% of Americans
(73 million people) have listened to a podcast in the last month, 17% in the last week
(48 million people). According to IAB and PwC, U.S. podcast ad revenue rose 87 percent
in 2017 to $314mn from $169mn in 2016. They forecast ad revenue will continue to grow
another 110 percent to $659mn in 2020. These findings illustrate the growing hold
podcasts have on American audio listening and the opportunity available to Pandora. As
the company expands podcast offerings, ad loads are likely to be lower than music
content due to the lack of natural breaks, but we believe the longer average listening
time and lower relative cost of content will be accretive to the business. With this end
goal in mind, management is currently developing what it calls the “Podcast Genome
Project,” a database similar to its Music Genome Project that would analyze the
attributes of every podcast to generate an accurate list of suggested podcasts for
consumers. We believe this segment provides an important opportunity that Pandora
must take advantage of as it seeks to capture a larger share of the U.S. terrestrial radio
market.

Fig. 8: Monthly Podcast Listeners Fig. 9: U.S. Podcast Revenue

Podcast Listeners % of Population

Advertising Revenue
100M 40%
34% $659
90M
35%
$700
31%
80M
30% $600
26% $515
70M 24%
25% $500
60M 21%
$402
50M 17% 20% $400
15% $314
40M 12% $300
15%
30M $169
10% $200
20M

10M
5% $100
31 39 44 55 64 73 84 92
0M 0% $0
2013 2014 2015 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E

US Podcast Listeners % of US Population (15+) US Podcast Revenue

Source: Edison Research, Triton Digital, Instinet estimates Source: IAB, PwC, Instinet research

Sirius investment provides foundation of bull case.

Earlier last year, Sirius XM purchased $480mn of preferred Pandora stock, which
amounted to a 19% stake of outstanding common stock (16% converted). Sirius also
gained three seats on Pandora’s Board, providing it input in the construction of
Pandora’s management team. However, the deal restricted Sirius from buying more
Pandora shares for 18 months as well as prevented it from buying more than 31.5% of
the company without Board approval.
Sirius XM has developed a profitable business in the satellite radio segment but is highly
dependent on the automotive market, which is changing as more cars are becoming
connected. As a result, Sirius is becoming vulnerable to the increased popularity of
on-demand streaming services such as Spotify and Apple Music. The investment for
Sirius provides a long-term insurance policy against these market shifts and exposure to
Pandora’s large user base. The investment provides Pandora with capital for strategic
investments (as seen in their purchase of AdsWizz), the optionality to expand further into

8
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

the autos segment and expand its offerings of non-music content. Given that the majority
of terrestrial radio listening takes place in the car and at work, greater exposure to the
automotive segment is essential to Pandora’s goal of taking share of listening time from
terrestrial radio. Furthermore, partnering with Sirius could also provide access to
exclusive Sirius content such as Howard Stern (as just one example), enhancing the
appeal of Pandora’s prized Podcast segment.
We note that John Malone’s Liberty Entertainment holds a controlling stake in Sirius XM,
as part of its broader stable of media properties and investments including QVC/HSN. As
such, we believe this means Pandora is poised to play a larger role in his media empire,
with positive results across the various platforms. Greater integration into the
Sirius/LSXMA franchise provides the foundation of the bull case for Pandora.

Business Details
Pandora is a streaming music platform, leveraging its Music Genome Project database
and algorithms to generate personalized playlists based on a user’s listening history and
preferences. Pandora offers an ad-supported radio service, a radio subscription service
(Pandora Plus), and an on-demand subscription service (Pandora Premium). The
company streamed over 20 billion hours of content in 2017 to nearly 75 million active
users (~5.5 million paid subscribers).
Pandora generates the majority of its revenue (73% of total in 2017, flat growth y/y) from
the sale of advertising across desktop, mobile, and other connected device platforms
including smart speakers and automobiles. Ad formats include audio and video
advertising delivered during content streams, display advertising, and native advertising
such as sponsored playlists. Mobile and connected device platforms constitute the
majority of Pandora’s advertising revenue. In addition, Pandora generates revenue from
its subscription services, Pandora Plus and Pandora Premium (22% of total in 2017,
+40% y/y). Total subscribers were nearly 5.5 million as of 2017, +25% y/y. Pandora
previously operated Ticketfly, a ticketing service that generated 5% of total 2017
revenue. Pandora sold Ticketfly to Eventbrite in September 2017.

Fig. 10: Pandora Revenue Composition, 1Q18

15%

18%

67%

Advertising % of total PLUS % of total Premium % of total

Source: Company data, Instinet research

The company’s most significant cost stems from the need to obtain licenses from, and
pay royalties to, music copyright owners and agents. The significant majority of streams
are paid under direct licensing agreements with music labels, generally paying a per
stream fee, a percentage of revenue associated with the service, or a per subscriber
minimum. Content acquisition costs were $804mn in 2017, or 58% of total non-ticketing
revenue, +9% y/y.

9
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Financials
Pandora has indicated that revenue growth in 2018 will come from its subscription offerings
in 2018 as the company is taking actions to stabilize audience and improve monetization in
its advertising business. On the cost side, label negotiations, new content launches,
distribution partnerships, ROI-based marketing initiatives, and cost-efficiency efforts will
impact near-term results. For 2Q18, Pandora has indicated that revenue is expected to be
between $360mn and $375mn, with the midpoint representing a 7% y/y growth rate vs.
2Q17 (ex TicketFly). Adjusted EBITDA is forecast to be a loss in the range of a ($45mn) to
($30mn), with the midpoint being $5mn less than the prior period.

Valuation
Valuation Methodology
We use EV/Sales to value Pandora, which currently trades at 1.1x 2019 consensus
estimates. To arrive at our target price of $8 we use an EV/Sales multiple of 1.4x our
2019 sales estimate, which equates to an EV/Sales to growth ratio of 0.20x and is the
average of the content and streaming companies in our (NFLX, SPOT, P); we assume all
of the dilutive securities are in the money. We define sales growth as the 2017-2019
CAGR and believe it is the best reflection of near to mid-term growth.

