Sirius XM's Q1 - The Good And The Bad

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) released its Q1 earnings today, and while the company is performing well, there is both some good and bad that transpired in the quarter. Overall, the quarter was good with a few surprises. The biggest problem is that some surprises were positive and others negative.

The Good

  1. Sirius XM added 452,890 subscribers
  2. Sirius XM had record revenue of $897 million
  3. Adjusted EBITDA grew to a record $262 million
  4. Sirius XM increased 2013 free cash flow guidance from $900 million to $915 million
  5. Sirius XM bought back 209 million shares
  6. Subscriber acquisition costs went down to $51

The Bad

  1. Sirius XM saw quarter-over-quarter ARPU drop from $12.12 to $12.05. This is the second consecutive quarter we have seen ARPU decline
  2. Sirius XM saw churn rise to 2.0%
  3. Sirius XM's revenue was about $8 million below street expectations
  4. Sirius XM missed street expectations on EPS by a penny, it reported 2 cents vs. expectations of 3 cents
  5. Sirius XM bought back 209 million shares

As you can see, I have the share buyback in both the good news and bad news column. The good news is that shares are being bought back. The bad news is that while the company was buying some $640 million worth of stock, the price per share actually saw declines in the quarter and not appreciation. With about 30% of the $2 billion assigned for buybacks, shareholders are not really seeing material appreciation. Yes, for the company and the longer term, buying back shares cheap is good. However, I am an investor, and I would rather see share buybacks driving the price of the equity now with a continuation in share appreciation moving forward.

The Q1 call will carry all of the positive attributes of the company. Rather than rehash what we all know as the positives, I will focus on some of the items that we want to monitor as investors.

  1. Churn at 2.0% is a concern. This is particularly true in that the ARPU was also down. Essentially, the company was in a situation where getting any more aggressive with retention efforts would have hit the ARPU line harder. We want to see churn at about 1.8% if we want to avoid revenue misses in the future.
  2. ARPU was down for the second consecutive quarter. I do not like to see this either. The company has increased the music royalty fee, and should be able to realize at least some benefit from that revenue. It appears that getting average revenue appreciation moving forward is going to be more of a challenge than many may realize.
  3. Revenue is getting lighter. The company added almost 453 million subscribers during the quarter, but was only able to manage revenue that was less than $5 million more than last quarter. Revenue missed street expectations for the second consecutive quarter. Missing expectations is never a good thing, even if the numbers are good. Essentially, the company must now manage expectations going forward. It is hard to post a positive surprise when expectations are too high.

Overall, the company is performing well, but not really doing anything that might be considered special. Because of this factor, price appreciation will be harder to realize moving forward. Yes, this company will see runs, but it will also see periods of time where the price action borders on getting boring. There are long-term positives here, and share buybacks will eventually begin to sink in, but the walk to $3.50 and beyond is a longer walk than perhaps many are expecting. Stay tuned, and do not be surprised if this equity is a bit range-bound for a bit longer yet.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.