Operator: Welcome to Pandora's First Quarter Fiscal Year 2014 Financial Results Conference Call. There will be a question and answer session at the end of the conference. Opening today's call is Dominic Paschel, Vice President, Pandora.
Dominic Paschel - VP, Corporate Finance and IR: Good afternoon, and welcome to Pandora's first quarter fiscal year 2014 financial results call for the quarter ended April 30, 2013. Some of our discussions will contain forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a discussion of the risks that could cause our results to differ from today's discussion, please refer to the documents we've filed with the Securities and Exchange Commission.
Also, I would like to remind you that during the course of this conference call, we will discuss non-GAAP measures of our performance. Reconciliations to the direct comparables, GAAP financial measures are provided in the tables in the press release and Form 8-K filed earlier this afternoon with the SEC. For your convenience, supplemental information has been included in today's press release and detailed financials regarding RPM metrics and are available on the Investor Relations site.
Today's call is available via webcast and a replay for two weeks. Following the conclusion of the call to access the press release, supplemental financial information or the webcast replay, please consult the IR section of Pandora.com.
With that, let me turn the call over to Joe Kennedy, Pandora's Chairman and CEO.
Joe Kennedy - President and CEO: Thanks Dom. The first quarter was a busy quarter for Pandora as we continue to execute across the business to demonstrate and expand our mobile leadership with both listeners and advertisers.
During the quarter, we marked two notable milestones. In the U.S. alone, we've reached over 200 million registered users and also surpassed 2.5 million Pandora One subscribers. Not many companies have the privilege of operating at this scale, and I want to thank our listeners for helping us to achieve these milestones.
During the quarter, we added more than 700,000 net new subscribers to Pandora One, more than we added in all of fiscal year 2013. And our Pandora One's over 2.5 million subscribers, almost half have now been generated on mobile devices.
Total listener hours for the quarter grew 35% year-over-year, reaching a record high of 4.2 billion hours for the quarter, compared to 3.1 billion in the same quarter last year. Active users also reached a record high in April, increasing 35% to 70.1 million from 51.9 million in April 2012.
We recently exceeded 30 billion thumbs in important user engagement metric which further fuels the big data intellectual property component of our best-in-the-world personalized radio technology.
We introduced the 40-hour listening limit for mobile users in March, much like we did on the desktop nearly four years ago. That limit has worked as we intended. We saw an increase in total active listeners and a deceleration in total hour stream, enabling us to manage our content acquisition cost with minimal impact on listenership or revenue growth.
And finally, Pandora's market share of all U.S. radio as of April 30, 2013 was 7.33%, up from 5.86% a year ago. We are also excited about our financial results for the quarter with total GAAP revenue growing 55% to $125.5 million and GAAP EPS loss of $0.16. Pandora's total non-GAAP revenue grew 58% to $128.5 million and non-GAAP EPS loss was $0.10. Mike will explain the non-GAAP presentation in a minute.
There are two important macro drivers of our business that continue to gain strong momentum. First, our mix of listener hours and ad revenue continues to ship towards mobile. Listening on mobile and other connected devices represented 79% of total listener hours during the first quarter and revenue generated from mobile represented two-thirds of Pandora's total revenue.
For the first quarter, total mobile revenue on a non-GAAP basis including advertising and subscription based revenue, grew 101% to $86.7 million from $43.2 million in the same quarter last year. As a result of our focus on driving mobile monetization, total mobile RPM on a non-GAAP basis reached $26.15, compared to $19.16 in the first quarter last year. Mobile monetization continues to be a core focus and our RPM growth is a clear demonstration of the progress we have made.
A second important macro trend affecting the business is the attraction of local advertising to digital channels. And because mobile is well suited for local advertising, this segment of our business is growing quickly. A recent report from BIA/Kelsey forecasted a sevenfold rise in mobile local media by 2017 to 9.1 billion from 1.2 billion in 2012, nearly 50% compound annual growth rate. Our strong listener presence in local radio ad markets, combined with our mobile advertising capabilities have accelerated our opportunity to grow our local advertising dollars. Pandora is number one in terms of listening in most local radio markets. We have deployed ad sales people in 28 of the top 40 local markets to further capture our share of the relevant advertising budgets.
To facilitate our growth in these markets, we are making numerous investments in infrastructure and technology. For example, just last week we announced yet another stage of our efforts to fully integrate Pandora into media buying platforms. One year ago, we announced the partnership with Triton Digital to measure Pandora using traditional radio metrics such as AQH and Cume. Earlier this year, we integrated those metrics into the Mediaocean and STRATA media buying platforms, an integration that continues to rollout through this summer.
