SiriusXM Earnings Look Good, But Look Deeper
SiriusXM reported earnings today, and at first blush it would appear that the company met expectations, and is performing well enough to raise some guidance metrics for the balance of the year. The company reported record revenue, saw net income increase 117%, had a record $381 million in adjusted EBITDA, has repurchased $2.1 billion in stock, and raised guidance on subscribers, revenue, and free cash flow. With all of that, what is not to like? Churn went up to 1.9% quarter over quarter, and conversion rate from trial subscriptions to self paying subscriptions dropped from 42% to 41%. These two metrics alone are enough to give the great results we saw otherwise some pause. In particular, the street seems to be thinking about connected cars, more consumer options, and whether or not the uptick in churn and downtick in conversion are indicators that are hinting toward a shift in what consumers use for audio entertainment.
Now, let’s be clear. The company is indeed producing good numbers. The company is still showing growth. The company is headed in the right direction. What then is holding this equity back? One thing that could be holding SiriusXM back is the fact that the majority of SiriusXM stock is held by Liberty Media. Liberty essentially runs SiriusXM and while they certainly want the company to do well, there may be a side that wants good performance, but not great performance. With each share bought back, Liberty’s stake in the company increases. At some stage, Liberty may well make another move, but as investors found out the last time around, that move will not be at a huge premium. This may frustrate some investors, but an investment in satellite radio may be much better under one roof than split up under partial ownership by a large player like Liberty.
Another thing that investors are looking at is the shift in metrics and how they are accounted for. The comparisons that seem so good now will become harder in the quarters to come. The fact of the matter is that while the 2014 guidance is good, the road to impressive gains will be getting more difficult. Subscriber revenue seems to be reaching a plateau. Ad revenue is seeming to plateau. There may not be elasticity in price, and the auto sector may peak next year. The segments for growth are evaporating and the competitive landscape is evolving as well. In my opinion the best way to describe SiriusXM at the moment is “stable”. Stay Tuned!
Liberty will make another low ball offer before the telematics services begin to have a positive impact on revenue and earnings. They didn’t discuss this product/service much today, but pretty soon they’ll have to.
When you consider that they barely advertise the service/product, have virtually zero presence in retail (love the half empty displays in Best Buy in the back of the store), and have never figured out a way to get people interested in listening outside of the car, it’s pretty remarkable how well they’re doing! I can only imagine where satellite radio would be if the company marketed it properly, and if management actually guided this wayward ship instead of letting it meander aimlessly. Their best effort is to notify subscribers who are already listening to turn on their dead radios so they can listen free for a couple of weeks! 99.9 % of the dead radios don’t get turned on because nobody knows about the promotion! This is the kind of “creativity” that is killing Sirius XM’s potential. A little common sense and a lot less apathy would do a lot to cure what ails this underachieving enterprise.
Very true, Walter, and good things to come 🙂
Spencer,
The problem with Siri is that there is always something “wrong” with the company. Always!
No matter how well the company performs there is never enough. The quarter was solid, without any doubt. Every medal has two sides. Yes, churn and conversion are getting worse….but they are dealing with a different demographic due to less well off customers entering OEMs and ever growing pool of the used car buyers.
The company is growing, revenue will increase by another $400M despite lower conversion and churn. But the most appealing factor is how the monetize. They will grow fcf by another $200M this year in spite of your concerns, and next year may be even better.
As to liberty, they may be not too excited for Siri to show stellar results for their own greedy interests. However, how do you explain that Siri bought back only 130M shares in Q3 versus liberty’s desire to “load” them with debt, reduce the number of shares and get them for a song?
Every medal has two sides. Liberty cannot suppress Siri forever for obvious reasons. Liberty is in essence Siri’s tracker with the only access to Siri’s cash via dividends.
To cut this long story short, sirius has been and will be showing not stellar but very strong both financial and customer growth results for years to come. They will be comfortably adding over $200M in fcf and buying back shares or paying off dividends. Liberty and Siri are in the same boat for a long time and captain Malone is not dumb to sink his own boat. liberty stock will stay low and ugly as long as Siri’ stock is low and ugly. The only way liberty can appreciate is by appreciating Siri. As to another low ball offer libel may get humiliated one more time. If they are smart enough to offer decent acquisitions terms (over $4) I will certainly vote for it because this will be for the benefit of everybody!!!