10
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 11: Pandora Valuation and Target Price Derivation

Price Target Derivation 2017 2018E 2019E 2020E

Sales 1,467 1,518 1,704 1,878
( x ) Target multiple 1.6x 1.6x 1.4x 1.3x
Enterprise value $2,386 $2,386 $2,386 $2,386
( + ) Cash & equivalents 544.4
( - ) Total debt 278.4
( - ) Other adjustments 0.0 0.0 0.0 0.0
Implied market cap 2,386 2,386 2,652 2,386
(/) Diluted shares 338
Equity value per share $8.00 $8.00 $8.00 $8.00
upside/(downside) to current 0%

Current Trading Multiples 2017 2018E 2019E 2020E

Current Enterprise Value 2,438 2,438 2,438 2,438
EV/Sales 1.7x 1.6x 1.4x 1.3x

Options Outstanding Options Strike TSM

Tranche 1 2.616 $8.55 1.255
Tranche 2 – – –
Tranche 3 – – –
Tranche 4 – – –
Total Treasury Method shares 1.255

Convertible Securities
Face value
Convertible Notes 2020 $152.1
Convertible Notes 2023 $192.9
Series A Preferred $480.0

Conversion price
Convertible Notes 2020 $16.42
Convertible Notes 2023 $9.57
Series A Preferred $10.50

Convertible shares
Convertible Notes 2020 9.263
Convertible Notes 2023 20.157
Series A Preferred 45.714

AdsWizz acquisition price $145

Percentage paid in stock 50%

Fully Diluted Shares Outstanding

Basic shares outstanding 252.9
( + ) Shares from In-the-money options (treasury method) 1.3
( + ) Shares from Convertible Notes 2020 9.3
( + ) Shares from Convertible Notes 2023 20.2
( + ) Shares from Series A Preferred 45.7
( + ) Shares from AdsWizz acquisition 9.1
Fully diluted shares outstanding (FDSO) 338.4
Source: Company data, Instinet estimates

Bull Case
Pandora is poised to benefit from secular tailwinds resulting from the shift to
digital Audio.
Bulls would point to the continuing shift in listening time from broadcast radio to digital
audio as reason for optimism. Pandora’s acquisition of AdsWizz and focus on expanding
its podcast and other non-music offerings position it well to gain from growth in digital.
Growth of Premium platform will boost earnings and margins.
Strong growth in the premium platform is crucial to many bullish outlooks for Pandora given
the higher revenues and margins in the premium offering than in the advertising segment.
Premium subscribers made up only ~5 million out of Pandora’s total 74 million users in
2017, but drove over 20 percent of total revenue. With the launch of the family plan in May
2018, bulls expect strong premium user growth to drive performance moving forward.

11
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Partnership with Sirius XM leads to greater integration in the LXSMA franchise.

Bulls would argue that the $480mn investment by Sirius XM in Pandora is just the
beginning of even greater cooperation. The investment provides Pandora with capital for
strategic investments (as seen in their purchase of AdsWizz), the optionality to expand
further into the autos segment and expand its offerings of non-music content.

Bear Case
There are too many competitors and Pandora has limited avenues of
differentiation.
Bears will point to the intense competition in the streaming space as reason to be
negative. Spotify, Apple, Amazon and Google all have larger paid subscriber bases than
Pandora and continue to grow at faster rates. Apple Music comes preinstalled on every
phone in Apple’s 1 billion installed base (250 million sold a year) providing an immediate
leg up on gaining users over Pandora. Furthermore, Apple’s, Amazon’s and Google’s
platforms operate as loss-leaders prioritizing growth in their larger respective
ecosystems over profitable operations. This approach limits Pandora’s ability to
differentiate itself and use pricing to grow margins.
Pandora has been late to adapt to market changes amid a competitive landscape.
Pandora has been a late adopter of the paid on-demand model with Pandora Premium
launching in March 2017 and its family plan wasn’t available until May 2018 (well after
everyone else offered them). Spotify and Apple Music’s offerings have been available for
years and they have used their market-leading positions to continue to take share. Bears
would argue this and the lack of a self-serve ad platform until recently have left Pandora
playing catch-up. In a market dominated by Spotify and the tech giants, this could prove
fatal for Pandora in the race to gain on-demand market share.
Lack of a presence outside the United States limits potential growth.
With its recent exit from Australia and New Zealand, bears would point to the fact that
Pandora now only operates in the United States. The domestic market is saturated with
numerous competitors all offering similar product offerings, leaving limited avenues for
differentiation for Pandora. Additionally, streaming growth is likely to be faster
internationally, moving forward as the U.S. market matures, which Pandora will not be
able to benefit from given its domestic focus.

12
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 12: Pandora GAAP Income Statement