The later stage offers the full cycle solution from planning to buying, to billing for multiplatform audio campaigns on Pandora with proprietary software built by Pandora's engineering team in conjunction with Pandora's ad operations and billing teams. Pandora is the first and only digital publisher to integrate the planning, buying, and billing phases of the media planning processes for any form of digital advertising. These technology developments and the integrations with STRATA and Mediaocean are making local advertising easier to buy.
We believe the combination of local audience reach, local ad sales team, and technology integrations have resulted in increased momentum in local advertising revenue, our fastest growing area of advertising sales.
On the listener side of our business, the next huge wave driving technology innovation and consumer adoption is the Internet of all things, the Internet connected on all devices. Everywhere, the user wants access to service and applications like Pandora.
Music is truly the soundtrack of our lives, and thus pervasive throughout our daily experiences. As a result, no category benefits more and no company is better positioned to take advantage of this huge next wave than Pandora.
As we work to realize fully our mission of connecting people with the music they love, we continue to innovate within our product offering as well. The most recent examples of this are the launch of the Pandora Premieres station and our latest integration with Facebook.
Pandora Premieres will feature previews from a wide variety of artists, both established and emerging across multiple genres up to one week prior to the scheduled U.S. launch date. Our expanded partnership with Facebook broadens our social innovation through a new timeline app. The timeline app allows listeners on both mobile and desktop to automatically publish their musical activity to their Facebook timeline and curate their musical identity within the music section of a timeline. We're excited to offer both listeners and artists new ways to connect.
In summary, Pandora is successfully executing on our core growth strategies, in particular mobile, local, and anytime, anywhere access via the Internet of all things. In this quarter, we are seeing the results of our efforts through increased momentum and network effects. We see tremendous opportunity to grow all of the key dimensions of our business this year. We remain excited about our future and believe that we have just scratched the surface of our potential.
With that, I will hand the call over to Mike Herring, our Chief Financial Officer. Mike?
Mike Herring - CFO: Thank you, Joe. Let me start by discussing the impact of our mobile listening limits before walking through our first quarter performance in more detail. Starting with this quarter, Pandora limited mobile listening to 40 hours per month to manage usage growth and the associated cost of content while minimizing listener disruption. This implementation has worked as intended. We saw an increase in total active listeners and a deceleration in full hours streamed. Whenever you operate at the scale of 70 million active users however, some outcomes of those kind of changes can have material effect beyond your expectations.
Specifically, although we had forecasted an increase in subscription activity with the establishment of the listening limit, the subscription conversion rate was higher than expected, resulting in a significant step-up in subscription numbers. As this increase in subscribers was material, we have presented a temporary non-GAAP adjustment to revenue to reflect the management estimate on subscription return to better illustrate the period's activity.
Because we have had limited operating history with in app subscription return, we are required to reserve 100% of the revenue associated with this subscription increase until that return right expires despite all the cost associated with delivering those services, transaction fees and content fees being incurred in the period. We forecast that this 100% return reserve will be required through the fourth quarter and then will be adjusted to a level based on actual experience in January of 2014.
In order for the revenue results to be comparable across periods, we've adjusted revenue for the return reserve for non-GAAP reporting purposes, resulting in additional non-GAAP revenue in this quarter and anticipate similar adjustments in second and third quarters of this year.
As we expect to have sufficient history to estimate a reserve in January of 2014, the sum accumulation of those adjustments will be added to GAAP revenue in the fourth quarter.
In Q1, the reserve adjustment resulted in $3 million increase in non-GAAP subscription revenue and $0.02 increase in non-GAAP EPS for the first quarter. Based on our current experience, approximately 99% of the related deferred revenue balance will be released in the (fourth) quarter and going forward the return reserve will be carried at approximately 1% of related revenue.
Now for a discussion of our first quarter results. Pandora delivered first quarter GAAP revenue of $125.5 million, representing 55% growth from the year ago quarter, above the high-end of our guidance range. Non-GAAP revenue including the subscription return reserve adjustment grew 58% to $128.5 million. Advertising revenue was $105.1 million, a 49% year-over-year increase. Subscription and other revenue was $20.4 million on a GAAP basis, an increase of 100% year-over-year and $23.4 million on a non-GAAP basis.
For the first quarter of fiscal 2014, GAAP basic and diluted loss per share was $0.16. Non-GAAP basic and diluted loss per share was $0.10 including approximately $7.4 million in stock-based compensation and including $3 million in revenue related to our subscription return reserve, at the high end of our non-GAAP EPS guidance range. Basic and diluted EPS were based on a 173.6 million weighted average shares outstanding.
As we emphasized on our last call RPM or revenue per thousand hours and LPM or licensing cost per thousand hours, are key metrics in understanding the dynamics of our financial model. LPMs are largely fixed with annual increases, so the margin on the business improves with RPM growth in excess of LPM. A cornerstone of our future success is total mobile RPM growth, including advertising and description revenue, and that is why we are so pleased with our continued performance in this area. First quarter 2014 total mobile RPM based on non-GAAP revenue increased to $26.15 from $19.15 in the same period last year. Web RPM also increased to $48.33 this quarter, up from $45.64 in the first quarter of 2013.
