SiriusXM Quarterly Preview – Expectations Are Key
SiriusXM will be reporting its quarterly financials this Thursday. In my opinion the key element of this call will be expectations. Right, wrong, or indifferent, Sirius has shifted from a “darling” when Liberty Media made an offer to bring the company under its umbrella to “questionable” ever since Liberty pulled its offer off of the table. The reasoning is actually pretty simple. If Liberty does not want the deal anymore what is wrong?
Now, before you start typing your hate-mail, hear me out. The issues with SiriusXM lately are partially founded in reality and partly based on perception. Whether we as investors like it or not, perception carries a lot of weight for an equity. Company guidance for 2014 includes:
- Revenue of over $4 Billion vs. initial 2013 guidance of $3.7 Billion ($3.8 Billion was actual in 2013)
- Net subscriber additions of approximately 1.25 million vs. initial 2013 guidance of 1.4 million (actual 1.66 million)
- Adjusted EBITDA of approximately $1.38 Billion vs initial 2013 guidance of 1.1 billion (Actual $1.17 Billion)
- Free Cash Flow of Approximately $1.1 Billion vs. initial 2013 guidance of $900 million (Actual $927 million)
As you can see, the initial guidance of 2013 was pretty good. The company beat its revenue guidance by $100 million, beat its subscriber guidance by about 250,000, beat its EBITDA guidance by $70 million, and beat its free cash flow by $27 million. In essence, the 2014 guidance is already more modest than what many are used to:
- Revenue Guidance is a 5% bump from 2013 (the rise was 12% in the year prior)
- Subscriber guidance is a 25% drop from 2013 (there was a 7% rise in the year prior)
- Adjusted EBITDA is an 18% bump from 2013 (the rise was 27% in the year prior)
- Free Cash Flow is an 18% bump from 2013 (the rise was 31% in the year prior)
In my opinion, with Liberty pulling out of the deal, the street is beginning to look at expectations that are flattening out. This call is more about the longer term than the near term. Let’s rewind a moment and look at the timeline. Liberty made its offer prior to the full year numbers and 2014 guidance being issued. The subsequently issued 2013 numbers were good, but the guidance story of 2014 was not as robust as some might have expected. Time eroded both SiriusXM and Liberty. Ultimately, Liberty pulled its offer.
The street is expecting SiriusXM to post a profit of 2 cents per share on revenue of $995 million. However, the street is also expecting 2014 revenue of $4.5 billion vs. guidance of $4 billion. There is a $500 million dollar delta that will create headwinds. Expectations are too high currently. In simple terms, it is hard for an equity to appreciate when expectations are likely too high. Last quarter the company did $1 billion in revenue. It is important that the company show revenue that is high enough to meet a pace for the $4 billion guidance, but preferable that it show revenue high enough to pace with current $4.5 billion expectations.
In my opinion this quarter needs to sell a vision. It needs to create a theme that satellite radio is relevant in the connected car and that satellite can continue to grow and produce cash flow that is something to envy on Wall Street. The parts and pieces are all there, but at the moment the vision has been blurred. SiriusXM needs to show a focus on what drives the bottom line and sell the concept that the company can still be a growth machine. It is not that I feel that the growth is gone. I think that it is slowing a bit though, and that is an idea that the street has not yet come to terms with.
I do look for the company to announce its intent on continued share buybacks. That will make many investors happy, but that process is slow, and it takes time for the street to digest the lower share count when the equity has multiple billions of shares. A side note. This will be the first quarter where the subscriber number will be front and center and can not hide behind the full years numbers like it did last quarter. Many of the casual followers of this stock would probably be shocked to learn that in Q4 the subscriber number was negative. The new GM deal makes the traditional subscriber metrics difficult to understand. The short term impact is the perception of low sub numbers. The benefit of the new GM deal comes from a better revenue share arrangement that will play out in the longer term. Stay Tuned!
Where have you seen the $4.5B revenue eTpectation of the street? I have not seen it anywhere. the average I saw was a bit under $4.2B that they have strong odds to meet.
