Sirius XM (SIRI) reported earnings last week (see conference call transcript here) and due to the wild market swings, I am just now getting around to fully reviewing these earnings. SIRI reported a very solid quarter and I am very happy with what is taking place behind the scenes.
Currently, I still hold a core position and will look to trade around it to lock in realized gains. The volatility we are seeing these days only benefits a trading mentality. I believe that is the best strategy for SIRI in the short-term but long-term the prospects are favorable as well. Now, let’s dig deeper into these earnings.
Sirius reported a first-quarter profit of about $42 million, or 1 cent a share, from a loss of $50 million, or 7 cents, a year earlier. Analysts expected the company to break even but SIRI amazed once again. SIRI added 171,441 net subscribers, a strong increase. Pro Forma revenue rose 11% to $670.6 million, to the pleasant surprise of many. The operating margin significantly increased from 7.1% to 19%, and the cash balance doubled to $803 million, further showing strength in the fundamentals.
The revenue increases were partially due to a music royalty charge added to some subscribers. SIRI increased advertising revenues by 18%, even though it’s a small portion of their entire revenue. Overall, these numbers were impressive to most.
Even with this great quarter, we will see challenges, as with any stock. SIRI is absolutely no different. SIRI is starting to become more expensive now with a large enterprise value near $10 billion. The easy gains have been made and now we will be in a slower yet still potentially highly profitable time in the stock. A time of harder gains does not necessarily mean sell and move on. These challenges could create more volatility and therefore more gains if you are frequently buying low and selling high, using the volatility to your advantage.
Now that delisting is no longer a concern, another challenge in the headlines is Howard Stern’s contract. The consensus is he will return so if he does not, this could spell trouble for the short-term stock even though I do not view Stern as a significant benefit to SIRI’s business if he is paid another $100 million a year. The advertising he brings to SIRI is beneficial but it is not the main source of revenue so the loss of him is less damaging in my eyes.
SIRI would definitely lose some customers if Stern left but many would find reasons to stay. Nobody talks about Stern that much anymore as shock-jocks are far more frequent today. I view his show as more of a luxury to some than a necessity whereas when SIRI first started, he was the main reason to have the service. Now SIRI has everything from MLB to Oprah Winfrey to completely diversify its services and reach the taste buds of a wider audience.
I fully expect if Stern left, that it would put short-term pressure on the stock and actually, I would consider that a benefit for us longs. We would be able to acquire cheap shares once again for better profits when SIRI overcomes Stern’s departure, assuming he leaves in the first place. However, I do not foresee him leaving nor do I foresee SIRI overpaying him once again. This should be a somewhat non-issue but still a potential challenge to monitor closely.
The economic recovery is another challenge to monitor closely and is my main concern. Auto sales have been nothing short of impressive and we are currently hearing economic recovery being proclaimed at every corner. However, I do not believe economic recovery is guaranteed for the entire year. My concern is geared towards late this year but it is still a challenge that SIRI may face short-term. Keep an eye on auto sales as unimpressive numbers may not devastate SIRI financially but the stock would surely take a hit from the panic.
I could also discuss, at length, challenges such as long-term debt, the significant increase in outstanding shares to 6.3 billion from 3.5 billion a year earlier, and the fact that SIRI cannot increase prices until around July 2011, due to the merger requirements. For the sake of keeping this article short, I will not belabor on these subjects. SIRI is actively paying off debt, which is hurting their short-term financials and prohibiting them from reinvesting that capital into the business but will be ultimately beneficial.
A price increase was probably not on the table to help, even if they were allowed to so do. We all expected to be in this situation and they do not have any short-term debt that is currently detrimental therefore it is not much of a concern to me. Liberty Media (LCAPA) could also be setting up a buyout soon and I do not necessarily consider that a bad thing but I would prefer them to hold off as the volatility we should see in SIRI will create many opportunities to profit from. Now let’s move onto the positives in SIRI.
Most of the positives are well-known and have been repeated frequently so I will sum them up rather than go into detail. The company's monthly customer churn rate decreased to 2% in the first quarter from 2.2% in the same quarter last year. The rate of customers who convert from a free trial to paying for service rose to 45.2% from 44.6%. These are solid numbers as SIRI benefited from the music royalty fees it passed onto some customers yet it did not deter the positive momentum in those figures.
As expected with the merger, SIRI now was able to spend less on advertising for new customers. Even TheStreet.com noticed the improved fundamentals and upgraded SIRI from sell to hold. To further improve fundamentals, the auto sales have been strong and are expected to continue.
If the economy does continue to improve and auto sales continue along that same positive trend, SIRI will only continue to amaze. With the used car sales starting to gain traction in helping SIRI obtain new customers through reaching a wider demographic, the long-term prospects continue to be solid. As they aggressively pay off more debt, the financials will start to strengthen. As a result, this will make SIRI more attractive to institutional buying.
Guidance was still conservative but SIRI is on pace to easily beat it. A continued track record of beating guidance is a benefit while keeping them protected from promising too much. In an economy like this, I am glad Karmazin does not feel pressured to raise guidance to levels which could be regrettable down the road. Currently, SIRI has guidance of 500,000 new subscribers this year and already added 171,441 in the first quarter. Karmazin is staying in control and not letting the analysts dictate the guidance he should provide, a quality many admire.
Delisting is a concern of the past. SIRI has fulfilled the Nasdaq requirements so the shorts will have a harder time finding reasons to bash this stock. As long as the economy does not crash, the positives in SIRI should easily outweigh any potential negative setbacks.
In summary, I am very happy about what we saw this quarter. I actually did not expect it to be as strong as it was so I am very pleased. However, the overall market is a concern to me as I do not feel economic recovery is guaranteed by any means.
As someone with a blended style of investing/trading, I am excited at the volatility I foresee in SIRI. I believe the short-term ceiling is around $1.40, barring any type of buyout from Liberty Media, which is definitely possible. With that being said, I see the potential for profitable trades around my core position, which is always a plus. As long as the auto sales continue to impress and the economy at least trends in a positive direction, SIRI has a great future. Just keep an eye on this economic recovery and how it relates to auto sales. Used cars will be a strong long-term catalyst but less of a factor for short-term as it is still ramping up.
Keep your eyes peeled for any type of buyout news from Liberty, as I feel we are inching close to that being likely. Also, keep your eyes peeled for news around Howard Stern’s contract. A surprise fallout with Stern should create a favorable buying opportunity due to shares being pressured.
Long-term, I do not expect Stern to be much of a factor but the buyout would be. I expect a buyout to be a positive move in the long-run but short-term, I want to capitalize on SIRI in a trading environment utilizing the experience I have with this stock. The day Liberty buys SIRI out, it becomes a fresh slate for SIRI and the mentality will be completely different.
As always, do your own homework to see if you agree. Good luck out there.
Disclosure: Author is long SIRI but positions may change at any time