Our total combined RPM based on non-GAAP revenue for the quarter was $30.74, up 17% compared to the year ago period. LPM for the quarter increased to $19.81 from $18.03 in the same period last year due to the annual increase in the licensing rates that went into effect in January 2013.
Pandora ended the first quarter with $75.4 million in cash, cash equivalents and short-term investments, compared to $89 million at the end of the prior quarter. The decrease was primarily due to an increase in royalty payments and other operating investments and to year-end bonuses and commissions paid in the first quarter to our sales force.
Cash used in operating activities was $12.6 million for the first quarter of fiscal 2014 compared to $10.6 million used in the year-ago quarter of fiscal 2013. Content acquisition costs were $82.9 million or 64% of non-GAAP revenue for the first quarter. As revenue leverage increases, the percentage of revenues paid for content acquisition will decrease. Although the absolute dollar amount will increase with listener hours, we are working on greater control and an increase in our ability to predict the licensing cost and manage growth with the limit on mobile listening hours.
As an organization, we increased headcount 55% year-over-year to 883 employees at the end of the first quarter in fiscal 2014 from 568 employees in the same period last year.
We increased engineering headcount 45% as we continued to focus on innovation and mobile leadership. Sales and marketing also grew, increasing 67% from the year ago period. Specifically, marketing and sales support grew 62%, while quota-bearing sales reps grew 73% to 248 total sales reps at the end of the quarter as we strengthened our position in local market following listener growth and advertiser acceptance. We continue to focus on building our sales team as effectively as possible and manage our growth and markets by territory to ensure new sales force additions are productive.
Overall, our marketing and sales expense represented 31% of non-GAAP revenue in the first quarter, and increased 71% compared to the year ago quarter, from $23.5 million to $40.1 million. Our product development expense represented 5% of non-GAAP revenue in the first quarter, and increased 71% compared to the year ago quarter, from $4.1 million to $7 million.
Our G&A expense represented 11% of non-GAAP revenue in the first quarter and increased 34% compared to the year ago quarter, from $10.6 million to $14.2 million. We continue to see leverage in G&A as we grow the business. And as a percentage of revenue, G&A declined from 13% to 11% of non-GAAP revenue year-over-year.
I'll wrap up with some thoughts regarding our guidance. As a result of the changes we made to limit listener hours and the growth of our subscription business, we are raising our guidance based on higher expectations for revenue from subscriptions, momentum in our advertising business, and increased leverage in our financial model.
Starting with the full fiscal year 2014, we are estimating non-GAAP total revenues to be in the range of $615 million to $635 million or growth at the mid-point of more than 45%.
From a profitability perspective, we expect fiscal 2014 non-GAAP EPS to be between a loss of $0.02 and earnings of $0.08. Fiscal 2014 non-GAAP EPS excludes stock-based compensation expense, assumes minimal tax expense given our net operating loss position and is based on $176 million basic and 197 million diluted shares outstanding for fiscal 2014.
For the second quarter of fiscal 2014, we currently expect total non-GAAP revenue to be in the range of $155 million to $160 million. Non-GAAP EPS is expected to be between a loss of $0.02 and earnings of $0.01 for the second quarter. Non-GAAP EPS includes the return reserve, excludes stock-based compensation expense, assumes a minimal tax expense given our net operating loss position and is based on 175 million basic and 196 million diluted shares outstanding for the second quarter of fiscal year 2014. When it comes to guidance philosophy, we are a growth company and our guidance reflects our growth expectations and the investment we are making to achieve that growth.
Our guidance assumes that we will continue to perform well on our existing program. We believe we have the scale and financial model to execute effectively with the current content cost structure to drive incremental gross margins. As we continue to drive this leverage, we will invest aggressively in growing our business.
Now I will turn back the call to the operator and we will get ready to take some of your questions.
Operator: Ralph Schackart, William Blair.
Ralph Schackart - William Blair: I was just curious what drove the better than expected mobile monetization, maybe some color, are premium (toll) rates growing up where pricing trends and did local have a factor into that?
Mike Herring - CFO: So mobile monetization is a mathematical product of a lot of different factors, all of which I think were trending well in the quarter. So, the denominator being the number of hours with the listener limit, we actually helped monetization by managing the growth of hours in mobile. We also saw through the in-app purchasing mechanism on Android phones and also the effect of the listening cap and increase in subscription rates, and that subscription dollars from a non-GAAP basis while we added the dollars back in there, so it could be reflective of the actual activity also drove an increased revenue and goes into that RPM calculation. Then, from an advertising perspective, the hires we made in infrastructure, we're making – infrastructure investments we're making in order to enable local advertising have gotten this off to a great start this year. And so, all three of those things are pushing RPMs in the right direction.