Pandora Media 2017 2018 2019 2020 2017 2018 2019 2020
Income Statement ($M) 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE CY CYE CYE CYE
Total Revenue 316.0 376.8 378.6 395.3 319.2 370.5 388.8 439.5 359.4 425.2 441.3 478.1 395.4 460.3 480.6 541.6 1,466.8 1,518.1 1,704.0 1,877.9
y/y 6.3% 9.9% 7.6% 0.7% 1.0% -1.7% 2.7% 11.2% 12.6% 14.8% 13.5% 8.8% 10.0% 8.3% 8.9% 13.3% 5.9% 3.5% 12.3% 10.2%
q/q -19.5% 19.2% 0.5% 4.4% -19.3% 16.1% 4.9% 13.0% -18.2% 18.3% 3.8% 8.3% -17.3% 16.4% 4.4% 12.7%
Non-GAAP Revenue 316.0 376.8 378.6 395.3 319.2 370.5 388.8 439.5 359.4 425.2 441.3 478.1 395.4 460.3 480.6 541.6 1,466.8 1,518.1 1,704.0 1,877.9
y/y 6.3% 9.9% 7.6% 0.7% 1.0% -1.7% 2.7% 11.2% 12.6% 14.8% 13.5% 8.8% 10.0% 8.3% 8.9% 13.3% 5.9% 3.5% 12.3% 10.2%
q/q -19.5% 19.2% 0.5% 4.4% -19.3% 16.1% 4.9% 13.0% -18.2% 18.3% 3.8% 8.3% -17.3% 16.4% 4.4% 12.7%
Content acquisition costs 187.4 195.9 204.2 216.5 217.6 221.6 222.9 226.1 243.4 244.0 247.1 244.9 264.0 271.5 273.6 267.3 804.0 888.2 979.4 1,076.6
Other cost of sales 25.5 27.4 27.3 32.4 26.8 25.9 28.0 35.2 28.8 28.7 30.7 37.1 29.7 29.9 32.2 40.6 112.6 115.9 125.2 132.4
Total cost of sales 231.6 243.8 242.8 248.9 244.4 247.5 250.9 261.3 272.1 272.7 277.7 282.0 293.7 301.4 305.8 308.0 967.1 1,004.1 1,104.6 1,209.0
Gross profit 84.4 133.0 135.9 146.4 74.8 123.0 137.9 178.3 87.3 152.5 163.6 196.1 101.7 158.9 174.8 233.7 499.7 514.0 599.5 669.0
Product development 39.6 41.2 39.5 34.0 35.9 36.1 35.0 37.4 37.7 38.3 39.7 38.2 40.5 40.3 42.1 42.0 154.3 144.4 154.0 164.8
Sales and marketing 125.1 145.9 107.6 114.0 124.2 126.0 112.8 114.3 125.8 127.6 110.3 119.5 126.5 128.9 115.3 124.6 492.5 477.2 483.2 495.3
General and administrative 44.5 58.0 48.2 40.1 41.6 41.7 40.8 41.8 40.4 39.3 39.7 40.6 43.5 41.4 42.1 44.7 190.7 165.9 160.1 171.7
Goodwill impairment 0.0 132.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 132.0 0.0 0.0 0.0
Contract termination fees (benefit) 0.0 23.5 (0.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 23.0 0.0 0.0 0.0
EBIT (124.8) (267.5) (58.9) (41.6) (126.9) (80.8) (50.7) (15.1) (116.7) (52.7) (26.2) (2.3) (108.9) (51.7) (24.7) 22.4 (492.9) (273.5) (197.8) (162.8)
Depreciation & amortization 17.7 17.4 14.0 13.8 13.8 13.9 14.4 15.4 15.5 15.9 16.3 16.7 17.1 17.3 17.8 19.0 62.9 57.4 64.5 71.1
EBITDA (107.1) (250.1) (44.9) (27.8) (113.1) (66.9) (36.3) 0.3 (101.2) (36.7) (9.9) 14.4 (91.8) (34.5) (6.9) 41.4 (429.9) (216.1) (133.3) (91.8)
Other income (expense), net (7.2) (7.3) (7.0) (4.8) (4.7) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (26.3) (19.7) (20.0) (20.0)
Income before taxes (131.9) (274.9) (66.0) (46.4) (131.6) (85.8) (55.7) (20.1) (121.7) (57.7) (31.2) (7.3) (113.9) (56.7) (29.7) 17.4 (519.2) (293.2) (217.8) (182.8)
Provision for taxes (benefit) 0.3 0.3 0.3 (1.7) 0.1 0.3 0.2 0.1 0.5 0.2 0.1 0.0 0.5 0.2 0.1 (0.1) (0.8) 0.7 0.9 0.7
Net Income (132.3) (275.1) (66.2) (44.7) (131.7) (86.1) (55.9) (20.2) (122.2) (57.9) (31.3) (7.3) (114.3) (57.0) (29.8) 17.5 (518.4) (293.9) (218.7) (183.6)
Stock dividend payable and transaction costs 0.0 14.5 18.3 7.3 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 40.2 29.5 29.5 29.5
Net loss available to common stockholders (132.3) (289.7) (84.6) (52.1) (139.1) (93.5) (63.3) (27.6) (129.5) (65.3) (38.7) (14.7) (121.7) (64.3) (37.2) 10.1 (558.6) (323.4) (248.2) (213.0)
Diluted shares (GAAP) 237.5 241.3 245.8 249.7 252.9 262.0 265.3 268.7 272.2 275.6 279.2 282.7 286.3 290.0 293.7 297.4 243.6 262.3 277.4 291.9
EPS ($0.56) ($1.20) ($0.34) ($0.21) ($0.55) ($0.36) ($0.24) ($0.10) ($0.48) ($0.24) ($0.14) ($0.05) ($0.42) ($0.22) ($0.13) $0.03 ($2.29) ($1.23) ($0.89) ($0.73)
Margin Analysis
Gross margin 26.7% 35.3% 35.9% 37.0% 23.4% 33.2% 35.5% 40.6% 24.3% 35.9% 37.1% 41.0% 25.7% 34.5% 36.4% 43.1% 34.1% 33.9% 35.2% 35.6%
Operating Margin -39.5% -71.0% -15.6% -10.5% -39.8% -21.8% -13.0% -3.4% -32.5% -12.4% -5.9% -0.5% -27.5% -11.2% -5.1% 4.1% -33.6% -18.0% -11.6% -8.7%
EBITDA Margin -33.9% -66.4% -11.9% -7.0% -35.4% -18.0% -9.3% 0.1% -28.1% -8.6% -2.2% 3.0% -23.2% -7.5% -1.4% 7.6% -29.3% -14.2% -7.8% -4.9%
Net Margin -41.9% -73.0% -17.5% -11.3% -41.3% -23.2% -14.4% -4.6% -34.0% -13.6% -7.1% -1.5% -28.9% -12.4% -6.2% 3.2% -35.3% -19.4% -12.8% -9.8%

Percent of Revenue
Cost of revenue - Content acquisition costs / core sales 65.0% 56.4% 56.7% 54.8% 68.2% 59.8% 57.3% 51.4% 67.7% 57.4% 56.0% 51.2% 66.8% 59.0% 56.9% 49.4% 54.8% 58.5% 57.5% 57.3%
Cost of revenue - Other / sales 8.1% 7.3% 7.2% 8.2% 8.4% 7.0% 7.2% 8.0% 8.0% 6.8% 7.0% 7.8% 7.5% 6.5% 6.7% 7.5% 7.7% 7.6% 7.3% 7.1%
Total Cost of sales 73.3% 64.7% 64.1% 63.0% 76.6% 66.8% 64.5% 59.4% 75.7% 64.1% 62.9% 59.0% 74.3% 65.5% 63.6% 56.9% 65.9% 66.1% 64.8% 64.4%
Product development 12.5% 10.9% 10.4% 8.6% 11.2% 9.8% 9.0% 8.5% 10.5% 9.0% 9.0% 8.0% 10.3% 8.8% 8.8% 7.8% 10.5% 9.5% 9.0% 8.8%
Sales and marketing 39.6% 38.7% 28.4% 28.8% 38.9% 34.0% 29.0% 26.0% 35.0% 30.0% 25.0% 25.0% 32.0% 28.0% 24.0% 23.0% 33.6% 31.4% 28.4% 26.4%
General and administrative 14.1% 15.4% 12.7% 10.1% 13.0% 11.3% 10.5% 9.5% 11.3% 9.3% 9.0% 8.5% 11.0% 9.0% 8.8% 8.3% 13.0% 10.9% 9.4% 9.1%
Tax rate -0.3% -0.1% -0.4% 3.6% -0.1% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% 0.2% -0.2% -0.4% -0.4%

Sequential growth
Product development 4.2% 4.2% -4.3% -13.8% 5.4% 0.7% -3.1% 6.8% 1.0% 1.4% 3.8% -3.7% 6.0% -0.6% 4.4% -0.2% 9.7% -6.5% 6.7% 7.1%
Sales and marketing -6.1% 16.6% -26.3% 5.9% 9.0% 1.4% -10.5% 1.4% 10.1% 1.4% -13.5% 8.3% 5.9% 1.9% -10.5% 8.0% 0.4% -3.1% 1.3% 2.5%
General and administrative -5.2% 30.2% -16.9% -16.8% 3.9% 0.1% -2.1% 2.3% -3.2% -2.7% 1.0% 2.3% 7.0% -4.7% 1.5% 6.3% 8.3% -13.0% -3.5% 7.2%
Total Opex excl Cost of sales -4.1% 17.1% -20.3% -3.7% 7.3% 1.0% -7.5% 2.6% 5.5% 0.6% -7.5% 4.6% 6.1% 0.0% -5.3% 5.9% 3.8% -6.0% 1.2% 4.3%
EBITDA --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