Concerning the fcf, it is obvious that the company will have a problem growing fcf annualy at 30%. But there is another side to the coin. What about the margins? Why wouldn’t you talk about them, with fcf increasing to over 25% of the revenue and EBIDTA being about 35%. Revenue will aslo grow robustly, with Agero contributing more and more every quarter.
It is true that the sub growth may (or may not) slow down for some time but the efficiency of the business will be getting better with each and every Q in the next several years. There are tons of reasons behind that. One of the major ones are smaller SAC due to the used car market expenses that are much smaller than OEM’s and smaller overall expenses vs. the revenue growth.
To conclude, the company is entering a stage of moneytization where each new customer is going to be more cost effective and higher cash effective than the previuos one. As to the customer growth, there will be a break through at some point in not so distant future due to the sheer number of sat enabled cars on the road.
The overall average is about $4.5 billion. Some analysts are not yet up to date. That is a problem when there is a shift in the model such as the GM shift.
New and better margins are not really going to show in 2014.
Agero, as I have pointed out many times, is not really a revenue generation story.
Sub growth will slow down. There is no question about it..
Sac improvement will happen at a modest pace. The used car market is good, but not so good that it is carrying a material impact yet. With each passing quarter I see more and more people simply opting out of SDARS. The company does seem to be trying to address thus by working on unique content, but the connected car, phone, etc is carrying an impact in satellite relevance.
Spencer,
I disagree with pretty much all your points. I am not going to waste your time and mine telling you why. You know my points way too well since we have communicated more than once.
I remain a firm believer that the company will do extremely well in 2014 and on. There is virtually nothing in its way to prevent it from excelling. $4.5B revenue in 2014 is a dream even for an optimist like me and I have not seen a single analyst who projects that. Name me the analyst and the company. The maximum I could see would be close to $4.3B.
Incidentally, as I have predicted from the moment liberty was booted from the merger deal, dividends are on the horizon based on today’s siri’s announcement regarding its $1.25 revolver and removal of the covenants that prevented them from paying dividends. I am slo certain that they will raise the leverage to 4.5, as they say. This means they can easily borrow up to $3B this year. Concerning the dividends, I just wonder how greedy liberty is going to be. They may pay themselves up to 8 cents per share this year. I do not mind since I will get a great bonus of six figures. Good for me!!!
Liberty was not booted from the deal. I have discussing debt leverage at 4.5 for eons now. Many said it would not happen….if I recall you were among that group.
After adding Agero’s employees, SiriusXM still only has 2100-2200 employees. This is not a labor intensive company and look at the revenue it produces.
On the perception issue, I hope the conf. call will produce clarity about the GM deal showing less subs. but more profit.
The short selling crowd manipulates this beautifully to their advantage.
Remember the old Chinese observation, “The first step is the start of a journey of 1,000 miles.” Siri is well into that journey and every quarter’s report shows they are bigger and stronger.
Let’s take a brick and mortar perspective regarding the competition. Pandora, Spotify, et al, are music boutiques. SiriusXM is a 1950s style Sears and Roebuck of everything broadcast.
Finally, there is too much the belief that the consumer is going to choose only one service. I know people who use multiple broadcasting services.
Note that the cost of a small black coffee at Starbuck’s is about 4 days service on siri.
Did Sirius have a price increase in Q1 for some or all of their subscribers? If so, do you know how much and will the higher pricing result in an increase in earnings or free cash flow?
PF….
Yes. They increased prices. It will take time to be absorbed.
“In order to keep delivering the best possible experience and value, a small rate adjustment was implemented on January 1, 2014 which affected several of our audio packages, including Select*, Premier and SiriusXM Internet Radio. For most subscribers to these packages, the increase amounts to as little as 50 cents per month and will be applied at the first subscription renewal date that occurs January 1, 2014 or later.”
All Access, the popular package is the same
Spencer,
I have never ever been against raising the leverage. On the contary, I was one of the few always supporting borrowing as much as they possibly could. The reason – buybacks and cheap rates while they last.
You still have not named me a single analyst who expects $4.5B revenue from siri in 2014. I know that that average was just under $4.2B that they have strong odds to beat!!! Tghis speaks volumes about your level of incompetency.