Operator: Laura Martin, Needham & Company.
Laura Martin - Needham: Just a couple of quick things. So the LPM of $19.18, I think you said that was – is that going to be then constant this whole year until next January when it steps up again, that's the first thing.
Mike Herring - CFO: Right. So, it will be relatively constant. It depends on the mix of hours between subscription hours and ad supported hours, the rates actually differ, but generally it will be essentially constant until the rates change again in January of 2014.
Operator: Corey Barrett, Pacific Crest Securities.
Corey Barrett - Pacific Crest Securities: So first, can you give any more detail on the dynamics behind the increase in deferred revenue in the quarter? Is that entirely a function of your strong subscriber additions or is a piece of that also coming from the integration with STRATA?
Mike Herring - CFO: So there is a portion of the deferred revenue that is related to advertising that is carried over between quarters, but the large majority of it is related to subscription activity. And although some of that is not related to the turn reserves that drive the non-GAAP adjustments, some of it is related to annual subscriptions that have renewed or purchased prior to the end of the quarter that – where that revenue is going to carry forward into future periods. A pretty significant piece of it actually at the end of the quarter is related to that reserve balance being carried forward, majority of it.
Operator: Peter Stabler, Wells Fargo Securities.
Peter Stabler - Wells Fargo Securities: So, wanted to talk a little bit about the advertising units. It's our understanding that there is a substantial amount of spot radio that transacted in 60 second units. I know this has been changing pretty significantly over the last, call it five years. I am wondering if the fact that there are still a number of advertisers out there who transact in 60s, is that percent an obstacle for you guys and how are you equipped to help advertisers make that transition? And then finally, looking longer-term, do you guys think you can bring advertisers into radio, who have not used radio before?
Joe Kennedy - President and CEO: I'll actually start with the second piece. No question, we are already bringing advertisers into radio into audio advertising, who haven't been there. We still continue to get a very significant portion of our audio ad related revenue from digital accounts not from the traditional $15 billion radio market as those digital buyers see the effectiveness of audio advertising on Pandora. When we take audio advertising, we make it targetable, and measurable, and interactive. We're clearly growing the market for audio advertising. To your first question, we don't take 60s, we take 15s and 30s. There are some advertisers who do focus on 60s. In most cases even advertisers' use 60s. Just take my background as a CMO back in my automotive days, we would always have a mix of 30s and 60s. What we have been very successful at sharing with advertisers is that a 30 second ad on Pandora, even a 15 second audio ad on Pandora is actually more effective than a 60 second ad in the over cluttered environment of broadcast radio. We have substantial resources to work with advertisers to develop new if needed shorter audio creative. So I think this strategy is working well and we don't see the historical use of 60s as a significant impediment to our continued growth.
Operator: James Marsh, Piper Jaffray.
James Marsh - Piper Jaffray: Just two quick questions related to mobile. First, I was hoping you could discuss a little bit about, just the number of auto dealer ads that you guys are experiencing. It just seems like there is a substantial number of auto dealer ads. Then secondly, I just want to talk about audio ad loads on that mobile platform. Just anecdotally, it seems like they are modestly higher and I was just wondering if you guys could quantify whether they've moved higher or not.
Joe Kennedy - President and CEO: Great questions and we have had tremendous success with bringing auto dealers on a local basis onto the Pandora platform. At this point, that's somewhat regional-specific, but we've actually been working very hard to spread what are very clear best practices in terms of developing that business across the country, so it is a key area of success for us and one we expect to continue to grow. It's a cornerstone of local advertising from a radio standpoint. To your second question, consistent with what we've always said, we have been very gradually increasing the overall ad load again just on a fractional basis, but our strategy that we've articulated is to very gradually grow that audio ad load over time and that continues to be the case.
Operator: Edward Williams, BMO Capital Markets.
Edward Williams - BMO Capital Markets: Could you just comment a little bit about how your local advertising is performing relative to national in terms of the percentage of overall revenues or what the growth rate is like between the two?
Mike Herring - CFO: Sure. So, our overall advertising revenue generally is still dominated by national, both from a digital perspective as well as international, network national spot radio, because that's where we got – that's where we've been in the longest and made our initial efforts. So local is still – although it's still a minor piece of the overall ad revenue, minor and growing the fastest. It's where we think there is tremendous opportunity and thus it's getting a lot of investment attention from us. So, there is lot of momentum there. It's going faster than the other piece of the ad revenue pie at Pandora, but it's still a minority percentage.