Source: Company data, Instinet estimates

13
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 13: Pandora Non-GAAP Income Statement

Pandora Media 2017 2018 2019 2020 2017 2018 2019 2020
Income Statement ($M) 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE CY CYE CYE CYE
Total Revenue 316.0 376.8 378.6 395.3 319.2 370.5 388.8 439.5 359.4 425.2 441.3 478.1 395.4 460.3 480.6 541.6 1,466.8 1,518.1 1,704.0 1,877.9
y/y 6.3% 9.9% 7.6% 0.7% 1.0% -1.7% 2.7% 11.2% 12.6% 14.8% 13.5% 8.8% 10.0% 8.3% 8.9% 13.3% 5.9% 3.5% 12.3% 10.2%
q/q -19.5% 19.2% 0.5% 4.4% -19.3% 16.1% 4.9% 13.0% -18.2% 18.3% 3.8% 8.3% -17.3% 16.4% 4.4% 12.7%
Subscription return reserve 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00 0.00 0.00 0.00
Non-GAAP Revenue 316.0 376.8 378.6 395.3 319.2 370.5 388.8 439.5 359.4 425.2 441.3 478.1 395.4 460.3 480.6 541.6 1,466.8 1,518.1 1,704.0 1,877.9
y/y 6.3% 9.9% 7.6% 0.7% 1.0% -1.7% 2.7% 11.2% 12.6% 14.8% 13.5% 8.8% 10.0% 8.3% 8.9% 13.3% 5.9% 3.5% 12.3% 10.2%
q/q -19.5% 19.2% 0.5% 4.4% -19.3% 16.1% 4.9% 13.0% -18.2% 18.3% 3.8% 8.3% -17.3% 16.4% 4.4% 12.7%
Content acquisition costs 187.4 195.9 204.2 216.5 217.6 221.6 222.9 226.1 243.4 244.0 247.1 244.9 264.0 271.5 273.6 267.3 804.0 888.2 979.4 1,076.6
Other cost of sales 24.4 26.5 26.5 31.6 26.1 25.6 27.2 34.3 27.9 27.8 29.7 36.1 28.7 28.9 31.2 39.6 109.0 113.2 121.6 128.4
Total cost of sales 229.0 240.4 240.4 246.5 242.5 246.0 248.9 259.2 270.1 270.7 275.6 279.9 291.6 299.3 303.7 305.7 956.3 996.8 1,096.3 1,200.4
Gross profit 87.0 136.4 138.2 148.8 76.7 124.5 139.9 180.3 89.3 154.5 165.7 198.2 103.7 161.0 176.9 235.9 510.5 521.3 607.7 677.6
Product development 29.1 31.5 30.9 26.5 28.7 28.7 27.8 29.8 30.4 30.3 31.6 30.0 32.5 31.7 33.2 32.7 118.1 115.1 122.4 130.1
Sales and marketing 104.3 126.6 92.9 100.4 107.6 112.8 99.6 100.4 112.4 113.0 95.4 104.5 111.8 113.2 99.2 107.5 424.1 420.5 425.4 431.7
General and administrative 35.5 44.4 31.6 28.0 25.9 33.1 32.4 32.9 31.9 30.0 30.2 31.0 34.1 31.4 31.7 33.8 139.5 124.3 123.1 130.9
EBIT (81.9) (66.1) (17.1) (6.1) (85.6) (50.1) (20.0) 17.2 (85.4) (18.9) 8.4 32.7 (74.6) (15.2) 12.9 61.9 (171.2) (138.5) (63.1) (15.1)
Total depreciation & amortization 17.7 17.4 14.0 13.8 13.8 13.9 14.4 15.4 15.5 15.9 16.3 16.7 17.1 17.3 17.8 19.0 62.9 57.4 64.5 71.1
Depreciation 10.6 11.8 11.8 11.9 12.3 12.4 12.9 13.9 14.0 14.4 14.8 15.2 15.5 15.7 16.3 17.4 46.2 51.4 58.4 65.0
Adjusted EBITDA (71.3) (54.3) (5.3) 5.8 (73.3) (37.7) (7.1) 31.0 (71.4) (4.4) 23.2 47.9 (59.1) 0.5 29.1 79.3 (125.0) (87.1) (4.7) 49.9
Other income (expense), net (7.2) (7.3) (7.0) (4.8) (4.7) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (5.0) (26.3) (19.7) (20.0) (20.0)
Income before taxes (89.0) (73.4) (24.2) (10.9) (90.3) (55.1) (25.0) 12.2 (90.4) (23.9) 3.4 27.7 (79.6) (20.2) 7.9 56.9 (197.5) (158.2) (83.1) (35.1)
Provision for taxes (benefit) (31.8) (23.3) (8.2) 41.0 (21.7) (19.3) (8.8) 4.3 (31.6) (8.4) 1.2 9.7 (27.9) (7.1) 2.8 19.9 (22.4) (45.5) (29.1) (12.3)
Non-GAAP Net Income (57.2) (50.1) (15.9) (51.9) (68.6) (35.8) (16.3) 7.9 (58.7) (15.5) 2.2 18.0 (51.7) (13.2) 5.1 37.0 (175.2) (112.8) (54.0) (22.8)
Non-GAAP shares 237.5 241.3 245.8 249.7 252.9 256.2 259.4 262.7 266.1 269.5 272.9 276.4 279.9 283.5 287.1 290.8 243.6 257.8 271.2 285.4
Non-GAAP EPS ($0.24) ($0.21) ($0.06) ($0.21) ($0.27) ($0.14) ($0.06) $0.03 ($0.22) ($0.06) $0.01 $0.07 ($0.18) ($0.05) $0.02 $0.13 ($0.72) ($0.44) ($0.20) ($0.08)
Non-GAAP Adjustments
Total stock-based comp 29.6 38.6 30.1 30.1 26.4 28.2 29.2 30.8 29.8 32.3 33.1 33.5 32.7 35.0 36.0 37.9 128.4 114.5 128.6 141.7
Amortization & one-time items (9.8) 153.3 (9.4) (2.3) (12.6) (1.2) 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 131.7 (12.2) 3.2 3.2
Income tax effect 32.2 23.6 8.5 (42.7) 21.8 19.6 9.0 (4.2) 32.1 8.6 (1.1) (9.7) 28.3 7.3 (2.6) (20.0) 21.6 46.2 30.0 13.0
Margin Analysis
Gross margin 27.5% 36.2% 36.5% 37.6% 24.0% 33.6% 36.0% 41.0% 24.8% 36.3% 37.5% 41.5% 26.2% 35.0% 36.8% 43.6% 34.8% 34.3% 35.7% 36.1%
Operating Margin -25.9% -17.5% -4.5% -1.5% -26.8% -13.5% -5.1% 3.9% -23.8% -4.4% 1.9% 6.8% -18.9% -3.3% 2.7% 11.4% -11.7% -9.1% -3.7% -0.8%
Adjusted EBITDA Margin -22.6% -14.4% -1.4% 1.5% -23.0% -10.2% -1.8% 7.1% -19.9% -1.0% 5.3% 10.0% -14.9% 0.1% 6.1% 14.6% -8.5% -5.7% -0.3% 2.7%
Net Margin -18.1% -13.3% -4.2% -13.1% -21.5% -9.7% -4.2% 1.8% -16.3% -3.6% 0.5% 3.8% -13.1% -2.9% 1.1% 6.8% -11.9% -7.4% -3.2% -1.2%
Percent of Revenue
Cost of revenue - Content acquisition costs / core sales 65.0% 56.4% 56.7% 54.8% 68.2% 59.8% 57.3% 51.4% 67.7% 57.4% 56.0% 51.2% 66.8% 59.0% 56.9% 49.4% 54.8% 58.5% 57.5% 57.3%
Cost of revenue - Other / sales 7.7% 7.0% 7.0% 8.0% 8.2% 6.9% 7.0% 7.8% 7.8% 6.5% 6.7% 7.6% 7.3% 6.3% 6.5% 7.3% 7.4% 7.5% 7.1% 6.8%
Total Cost of sales 72.5% 63.8% 63.5% 62.4% 76.0% 66.4% 64.0% 59.0% 75.2% 63.7% 62.5% 58.5% 73.8% 65.0% 63.2% 56.4% 65.2% 65.7% 64.3% 63.9%
Product development 9.2% 8.4% 8.2% 6.7% 9.0% 7.7% 7.2% 6.8% 8.5% 7.1% 7.2% 6.3% 8.2% 6.9% 6.9% 6.0% 8.1% 7.6% 7.2% 6.9%
Sales and marketing 33.0% 33.6% 24.5% 25.4% 33.7% 30.4% 25.6% 22.9% 31.3% 26.6% 21.6% 21.9% 28.3% 24.6% 20.6% 19.9% 28.9% 27.7% 25.0% 23.0%
General and administrative 11.2% 11.8% 8.3% 7.1% 8.1% 8.9% 8.3% 7.5% 8.9% 7.1% 6.8% 6.5% 8.6% 6.8% 6.6% 6.2% 9.5% 8.2% 7.2% 7.0%
Tax rate 35.8% 31.8% 34.0% -376.2% 24.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 11.3% 28.7% 35.0% 35.0%
Sequential growth
Product development 3.1% 8.2% -2.0% -14.4% 8.6% -0.2% -3.1% 7.1% 2.1% -0.3% 4.2% -4.9% 8.2% -2.4% 4.8% -1.6% 15.3% -2.6% 6.4% 6.3%
Sales and marketing -9.7% 21.4% -26.6% 8.1% 7.2% 4.8% -11.7% 0.8% 11.9% 0.5% -15.6% 9.5% 7.0% 1.2% -12.4% 8.5% 1.1% -0.9% 1.2% 1.5%
General and administrative -1.7% 25.3% -28.9% -11.3% -7.5% 27.5% -1.9% 1.5% -3.1% -5.7% 0.6% 2.7% 9.9% -7.9% 1.0% 6.6% 5.4% -10.9% -1.0% 6.4%
Total Opex excl Cost of sales -6.1% 20.0% -23.3% -0.3% 4.8% 7.6% -8.4% 2.0% 7.1% -0.7% -9.3% 5.3% 7.8% -1.2% -6.9% 6.1% 4.2% -3.2% 1.7% 3.3%
Adjusted EBITDA --- --- --- --- --- --- --- --- --- --- --- 106.2% --- --- 5626.5% 172.1% --- --- --- ---

