3 Answers From Sirius XM
Changes are afoot at Sirius XM Radio (NAS: SIRI) as the satellite radio giant gears up for a year of accelerated growth by ramping up its Web-based initiatives.
Sirius XM posted improving quarterly results this morning. Revenue climbed 7% to $784 million, fueled by a better-than-8% increase in subscribers that was partly weighed down by a nearly 2% decline in average revenue per user. Sirius XM's profit of $0.01 a share matched Wall Street's target.
Sirius XM continues to be more of a bottom-line growth story than a top-line speedster. This is a scalable model where operating costs grew only half as quickly as the media giant's revenue, and programming costs have actually fallen by nearly 10% over the past year. Adjusted EBITA climbed 16% to $167 million for the quarter, and free cash flow rose 15% to $192 million.
The interesting nugget in this morning's report is that Sirius XM is going to take on the personalized radio services offered by Pandora (NYS: P) and Clear Channel's iHeartRadio head-on later this year. Streaming subscribers -- consisting mostly of receiver-based subscribers paying $3 a month more for Web-based access on PCs and wireless devices -- will be treated to both customized radio and "on demand" access to many of the platform's top shows.
Yes, Pandora will probably do a better job in terms of customized music. It's had a dozen years of data mining in crafting its fast-growing service. However, only its ad-laden service is free. Pandora's commercial-free service is also $3 a month -- and it doesn't have Sirius XM's talk show stars at its beck and call.
I had three questions leading into today's report. Let's see the answers that we received.
1. Are conversion rates improving?
Unfortunately, conversion rates continue to decline. Just 44% of those buying cars with satellite receivers keep paying after their free trials run out, and that's at the very bottom of its historical range.
Sirius XM has been able to make it up in volume. Satellite receivers are now factory-installed in 67% of new cars, up from its 62% reach a year earlier. Sirius XM has also worked with used car dealers to provide incentives for buyers of secondhand cars to activate dormant receivers. There are now 4,000 dealers participating in the plan that gives used car buyers three free months in exchange for contact information.
Churn will take a hit this year. CEO Mel Karmazin projects that January's rate increase of 12% will result in the monthly churn rate increasing from 1.9% to 2.1%. It may not seem like a big number, but we're talking about an average of more than 40,000 members leaving because of the higher rate. Netflix taught us last summer that even a loyal audience isn't immune to walking after a rate increase, though Netflix's increase was for as much as 60%. Sirius XM -- despite the sharp drop in programming and content costs -- was due for a modest price increase after years of toeing the line, so there hasn't been a lot of bellyaching beyond those set to quietly walk away this year.
It will take some time before the rate applies to existing listeners since many are paying a year or more in advance. The company expects it to take about 18 months for the new monthly rate of $14.49 a month to kick in across its subscriber base.
2. Will guidance for 2012 be revised?
Sirius XM initiated its outlook for 2012 back in September, and Karmazin is surprisingly sticking with his revenue target of $3.3 billion for this year. This was really the only significant letdown in the report, as analysts were already perched at $3.36 billion in their projections for 2012. The economy's turning, new car sales are strong, and the company closed out the fourth quarter with more subscribers than it was publicly projecting. Why couldn't Karmazin have bumped that figure up to $3.4 billion?
Karmazin revealed that Sirius XM is targeting 1.3 million net additions in subscribers, a 6% increase. He also points out that advertising will grow faster than his revenue target. Why is revenue only going to grow by "almost" 10%? The guidance makes it seem as if either very few of its members will be subjected to the 12% increase early on or that Sirius XM will have to do a bit of promotional discounting to keep potential cancellations from deactivating.
Sirius XM is also sticking to its free cash flow target of $700 million, a huge 75% boost over 2011. The satellite radio star is boosting its adjusted EBITDA guidance from $860 million to $875 million. If it's impressive to see adjusted EBITDA at nearly 27% of revenue, Karmazin noted this morning that the company's long-term target is to hit adjusted EBITDA margins of 40%.
3. Can Sirius XM make peace with Howard Stern?
Sirius XM's biggest star wasn't brought up during the call.
Howard Stern has been vocal about his legal tussle with the company over what he feels are unpaid bonuses related to the number of subscribers acquired as a result of the merger with XM.
Now that Comcast's (NAS: CMCSA) (NAS: CMCSK) NBC has signed the free-talking radio icon for the upcoming season of America's Got Talent it will be interesting to see if Sirius XM and Stern can come to a settlement before Stern becomes more visible to primetime television-viewing audiences. Stern's new side gig will provide Sirius XM great exposure, but only if the two parties are on the same side.
Running of the bulls
Despite the mixed results and disappointment in the revenue and subscriber addition guidance for 2012, I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.
XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report reveals all.
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