Edward Williams - BMO Capital Markets: My question relates to international markets developments. And specifically can you talk about whatever progress you may have made in launching in Australia and New Zealand, and any other markets where you might be negotiating with the music labels directly for some sort of a license that isn't a compulsory per play license like in the U.S., any possibility that you are going to open up in Europe? Thanks so much.
Joe Kennedy - President and CEO: Jordan, we're very excited about the continued progress we see in Australia and New Zealand. Continuing to grow a significant percentage week or week, exponential growth actually faster than the growth we saw during the comparable period in the U.S. So, a clear demonstration of Pandora's appeal outside the U.S. and where that appeal is truly global, nothing to share in terms of other markets at this point. We continue to have dialog about a number of markets and we will be, as we said before, aggressively opportunistic but also patiently opportunistic in pursuing those opportunities. And when a market is ready to open we will communicate that, but you probably won't hear much from us until we reach that point in a given market.
Operator: Scott Devitt, Morgan Stanley.
Scott Devitt - Morgan Stanley: The first one, Joe, the VP of audio sales has recently quoted suggesting that you may get up to 50 markets in terms of local sales force coverage in the next few months. That's quite a bit bigger than we had anticipated or at least the ramp is faster. I was wondering are you accelerating that and can you just walk through the number of hires to get to those numbers?
Joe Kennedy - President and CEO: So, we are focused on the first 28 markets that we have identified for this year in terms of in person sales people. Unless we see a compelling reason from an investment perspective to go to additional ones, that currently is not in our short-term plans in terms of feet on the street. That said there are numerous especially first 50, local DMAs that we are targeting through inside sales or by extension through existing sales offices. An example of that might be that Milwaukee radio market, which we don't have people feet on the ground in Milwaukee, but we have significant sales presence. Our fourth largest sales office in Chicago that covers Milwaukee from a local sales perspective. So we're able to address that DMA, even though we don't have someone in market. That said, once we get momentum there we see tremendous opportunity, that's how we line up the next local markets to go after. It's really an analytical framework we set up and then we go to our sales management and go with where they feel the best opportunity is.
Operator: Anthony DiClemente, Barclays.
Anthony DiClemente - Barclays: I have two questions. If you could on mobile update us on where you guys are in terms of the mix of ads served, so display ads versus audio ads versus video adds and then maybe talk about the evolution of how that mix could change potentially going forward? Then, second question on a related or related question would be, can you please remind us where you are in terms of sell-through rate of ads as a percentage of your ad load just roughly and where that could potentially go in terms of trajectory over time, that'd be great.
Joe Kennedy - President and CEO: Anthony, in terms of the mix of our adds, again, the great power of our platform is that we are able to offer advertisers display, audio and video ads and we continue to see the revenue with all of those categories grow. We've seen the greatest growth in the most recent period on the audio slide. I think that is our killer ad product. It's our native ad product if you will, and obviously it's the focus of our efforts in terms of the local selling that we've talked about. So, good traction there, our fastest growth rate, but again, the other pieces are growing nicely as well. In terms of sell-through rate, we continue, and consistent with a previous question on the audio side, to gradually increase the rate of sold ads per hour on the audio slide, consistent with what we've articulated to investors in the past in terms of expectation setting. On the visual ad side, again, we continue to see good growth there, but we do, on the mobile side, continue to have substantial levels of inventory that we are not selling ourselves at premium rate and view that as upside as more and more ad dollars flow into the mobile ad market.
Operator: Michael Graham, Canaccord Genuity.
Michael Graham - Canaccord Genuity: Could you just go into a little more detail on where we are on the STRATA and Mediaocean rollouts? I mean, you mentioned that you're fully on board with the platforms, but can you describe the implementation? Like are we all the way done with STRATA implementation heading into Q2, but Mediaocean may not be totally in there until Q3? Just to gauge the impact. Then Joe, could you just comment on where we are with the CEO search?
Mike Herring - CFO: So, let me start and then I'll hand it over to Joe to comment on the search. So, the STRATA integration really started rolling out in February with Mediaocean falling in April, and these are gradual rollouts. They need to be adopted by the agencies, and so there is training that's done, there is process to that rollout and Q1 was really focused on getting agencies to adopt a new platform whether it's upgrade their system or just be able to view Pandora within their screens and try to interact with it. We have seen really nice uptake into that. There was some recent conversation in the press about it. We've definitely seen our agencies that we have worked with very closely historically, be kind of the early adopters in the first of couple of dozen from that perspective, immediately started using the integration. And then we started to work through the ones we haven't quite got to yet. I think we're still probably – until we won't have that the vast majority of agencies working through this system probably till late summer, but we're on track to slightly ahead of track in terms of our projected rollout for that. That said, the last part that we just announced and rolled out was the back office piece event, which allows us to really connect on the purchasing, that's done through these platforms to the billing and collection inside of the business, which is actually incredibly beneficial to the buyers, as well as Pandora. It really takes a lot of the friction out of it and the paperwork and the back and forth out of the relationship. We're also hopeful that will be part of the attraction for agencies to adopt it, and then increase the business they do with Pandora through those platforms. So, great momentum there and I'll let Joe talk about the search.
