Wednesday Sirius XM (SIRI) announced that it will beat its financial guidance for 2012. And, as expected the company added historically high net subscriptions of 2 million. This brings the total active subscription base to almost 24 million. Sirius also issued new subscriber and financial guidance for 2013:
- 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.
At first glance this would send many investors into "sell mode". However, the shares jumped to another 52 week high of $3.16, before closing at $3.12. Then Sirius CFO David Frear gave the guidance some color when he spoke at the Citi Global Conference in Las Vegas Wednesday. He reminded investors that the original guidance for net subscriber additions for last year was only 1.3 million. And the company beat that number by an impressive 50%. That prediction had been made due to the fear that last year's price increase would cause subscribers to cancel. As we now know, that did not happen. However this time there is a different explanation for the low guidance.
One "big OEM" is switching from paid to unpaid trials in Q4 2013. This means that the subscriptions will not be counted until they are converted to self pay by the consumers after the 3 month trial. In the past they would have been counted when the cars were in production. According to Frear it is "just a geography issue". The opportunity is the same, with the same conversion rate; but it does cause a "distortion in net subscriptions". However he thinks that most analysts understand this.
The chatter (since last summer) is that the "OEM" is General Motors (GM). And although former CEO Mel Karmazin had alluded to a lucrative renegotiated contract for Q4 2013, he said their policy was not to discuss any OEM contracts. GM sold 2.59 million units in the United States in 2012. This means that with the expected 4% increase, the company could produce around 675,000 units in the fourth quarter next year. Most of the new GM cars come standard with Sirius XM radios according to their website:
Sirius XM satellite Radio is standard on most new and used GM
vehicles. With a 3-month trial subscription to the XM Premier
package you'll hear the music you want without the hassle of
commercials, CDs or playlists. Plus live play-by-play action of your favorite sports, comedy, talk, news, entertainment, family
programming and more. All with coast-to-coast coverage, wherever you drive. Welcome to the world of Sirius XM.
So if "most" of those units are not counted as subs in production, this would leave a huge hole in the net sub additions for Q4 2013. And there would also be a 3 month lag on reporting the expected 45% conversions of these subscriptions. However this will not affect the first three quarters of 2013. This suddenly feels like Deja vu. Last year, when the low sub guidance for 2012 was announced on February 9, the stock slowly declined as the negative articles poured into the financial sites. Here is what happened to the share price:
|Mar 1, 2012||2.27||2.28||2.23||2.23||47,316,500||2.19|
|Feb 29, 2012||2.25||2.28||2.23||2.26||93,896,500||2.22|
|Feb 28, 2012||2.24||2.25||2.17||2.22||55,313,300||2.18|
|Feb 27, 2012||2.19||2.25||2.17||2.23||63,727,700||2.19|
|Feb 24, 2012||2.10||2.20||2.09||2.20||115,626,400||2.16|
|Feb 23, 2012||2.10||2.12||2.09||2.10||36,590,400||2.06|
|Feb 22, 2012||2.11||2.12||2.08||2.09||54,145,800||2.05|
|Feb 21, 2012||2.14||2.15||2.11||2.12||40,007,600||2.08|
|Feb 17, 2012||2.15||2.16||2.13||2.15||33,295,000||2.11|
|Feb 16, 2012||2.14||2.16||2.14||2.15||18,968,400||2.11|
|Feb 15, 2012||2.16||2.18||2.14||2.14||40,130,600||2.10|
|Feb 14, 2012||2.14||2.17||2.13||2.15||34,597,000||2.11|
|Feb 13, 2012||2.15||2.16||2.13||2.15||30,155,600||2.11|
|Feb 10, 2012||2.14||2.19||2.13||2.15||49,788,400||2.11|
|Feb 9, 2012||2.16||2.20||2.13||2.19||114,360,600||2.15|
|Feb 8, 2012||2.12||2.19||2.10||2.19||104,175,400||2.15|
As you can see, the price hit a high of $2.20 on the 9th, and dropped to a low of $2.08 on February 22. It then recovered to $2.25 a few days later. Only time will tell if Sirius investors are more sophisticated now. If not, expect dips, for great buying opportunities until the Conference Call. Because there will be lots of explanations of this transition in the next several calls.
Frear also mentioned that the company could buy 600 million shares with its $2 billion buyback. This would be a price of $3.33, which may give a clue as to what the buyback plans are. I think that after the options expire on the 18th, Sirius will buy some shares. Normally that time would be the run up to earnings and guidance, but now the cat is out of that bag. However, if the buyback is completed before the CC, the shares will soar on the news.
Another highlight of the Las Vegas Conference was when Liberty Media (LMCA) CEO Greg Maffei spoke Tuesday night. He took the Reverse Morris Trust off the table for the next two years. As SA author Stephen Faulkner pointed out, Maffei said it twice:
We've had this SIRI stake for quite awhile... uhh... three, almost coming up on four years now. You know, John Malone has said someday SIRI will become an independent company and I'd be silly to disagree with my chairman who has 45 percent of the vote. But I think he's right in pointing out that doesn't necessarily mean that's going to happen in 2013 or 14... that it's somewhere down the road... you know that'll be the way it is.
...and I certainly would agree with John (Malone), someday SIRI will be an independent company... uhhh... but I don't think that's a 2013 or 2014 event.
This is actually the biggest news to come out about Sirius in a long time. There are a lot of investors that have been really worried about what affect the RMT would have on Sirius shareholders. This removes one more layer of uncertainty about the Liberty takeover. It means that Liberty sees future value in holding on to Sirius for a couple of years.
I expect that when this new "lucrative Q4" contract is put in motion, the earnings will jump. And it will be very strange to have additional earnings with lower net sub additions. But the bottom line is the bottom line. And a bigger bottom line is the goal. If the weak handed investors sell on this low sub guidance news, and the price drops, it will be a win-win for the Bulls. My near term target after this first buyback is completed remains at $3.65.
Disclosure: I am long SIRI.