Pandora 2016 Annual Report Download - page 71

to continue to fluctuate in future quarters.
Our results reflect the effects of seasonal trends in listener and advertising behavior. We expect to experience both higher
advertising sales due to greater advertiser demand during the holiday season and increased usage due to the popularity of
holiday music during the last three months of each calendar year. In addition, we expect to experience lower advertising sales
in the first three months of each calendar year due to reduced advertiser demand and increased usage due to increased use of
media-streaming devices received as gifts during the holiday season. We believe these seasonal trends have affected, and will
continue to affect our operating results, particularly as increases in content acquisition costs from increased usage are not offset
by increases in advertising sales in the first calendar quarter.
In addition, expenditures by advertisers tend to be cyclical and discretionary in nature, reflecting overall economic
conditions, the economic prospects of specific advertisers or industries, budgeting constraints and buying patterns and a variety
of other factors, many of which are outside our control. As a result of these and other factors, the results of any prior quarterly
or annual periods should not be relied upon as indications of our future operating performance.
We have invested in building a local advertising sales force in major radio markets and as of December€31, 2015, we had
154 local sellers in 39 markets in the United States. As a result, we experienced an increase in local advertising revenue as a
percentage of total advertising revenue in the twelve months ended December 31, 2015 compared to the twelve months ended
December 31, 2014, and we intend to continue investing to extend our local market presence for the foreseeable future.
Critical Accounting Policies and Estimates
Our discussion and analysis of our consolidated financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these
consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates
form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated
financial statements. We believe that our critical accounting policies reflect the most significant estimates and assumptions used
in the preparation of the consolidated financial statements.
We believe that the assumptions and estimates associated with our royalties for performance rights of musical works,
advertising revenue, subscription and other revenue, business combinations, goodwill and intangible assets and stock based
compensation and the valuation of stock option grants and market stock units have the greatest potential impact on our financial
statements. Therefore, we consider these to be our critical accounting policies and estimates.
Royalties for Performance Rights of Musical Works
We incur royalty expenses from our public performance of musical works. This includes royalties that we pay for public
performance rights to the owners of those musical works or their agents, such as ASCAP, BMI, SESAC and individual
publishers. We record a liability for public performance royalties based on our best estimate of the amount owed to each
licensor, PRO or individual copyright owner, based on historical rates, third-party evidence and legal developments consistent
with our past practices. For each quarterly period, we evaluate our estimates to assess the adequacy of recorded liabilities. If
actual royalty rates differ from estimates, revisions to the estimated royalty liabilities may be required, which could materially
affect our results of operations.
Revenue Recognition
We recognize revenue when four basic criteria are met: (1)€persuasive evidence exists of an arrangement with the
customer reflecting the terms and conditions under which the products or services will be provided; (2)€delivery has occurred or
services have been provided; (3)€the fee is fixed or determinable; and (4)€collection is reasonably assured. We consider a signed
agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement. Collectability
is assessed based on a number of factors, including transaction history and the creditworthiness of a customer. If it is
Table of Contents
60