Joe Kennedy - President and CEO: In terms of the search, the right people here are focused on exactly the right process in terms of identifying a great successor. I am 100% engaged in the role for however long it takes. I am very excited about the plan that we have for this year. I am very excited about our execution of that plan and look forward to not just identifying a great successor, but a great transition and handing over a business with tremendous momentum.
Operator: Aaron Kessler, Raymond James.
Aaron Kessler - Raymond James: A couple of questions. First, just to clarify on the guidance. I think last quarter you mentioned you weren't including any revenues from the radio ad platforms in the full year guidance, can you just confirm that's still the case? Just on the Pandora One versus maybe those consumers that paid an extra $1, can you just maybe break out I guess how much of the consumers paid an extra $1 versus made Pandora One subscriptions?
Mike Herring - CFO: I'll start with the second piece and then I'll go back to the first one. So second piece, those who paid the $0.99, those are not included in the 2.5 million subscribers that we talk about, 2.5 million subscribers is purely Pandora One subscribers. The revenue that comes from that, the people who paid the $0.99 is a nonmaterial rev piece to our revenue in the quarter in terms of us moving the dial. It's just part of kind of an edge case, one of the many ways – one of the many dials we have in our business to try and balance the cost of content with the revenue actually we're collecting from our users. The first piece about how much – whether guidance assumes revenue that's flowing through ad platforms, it's not quite that straight forward. It certainly assumes revenue coming from those platforms. The question I think you are really trying to get at Aaron and I appreciate the question, is did that guidance assume uplift from those integrations. And it assumes that we continue to execute on our sales plan and a big piece of that sales plan is driving local audio ad dollars, and those are facilitated by two things; to a large extent, these integrations and also by hiring the sales people directly to address those budgets in the local markets. So, it definitely has a factor in our projections. It's too early in those integrations to have built in anything dramatic from an uplift perspective. It's more of a current trajectory based on our experience year-to-date through the end of Q1 in terms of our building our guidance for the year.
Operator: Mark Mahaney, RBC Capital Markets.
Mark Mahaney - RBC Capital Markets: Three quick questions. With the increase in net subscription revenue, that Pandora One revenue, any broader thoughts on how you want to run the business in the future? In the past, you've always wanted to be ad – almost primarily an ad-driven business. Is there something now that makes you think that maybe you'll have a more subscription mix in the model going forward than you've had in the past? Secondly, real quickly on the subscription return reserve. Again, Mike, all the costs of that are already in the P&L, it's just the revenue, that's the only thing that's adjusted GAAP to non-GAAP? And then third, could you quantify how big you think, of your total revenue now, how much would you describe as local?
Mike Herring - CFO: Thank you very much for the three quick questions. First of all on the sub revenue, you know subscription or paid listening, as I like to refer to it because with the $0.99 and I think of other ways we are going to roll out over the next month and year, we don't look at it purely as a subscription service but rather as ways of providing paid listening options to our users. Almost like more a product feature rather than a business line. So, it's always been a part of our strategy. The product in terms of how you listen to it, it's still radio. You pay our subscription and it's still not an on-demand service. It doesn't change the way that service works in terms of your listening experience, it's just a different way certain consumers want to interact with that same radio experience. From a product perspective, it doesn't change. We will be thinking a lot, especially now that, in that purchasing behavior especially on Android, has changed the dynamics of how many people are looking at paid listening as a preferred option. We will always look into optimizing our business and finding that balance between how much we want to emphasize the subscribers versus focus on ad sales piece. We personally – and it's one reason I came to Pandora, is that they've been focused on providing a free radio product that addressed the huge opportunity that is audio or radio advertising in the United States. That opportunity is still I think very much in the sites of Pandora. Just because our paid listening, our subscription business has turned out to be pretty successful, I don't think that's going to change that larger strategic focus. On the second piece, on the return reserve, you're exactly correct. I wanted to put in the non-GAAP adjustment is that the transaction cost, the fees we pay to the platform providers in the applications, are all expenses in the period they are incurred. As well as the content cost for the hours of music listened by subscribers who have purchased those subscriptions in that period. So by adding that revenue back, I believe it better reflects the matching of those expenses of what that revenue is and give the right trajectory of the business. By the time we get through Q4, we'll get to a normalize return reserve estimate and that adjustment will no longer be necessary. We'll have two years of experience at that point. Then lastly, on how much of our overall revenue is local. I mentioned earlier that still the large majority of our revenue are national accounts usually through digital, digital advertisers, as well as the majority of our audio advertising is still national. So local as a percentage of our overall advertising spend it's still small. But we think it has some of the biggest opportunity and that's why it gets so much attention from Pandora in terms of investment, as well as airtime on calls like this.