Source: Company data, Instinet estimates

14
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 14: Pandora Balance Sheet

Pandora Media 2017 2018 2019 2020 2017 2018 2019 2020
Balance Sheet ($M) 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE CY CYE CYE CYE
Assets
Cash and equivalents 170.9 209.6 493.2 499.6 454.9 396.5 332.5 309.2 297.8 263.5 226.6 226.8 228.9 205.7 169.4 179.6 499.6 309.2 226.8 179.6
Short-term investments 32.1 18.1 6.2 1.3 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 1.3 89.5 89.5 89.5
Accounts receivable 262.9 288.3 312.3 336.4 269.6 283.5 320.7 374.0 303.5 325.4 364.0 406.9 333.9 352.2 396.4 460.9 336.4 374.0 406.9 460.9
Prepaid content acquisition costs 48.5 39.9 80.2 55.7 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 55.7 35.9 35.9 35.9
Prepaid expenses and other current assets 29.4 18.2 20.3 19.2 20.1 20.1 19.7 20.1 19.5 19.0 19.2 19.6 21.0 20.0 20.3 21.5 19.2 20.1 19.6 21.5
Assets held for sale 0.0 227.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total current assets 543.9 801.9 912.2 912.2 870.0 825.5 798.2 828.8 746.2 733.2 735.1 778.7 709.1 703.2 711.4 787.4 912.2 828.8 778.7 787.4
Long-term investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Convertible promissory note receivable 0.0 0.0 34.1 35.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 35.5 0.0 0.0 0.0
Property and equipment, net 128.8 120.8 117.7 116.7 114.5 108.1 101.1 97.5 92.8 85.5 78.1 74.6 69.0 61.1 53.0 49.0 116.7 97.5 74.6 49.0
Goodwill 306.4 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2 71.2
Intangible assets, net 85.3 23.2 21.3 19.4 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 19.4 17.9 17.9 17.9
Other long-term assets 33.7 13.5 9.0 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3
Total Assets 1,098.1 1,030.6 1,165.5 1,166.3 1,084.9 1,034.0 999.8 1,026.7 939.5 919.1 913.5 953.6 878.5 864.8 864.8 936.9 1,166.3 1,026.7 953.6 936.9
Liabilities & Shareholders' Equity
Accounts payable 21.2 12.8 8.4 14.9 15.8 13.0 8.7 15.6 17.5 14.3 9.7 16.9 18.9 15.8 10.6 18.4 14.9 15.6 16.9 18.4
Accrued liabilities 33.9 43.6 33.2 34.5 37.7 38.0 35.2 36.1 38.1 38.3 35.4 37.0 39.3 39.3 37.2 39.4 34.5 36.1 37.0 39.4
Accrued content acquisition costs 90.0 88.3 99.8 97.8 106.3 108.2 108.9 110.4 118.9 119.2 120.7 119.6 128.9 132.6 133.6 130.6 97.8 110.4 119.6 130.6
Deferred revenue 32.4 32.5 42.8 31.5 37.7 43.7 45.9 51.9 42.4 50.2 52.1 56.4 46.7 54.3 56.7 63.9 31.5 51.9 56.4 63.9
Accrued compensation 43.9 45.6 34.0 47.6 42.9 43.3 40.1 41.1 43.4 43.6 40.4 42.2 44.8 44.8 42.4 44.9 47.6 41.1 42.2 44.9
Other current liabilities 32.8 43.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total current liabilities 254.1 265.8 218.2 226.3 240.3 246.3 238.8 255.2 260.3 265.6 258.2 272.1 278.6 286.8 280.7 297.3 226.3 255.2 272.1 297.3
Other long-term liabilities 33.9 25.7 27.1 23.5 22.7 22.7 22.7 22.7 22.7 22.7 22.7 22.7 22.7 22.7 22.7 22.7 23.5 22.7 22.7 22.7
Convertible Debt 347.2 352.2 267.4 273.0 278.4 278.4 278.4 278.4 278.4 278.4 278.4 278.4 278.4 278.4 278.4 278.4 273.0 278.4 278.4 278.4
Total liabilities 635.2 643.6 512.6 522.8 541.4 547.4 539.9 556.3 561.4 566.7 559.3 573.3 579.8 588.0 581.8 598.4 522.8 556.3 573.3 598.4
Redeemable convertible preferred stock 0.0 0.0 483.6 490.8 498.2 498.2 498.2 498.2 498.2 498.2 498.2 498.2 498.2 498.2 498.2 498.2 490.8 498.2 498.2 498.2
Stockholders' equity 462.9 387.0 169.3 643.5 543.5 486.6 459.9 470.4 378.0 352.4 354.2 380.4 298.8 276.8 283.1 338.5 643.5 470.4 380.4 338.5
Total liabilities and stockholders' equity 1,098.1 1,030.6 1,165.5 1,166.3 1,084.9 1,034.0 999.8 1,026.7 939.5 919.1 913.5 953.6 878.5 864.8 864.8 936.9 1,166.3 1,026.7 953.6 936.9

