Right on cue, and just one hour before Sirius XM Radio (SIRI) CFO David Frear was scheduled to speak at the Citi Global Internet, Media and Telecommunications Conference, the company announced that it had achieved 2 million net subscriber additions and that "it expects to meet or exceed all of its 2012 financial guidance." The company also issued 2013 guidance as follows:
- Revenue of over $3.7 billion,
- Adjusted EBITDA of over $1.1 billion,
- Free cash flow approaching $900 million,
- Self-pay net subscriber additions of approximately 1.6 million, and
- Total net subscriber additions of approximately 1.4 million.
While some investors may have been looking for stronger guidance, the market seems to have taken the news in stride and there is little change to the share price.
It is not unusual for the company to issue conservative guidance, and it had been a hallmark of former CEO Mel Karmazin's tenure. Whether or not the new regime has chosen to continue the Karmazin formula of underpromise and overdeliver, or believes that the guidance is the most accurate assessment of 2013 performance, may be one of the more interesting stories for the coming year. Regardless of how the story unfolds, there are several data points that leap out.
The revenue guidance of $3.7 billion is 9% above the $3.4 billion results guidance for 2012. This is a dramatic slowdown from the $0.4 billion or 13% growth of 2012 over 2011, and comes despite a growth in the number of self-pay net adds of 8% and a 12% price increase that was gradually rolled out to the subscriber base in 2012. In the previous conference call, the company noted that "the price increase has been rolled out to approximately 60% of the self-pay subscriber base." As the rest of the subscriber base receives their price increase by the middle of 2013, and with the increase in self-pay subscribers, one should have expected to see the revenue grow by more than 9%. And, if these are not sufficient reasons to see a larger increase in the revenue, there will also be an increase in the music royalty fee (MRF) from $1.42/month to $1.81/month in 2013.
Part of the lack of growth might be attributable to a reduction in the number of paid promotional subscribers. It has been speculated that the renegotiation of the GM deal would move the GM trials from the paid category to the unpaid category. However, since this is a change that would only affect Q4 2013, the impact should be small. Not only is it just one quarter, but the way the company accounts for revenue, most of the lost Q4 trial prepayment would be in deferred revenue and would not have impacted 2013.
A much more likely explanation is the continued and growing use of retention discounting. At the Citi conference referenced above, Liberty Media (LMCA) CEO Greg Maffei presented yesterday, and was questioned about Liberty's plans with Sirius XM. He was asked about the extensive use of retention discounts by Sirius XM and whether investors should be concerned that a new CEO would discontinue the current practice. Maffei replied that the Sirius XM business model was currently working well and that he didn't anticipate changes.
Free Cash Flow (FCF)
The FCF projection of $900 million is perhaps the most disappointing number. It is probably held down by the relatively small growth in revenue. With the revenue growing, and the interest expense declining significantly from the 2012 levels, and the used car efforts carrying much lower costs, an investor should have expected an increase of more than $200 million from the 2012 results guidance.
What is known about 2013 cash outlays is that there will be an increase in the music royalty payment equal to less than 1% of revenue and the added cost to launch Sirius 6. One other cash cost could be tied to the $2 billion share buyback and the incremental interest expense associated with drawing down the revolver to fund the buyback.
The post-merger record of 2 million net adds for 2012 was driven by the increase in new vehicle sales, expansion of the used vehicle program and lower than expected churn. During the Citi conference presentation, Frear noted that the 2013 self-pay net add guidance of 1.6 million is expected to grow 30% -- indicating that 2012 self-pay net adds were about 1.2 million. This means that the large growth in subscribers during 2012 came from a 0.8 million unit increase in paid promotional subscribers. The 2013 total net add guidance of 1.4 million -- below the self-pay subscriber net add increase of 1.6 million -- is likely an indication that the new GM deal is affecting the number of paid promotional trials.
The used car program will continue to be an important driver to the growth of the subscriber population. Frear noted that the number of dealers in the program was currently "about 8,000" This is up from 7,025 at the end of Q3 and 3,734 at the end of 2011 and should continue to expand, although fewer dealers are likely to be added in 2013.
The guidance for 2013 would appear to be conservative, constrained largely by the revenue guidance of $3.7 billion. It is a number that, in turn, will constrain the growth in FCF. And it is guidance that would not appear to be likely to inspire analysts to increase their price targets.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.