Operator: Nat Schindler, Bank of America Merrill Lynch.
Nat Schindler - Bank of America Merrill Lynch: Just two quick questions. One, can you give us the mobile ad RPM number? I didn't see that yet and maybe I missed it. I'm not in the best position to look. But I know that you've given that in the past and I want to be able to differentiate it from the total mobile RPM number.
Mike Herring - CFO: Sure. So it is in the exhibits to the press release that's filed. So the mobile ad RPM is $23.23 for the first quarter.
Operator: Barton Crocket, Lazard Capital Markets.
Barton Crocket - Lazard Capital Markets: I want to squeeze in a couple if I could. First, I was wondering if you could give some color on the subscription component to your forward guidance. Do you assume subs continue to grow at the level akin to what we saw in the first quarter or does that kind of taper off in terms of your guidance? Also, are you seeing any evidence that it's tapering off after maybe kind of an initial surge here after the usage cap? Then, the separate topic I wanted to get at is, just some early thoughts about, if Apple were to launch a service, to what degree any deal that they strike with labels could be precedent setting in terms of the Copyright Royalty Board process it will pick up in a year or maybe the possibility of you guys doing a private or some type of other web exchange settlement or private deal with labels?
Mike Herring - CFO: So, I'll let Joe answer that second part of your question and I'll start out with the first piece. So, the sub component is an important part of our forward guidance and it certainly was a component of the raise in annual guidance and our outlook for Q2. But we didn't assume the same net subscription growth rate that we saw in Q1, because we do believe a large percentage of those, and we know a large percentage of those were convergence on people who hit the mobile listening cap. We had over 700,000 net additional subscribers in the quarter. That was greater than the number of net subscribers we added in all of fiscal 2013. So, I think it was a step function. We had been seeing subscriptions growth at a healthy clip and we have seen that clip increase even without the cap, outside the cap due to things like the Google in that purchase enablement which was new to 2014, to take off in 2014. But we definitely have assumed a lower conversion rate, lower subscription growth rate post Q1. You want to address the second part, Joe.
Joe Kennedy - President and CEO: The basic answer is, in any potential deal between Apple or any player regarding radio or rights, closely related to radio, would be available as potential precedent in the upcoming CRB, again that ranges from the deals that Clear Channel has done with numerous independent labels to any deals that Apple might do.
Operator: Rich Tullo, Albert Fried & Co.
Rich Tullo - Albert Fried & Co.: My run-on sentence question is as follows. As we discuss revenue, we're looking at this non-GAAP revenue, are we to assume that non-GAAP revenue is revenue plus the change in deferred liability? And if so, why don't we just talk about that because it creates an easy comparison next year? And in relation to that, since the non-GAAP revenue is related to subscribers, can you please provide a little color on this subscriber base, because there seems to be three distinct components. Micro payments based on apps and music purchases, short-term micro subscriptions, then long-term annual subscriptions. If you can please provide a little color on that, that would be great, as we think about subscriptions a little bit. In relation to the rest of the guidance, how big of an influence in the hockey stick up, even outside of deferrals is being on the ad industry APIs?
Mike Herring - CFO: So, the first part is the reason to do the adjustment rather than just say, go to like a bookings proxy, which I think is what you're talking about, a change in deferred revenue. It's not a standard change in deferred revenue. It was just the change in deferred revenue from annual subscriptions versus monthly. Then we could talk about bookings in that context. This is a temporary difference based upon accounting rules that don't follow the way the business is actually operating. Since it's temporary and reserves itself by the end of this fiscal year, then it was important from my perspective to add that piece back. You said in order to make comparable year-over-year, that's exactly why actually. When we're comparing Q1 of next year to Q1 of this year, Q1 of next year will not have this deferred adjustment. So without adjusting this year, it would make the two quarters not comparable. They would be apples to oranges in terms of comparing revenue run rates. It would make Q1 2014 look lower in revenue. It would make the growth rate quarter-over-quarter look higher and it would make Q4 of this year look abnormally high because they would have had this catch up revenue piece. So as we wash through that this year, we will make those adjustments to make it clear to you and to our investors. But that's a really good question, so thank you for the opportunity to explain that. From a subscriber base, really there are three ways to pay for listening on Pandora. The first is this kind of pay to play $0.99 piece. And like I mentioned earlier, that's in the subscription and other revenue line on our income statement, but it's not a material piece to that number. And those people that choose that option are not included in the subscriber number that we talked about, 2.5 million. But in that 2.5 million there's really two types to durations of subscriber, there is the annual subscriber and there's a monthly subscriber, and among the mobile subscribers, they are essentially all monthly subscribers, and over 1 million of those 2.5 million subscribers are mobile-enabled subscribers who purchased their subjection through their mobile device. So that you could get some sense of kind of what that mix is and what that profile of our subscriber base looks like. And lastly, how big of that revenue growth on the backend is based on the integrations. It's not – the integrations are an important piece to a mosaic of things we're doing in order to drive revenue in this business. Specifically around advertising revenue growth, it includes the investment in (indiscernible) people, it includes the integrations into the Mediaocean and STRATA platforms, it include the back-office work we are doing in order to take friction out of the transaction process, and I think, it also includes to a large extent, advertiser acceptance of Pandora ads in a viable and high return way to do radio advertising on a local basis and a national basis. So, those things all are coming together we think in a very attractive way. And that has led us to the revenue path or revenue guidance that we gave for this year.