Source: Company data, Instinet estimates

15
Nomura | Instinet | Pandora Media, Inc. 10 July 2018

Fig. 15: Pandora Cash Flow Statement

Pandora Media 2017 2018 2019 2020 2017 2018 2019 2020
Cash Flow Statement ($M) 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE CY CYE CYE CYE
Cash from operations:
Net i ncome (l oss ) (132.3) (275.1) (66.2) (44.7) (131.7) (86.1) (55.9) (20.2) (122.2) (57.9) (31.3) (7.3) (114.3) (57.0) (29.8) 17.5 (518.4) (293.9) (218.7) (183.6)
Goodwil l impairment 0.0 132.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 132.0 0.0 0.0 0.0
Los s on sal es of subsi diari es 0.0 0.0 9.5 (0.1) 2.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.4 2.2 0.0 0.0
Depreciation and amorti zati on 17.7 17.4 14.0 13.8 13.8 13.9 14.4 15.4 15.5 15.9 16.3 16.7 17.1 17.3 17.8 19.0 62.9 57.4 64.5 71.1
Stock-based compens ation 29.6 38.6 30.1 30.1 26.4 28.2 29.2 30.8 29.8 32.3 33.1 33.5 32.7 35.0 36.0 37.9 128.4 114.5 128.6 141.7
Amorti zation of premi um on investments, net 0.1 0.0 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 (0.1) 0.0 0.0
Accreti on of di scount on converti bl e promiss ory note 0.0 0.0 (0.2) (0.5) (0.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.7) (0.5) 0.0 0.0
Other operati ng acti vi ti es 0.4 (0.2) 0.1 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.1 0.0 0.0
Amorti zation of debt di scount 4.9 4.9 5.1 5.2 5.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.2 5.4 0.0 0.0
Interes t income 0.0 0.0 (0.3) (0.8) (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.1) (0.8) 0.0 0.0
Provi sion for bad debt 1.4 7.9 1.6 1.4 (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.2 (0.3) 0.0 0.0
Excess tax benefi t from stock-based awards 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Changes i n restri cted cas h 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Changes i n operating ass ets and l iabil ities
Accounts recei vable 44.9 (32.3) (23.9) (25.5) 67.2 (13.9) (37.1) (53.4) 70.5 (21.8) (38.6) (42.9) 73.0 (18.3) (44.2) (64.6) (36.8) (37.3) (32.8) (54.1)
Prepai d content acqui siti on cos ts (2.2) 8.7 (40.3) 24.5 19.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (9.4) 19.8 0.0 0.0
Prepai d expens es and other ass ets (5.6) (6.1) (6.3) 1.4 (1.6) (0.0) 0.4 (0.4) 0.6 0.5 (0.2) (0.4) (1.4) 1.0 (0.3) (1.3) (16.6) (1.6) 0.5 (2.0)
Accounts payabl e and accrued l iabil ities 13.2 1.9 (15.3) 9.3 4.7 (2.4) (7.1) 7.8 3.9 (3.0) (7.5) 8.8 4.3 (3.1) (7.2) 10.0 9.1 3.1 2.2 4.0
Accrued content acquis ition cos ts (3.8) (1.7) 11.5 (2.0) 8.5 1.9 0.7 1.5 8.4 0.3 1.5 (1.0) 9.3 3.7 1.0 (3.1) 4.0 12.7 9.2 11.0
Accrued compensati on (13.2) 0.0 0.5 2.0 (1.3) 0.4 (3.2) 1.0 2.3 0.2 (3.3) 1.8 2.6 0.0 (2.4) 2.5 (10.7) (3.1) 1.1 2.7
Other l ong-term li abi l ities 0.0 0.0 (0.7) (2.5) (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (3.2) (0.8) 0.0 0.0
Deferred revenue 4.0 0.1 1.5 (2.5) 6.2 6.1 2.2 6.0 (9.5) 7.8 1.9 4.3 (9.8) 7.7 2.4 7.2 3.1 20.4 4.6 7.5
Rei mbursement of cos t of l eas ehold i mprovements 5.2 0.0 0.0 0.0 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.3 0.4 0.0 0.0
Other operati ng acti vi ti es (0.2) 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0
Net Cash from Operating Activities (35.9) (103.5) (79.2) 9.2 17.4 (52.0) (56.6) (11.5) (0.6) (25.6) (28.1) 13.5 13.6 (13.9) (26.6) 25.2 (209.5) (102.7) (40.8) (1.7)
Cash from Investing:
Purchas es of property and equi pment (2.0) (6.6) (4.3) (2.8) (3.4) (4.4) (4.3) (4.8) (4.7) (5.1) (5.3) (5.7) (4.7) (5.5) (5.8) (6.5) (15.7) (17.0) (20.8) (22.5)
Internal use s oftware cos ts (7.8) (3.1) (3.1) (6.2) (5.5) (3.1) (3.1) (6.9) (6.2) (3.5) (3.6) (7.5) (6.8) (3.8) (3.9) (8.5) (20.2) (18.6) (20.8) (23.0)
Purchas es of patents 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Changes i n restri cted cas h 0.0 (0.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.6) 0.0 0.0 0.0
Purchas es of investments 0.0 0.0 0.0 0.0 (89.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (89.3) 0.0 0.0
Proceeds from maturi ti es of inves tments 11.2 14.1 11.8 5.0 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 42.1 1.3 0.0 0.0
Proceeds from sal e of i nvestments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Proceeds from sal es of subsidiari es, net of cas h 0.0 0.0 125.4 (1.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 124.3 0.0 0.0 0.0
Proceeds from cancel lati on of convertible promi ssory note 0.0 0.0 0.0 0.0 34.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 34.7 0.0 0.0
Payments rel ated to acquisi tion, net of cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net cash used in investing 1.48 3.7 129.9 (5.1) (62.2) (7.5) (7.4) (11.7) (10.9) (8.6) (8.9) (13.2) (11.5) (9.3) (9.6) (15.0) 129.9 (88.9) (41.6) (45.5)
Cash from Financing:
Proceeds from is suance of converti ble note 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Is suance of redeemable convertible preferred s tock 0.0 172.5 307.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 480.0 0.0 0.0 0.0
Payment for purchase of capped call 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Borrowi ngs under debt arrangements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Repayments of debt 0.0 0.0 (90.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (90.0) 0.0 0.0 0.0
Payment of debt is suance costs from refinanci ng 0.0 (12.6) (16.7) (1.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (30.5) 0.0 0.0 0.0
Proceeds from foll ow-on offering, net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Proceeds from empl oyee stock purchase plan 2.8 3.3 1.9 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.9 0.0 0.0 0.0
Proceeds from exercis e of stock options 2.4 0.8 4.7 1.9 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.8 0.2 0.0 0.0
Tax payments from net share settl ements of RSUs 0.0 0.0 0.0 0.0 (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.3) 0.0 0.0
Excess tax benefi t from stock-based awards 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net cash used in financing 5.2 164.0 207.4 3.6 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 380.2 (0.0) 0.0 0.0
FX Impact 0.2 0.1 (0.1) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 (0.0) 0.0 0.0
Cas h hel d for s al e 0.0 (25.6) 25.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cas h at beginning of peri od 199.9 170.9 209.6 493.2 500.9 456.0 396.5 332.5 309.2 297.8 263.5 226.6 226.8 228.9 205.7 169.4 199.9 500.9 309.2 226.8
Change i n cash (29.1) 38.7 283.6 7.7 (44.9) (59.5) (64.0) (23.3) (11.5) (34.3) (36.9) 0.3 2.0 (23.2) (36.3) 10.2 300.9 (191.6) (82.4) (47.3)
Cas h at end of period 170.9 209.6 493.2 500.9 456.0 396.5 332.5 309.2 297.8 263.5 226.6 226.8 228.9 205.7 169.4 179.6 500.9 309.2 226.8 179.6
Free Cash Flow calculation
Net cash from operati ng acti vi ti es (35.9) (103.5) (79.2) 9.2 17.4 (52.0) (56.6) (11.5) (0.6) (25.6) (28.1) 13.5 13.6 (13.9) (26.6) 25.2 (209.5) (102.7) (40.8) (1.7)
Capi tal expenditures (2.0) (6.6) (4.3) (2.8) (3.4) (4.4) (4.3) (4.8) (4.7) (5.1) (5.3) (5.7) (4.7) (5.5) (5.8) (6.5) (15.7) (17.0) (20.8) (22.5)
Free Cash Flow (CFO less Capex) (37.9) (110.1) (83.5) 6.4 14.0 (56.4) (60.9) (16.3) (5.3) (30.7) (33.4) 7.8 8.8 (19.4) (32.4) 18.7 (225.1) (119.6) (61.6) (24.3)
Sequential FCF growth --- --- --- --- 119.3% --- --- --- --- --- --- --- 13.5% --- --- --- --- --- --- ---
Adjusted EBITDA/FCF conversion --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
FCF/Share ($0.16) ($0.46) ($0.34) $0.03 $0.06 ($0.22) ($0.23) ($0.06) ($0.02) ($0.11) ($0.12) $0.03 $0.03 ($0.07) ($0.11) $0.06 ($0.92) ($0.46) ($0.22) ($0.08)

Source: Company data, Instinet estimates

16
Nomura | Instinet | Pandora Media, Inc.

Appendix A-1
Analyst Certification
I, Mark Kelley, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The terms "Nomura" and "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC('ILLC'), U. S. registered broker dealers and members of SIPC.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures
Pandora Media, Inc. P US USD 7.99 09-Jul-2018 Neutral Not rated A34

A34 As of 14th Nov 2016, the ratings and price targets depicted in the chart below have been assigned by Instinet, LLC. Previous ratings and
price targets on this chart were published by another affiliate of the Nomura Group, including Nomura Securities International, Inc.

Pandora Media, Inc. (P US) USD 7.99 (09-Jul-2018) Neutral (Sector rating: Not rated)
Rating and target price chart (three year history)
Date Rating Target price Closing price
15-Aug-17 Not Rated 8.40
09-May-17 12.00 9.94
15-Nov-16 Neutral 10.89
15-Nov-16 14.00 10.89
11-Nov-16 Not Rated 10.96
26-Oct-16 14.00 11.77
06-Sep-16 16.00 14.52
29-Apr-16 13.00 9.93
12-Feb-16 12.00 8.00
17-Dec-15 17.00 15.26
23-Oct-15 16.00 12.39
22-Sep-15 22.00 20.93

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology To arrive at our target price of $8 for Pandora Media (P) we use an EV/Sales multiple of 1.4x our 2019
sales estimate, which equates to an EV/Sales to growth ratio of 0.20x and is the average of the content and streaming
companies in our (NFLX, SPOT, P). The benchmark for this stock is the S&P 500 Index.

Risks that may impede the achievement of the target price Downside Risks: 1) There are too many competitors, and
Pandora has limited avenues of differentiation; 2) Pandora has been late to adapt to market changes amid a competitive
landscape; 3) lack of a presence outside the United States limits potential growth.

Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.
Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested
from Nomura Securities International, Inc., or Instinet, LLC on 1-877-865-5752. If you have any difficulties with the website, please
email [email protected] for help.

17
Nomura | Instinet | Pandora Media, Inc.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI or ILLC, and may not be subject to
FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research
analyst account.

Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are
registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and
NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.

Distribution of ratings (Nomura Group)

The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
53% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this
rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA)
with this rating were supplied material services** by the Nomura Group.
42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with
this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group
5% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 13% of companies with
this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group.
As at 30 June 2018.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation

Distribution of ratings (Instinet, LLC)

The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
59% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

Definition of Nomura Group's equity research rating system and sectors

The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Target Price
A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's
estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and
by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

Disclaimers
This publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with the
contributions of one or more Nomura Group entities whose employees and their respective affiliations are specified on page 1 or identified
elsewhere in the publication. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries including:
Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New
York, US; Instinet, LLC ('ILLC'); Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd.

18
Nomura | Instinet | Pandora Media, Inc.

(‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the
KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the
Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and
Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; PT Nomura Sekuritas Indonesia
(‘PTNSI’); Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and
Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie
Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI
Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034;
SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch
(‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by
Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under an agreement between CNS
and NSL. ‘NSFSPL’ next to an employee’s name on the front page of a research report indicates that the individual is employed by Nomura
Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. The "BDO-NS"
(which stands for "BDO Nomura Securities, Inc.") placed next to an analyst’s name on the front page of a research report indicates that the
analyst is employed by BDO Unibank Inc. ("BDO Unibank") who has been seconded to BDO-NS, to provide research assistance services to
NSL under an agreement between BDO Unibank, NSL and BDO-NS. BDO-NS is a Philippines securities dealer, which is a joint venture
between BDO Unibank and the Nomura Group.

THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO
BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) OTHER THAN DISCLOSURES RELATING TO THE NOMURA GROUP,
BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY
NOMURA GROUP.
Other than disclosures relating to the Nomura Group, the Nomura Group does not warrant or represent that the document is accurate, complete,
reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this
document and related data. To the maximum extent permissible all warranties and other assurances by the Nomura Group are hereby excluded
and the Nomura Group shall have no liability for the use, misuse, or distribution of this information.
Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including
the opinions and estimates contained herein, are subject to change without notice. The Nomura Group is under no duty to update this
document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura
Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The Nomura Group does not provide tax advice.
The Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as
principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other
derivative instruments based thereon, of issuers or securities mentioned herein. The Nomura Group companies may also act as market maker
or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of
market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will
be separately disclosed within the specific issuer disclosures.
This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s.
Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third-party.
Third-party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and
are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such
content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or
fitness for a particular purpose or use. Third-party content providers shall not be liable for any direct, indirect, incidental, exemplary,
compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and
opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements
of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for
investment purposes, and should not be relied on as investment advice.
Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this
information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including
any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its
affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of
originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any
of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information
have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.
The intellectual property rights and any other rights, in Russell/Nomura Japan Equity Index belong to Nomura Securities Co., Ltd. ("Nomura")
and Frank Russell Company ("Russell"). Nomura and Russell do not guarantee accuracy, completeness, reliability, usefulness, marketability,
merchantability or fitness of the Index, and do not account for business activities or services that any index user and/or its affiliates undertakes
with the use of the Index.
Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be
viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a
number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations
contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of
differing time horizons, methodologies or otherwise. The Nomura Group publishes research product in a number of different ways including the
posting of product on the Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products
and services from the research department depending on their individual requirements.
Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future
performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future
performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future
distribution of returns. Any figure, strategy or index created and published for illustrative purposes within this document is not intended for “use”
as a “benchmark” as defined by the European Benchmark Regulation.
Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived
from, the investment.
With respect to Fixed Income Research: Recommendations fall into two categories: tactical, which typically last up to three months; or strategic,
which typically last from 6-12 months. However, trade recommendations may be reviewed at any time as circumstances change. ‘Stop loss’
levels for trades are also provided; which, if hit, closes the trade recommendation automatically. Prices and yields shown in recommendations

19
Nomura | Instinet | Pandora Media, Inc.

are taken at the time of submission for publication and are based on either indicative Bloomberg, Reuters or Nomura prices and yields at that
time. The prices and yields shown are not necessarily those at which the trade recommendation can be implemented.
The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not
be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption
from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura
entity in your home jurisdiction.
This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised
by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a
member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable
regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This
document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the
UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK,
which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been
approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been
approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the
content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients
who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document
in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of
Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its
contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. The entity that prepared this
document permits its separately operated affiliates within the Nomura Group to make copies of such documents available to their clients.
This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined
by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or 'professional clients' (as defined by the Dubai Financial
Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or ‘Business Customers’ (as defined by the Qatar Financial
Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of the Nomura Group, as the
case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other
than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’
or ‘Institutions’ located in Saudi Arabia or 'professional clients' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar . By
accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an ‘Authorised Person’, an ‘Exempt
Person’ or an ‘Institution’ in Saudi Arabia or that you are a 'professional client' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in
Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE
or Saudi Arabia or Qatar.
Notice to Canadian Investors: This research report is not a personal recommendation and does not take into account the investment objectives,
financial situation or particular needs of any particular individual or account. It is made available to you in reliance on NI 31-103, section 8.25.
For report with reference of TAIWAN public companies or authored by Taiwan based research analyst:
THIS DOCUMENT IS SOLELY FOR REFERENCE ONLY. You should independently evaluate the investment risks and are solely responsible
for your investment decisions. NO PORTION OF THE REPORT MAY BE REPRODUCED OR QUOTED BY THE PRESS OR ANY OTHER
PERSON WITHOUT WRITTEN AUTHORIZATION FROM NOMURA GROUP. Pursuant to Operational Regulations Governing Securities Firms
Recommending Trades in Securities to Customers and/or other applicable laws or regulations in Taiwan, you are prohibited to provide the
reports to others (including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities in
connection with the reports which may involve conflicts of interests. INFORMATION ON SECURITIES / INSTRUMENTS NOT EXECUTABLE
BY NOMURA INTERNATIONAL (HONG KONG) LTD., TAIPEI BRANCH IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT BE
CONSTRUED AS A RECOMMENDATION OR A SOLICITATION TO TRADE IN SUCH SECURITIES / INSTRUMENTS.
NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II)
REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF THE NOMURA GROUP. If this document has been
distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information
could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for
any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please
request a hard-copy version.

The Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but
not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese Walls and
employee training.
Additional information regarding the methodologies or models used in the production of any investment recommendations contained
within this document is available upon request by contacting the Research Analysts listed on the front page. Disclosures information
is available upon request and disclosure information is available at the Nomura Disclosure web
page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright © 2018 Instinet Incorporated and/or its affiliates. All rights reserved.

20