Operator: John Blackledge, Cowen and Company.
John Blackledge - Cowen and Company: Just two questions. Firstly on the local side, I think you mentioned 248 sales reps. Could you just remind us how many of those are for the local effort? Then, what's the expectation for further sales build out on the local side this year? Second question is on the subscription side. How do you think about the price of the service and is there any chance for a pricing increase at some point in the near term?
Mike Herring - CFO: So, out of 248 sales reps out there, we are now up to 72 sales reps specifically focused on local markets in app, inside the DMA, so feet on the street in those 28 local markets. And in terms of where we go from investment form here, I mentioned briefly on the call that, in my earlier remarks that we are looking at where we are getting the highest return, where the biggest demand is, where we think the best opportunities are, in existing markets where we have people and in markets where we haven't yet put people. All that said the majority of our sales person investment for the fiscal year is in place. We still add people where we think the right investment is possible as investment dollars become available. But the big push to get people in market was over the last two quarters. Then around subscription pricing, we've really had the same pricing since we've launched other services that do similar type of things – tend to raise prices over time. That's not been Pandora's route to market to date. But we do have ever rising costs and it's something that we look at very closely both in terms of how to best manage our business and how to best serve the subscriber to the business. So, it's definitely on the table, but we don't have anything to talk about in terms of our future plans at this point.
Operator: Martin Pyykkonen, Wedge Partners.
Martin Pyykkonen - Wedge Partners: Nice quarter and outlook as well. Two things if I could given the subscriptions. Just wondering, you mentioned Mike, step function and its part of the guidance, but it's kind of a sliding scale downward throughout the year. Was the percentage or number, especially that 700,000, was it skewed to your highest volume users of the highest rank, kind of the top tier of your free app supported users as far as the core of the converted, and it's your expectation if that was the case that you go the next layer down, those that weren't quite in the top 4% or 5%, but would be conversion potential? Just wanted some color on that. Then broader on the local side, it's been covered pretty well. But with regard to targeting specifically, are you finding advertisers looking at your platform really wanting to drill down to targeting? We have the unfortunate experience of listening to local ads there, they're not targeted, they're car dealers, Lasik surgery, all those stuff you usually hear. But are your advertisers really looking for down targeting more or is it somewhat still the traditional play just the fact that your share is going up obviously pretty substantially?
Mike Herring - CFO: So really quickly on the first piece. The step function was – I definitely skewed on average to higher users because the mobile listening capital is such a driver of conversion rate in the quarter. Historically, and we believe going forward, subscribers aren't necessarily the high-usage users. They just want to prefer to have some sort of reason to have advertising out of their listening experience. So we think it's not about going deeper into users that use less hours in terms of driving conversion. It's more of appealing to the users' need, how they wanted to consume music, how they want to use the service, and then crafting a paid listening screens around that, so, and Joe, do you want to address the second piece?
Joe Kennedy - President and CEO: Yeah, in terms of targeting, Martin, what we're really seeing the interest of local advertisers is the very basic but very powerful demographic and geographic targeting. These are advertisers that historically have just tried to pick a radio station format, adult contemporary with the hope of finding the right demographic target for what they are after on Pandora. Hey, if you're after women 35 and 54, you can target that straight-off. Also important on the geographic front, there was an earlier question about auto dealers. Auto dealers rarely sell across an entire DMA. They typically sell three or four counties. We enable that geo-targets and it's very powerful for them. So, that in some sense very basic geo and demos targeting is where we're seeing the interest, but believe that it’s very powerful and very effective for local advertisers.
Dominic Paschel - VP, Corporate Finance and IR: Operator, given that we're at the top of the hour, we'll conclude. We do realize we have left a few of you guys in the queue and we will rotate next time through different analysts. So we do appreciate your support. With that operator, can you take us back to Pandora.