Sirius Reports Earnings, Investors Vindicated With No Sell-Off

| About: Sirius XM (SIRI)

"We are very pleased to report another strong quarter of subscriber revenue and adjusted EBITDA growth together with improving margins and increasing cash flow. We added 118% more subscribers in Q1 2011 than in Q1 2010. Net subscriber additions of more than 373,000 represented the strongest first quarter subscriber growth in the 3 years since Q1 2008.

These were the words to Mel Karmazin, CEO of Sirius XM (NASDAQ:SIRI). This told you all you needed to hear in his opening remarks during the conference call. Everything else as my good friend “headybaldguy” likes to say “was vindication”. And by the market’s reaction, “vindication” it was.

The day that we have all been waiting for has finally arrived. Sirius XM Radio just announced first quarter 2011 earnings. The company missed analysts’ Q1 consensus revenue estimate slightly but met expectations on the bottom line. However, they surprised me by raising free cash flow estimate by an additional $50 million to what is now $350 million for the year. Overall, I’m still taking some time to let it all digest, but I have to say that I was very impressed with the company’s results and felt that Mel did a superb job this quarter. There were several things that stood out during the call and I will attempt to highlight a few of them here.

First and foremost, Sirius reported higher Q1 revenue as it added more listeners. However, it said supply chain uncertainty in Japan would affect car sales and likely hurt its subscriber growth for the year. I think this is a pretty important disclosure and it’s something investors should monitor. I was amazed to hear that It added 373,064 subscribers in the quarter, bringing its total subscribers to an all-time high of 20.6 million. The 373k additions represent the strongest 1st quarter growth since 2008. This continues to be an example of remarkable managerial execution in light of where the company was just a brief two years ago. The gross subscriber additions were up 19%. This was reportedly due to higher OEM sales and reactivations.

I was a little disappointed however, that management chose to maintain its original 1.4 million subscriber expectations that it guided during the fourth quarter. But this is understandable, considering the statement that followed by Mel Karmazin. He said:

If it were not for car supply chain uncertainty resulting from the tragedy in Japan, we would be in a position to raise our subscriber guidance.

So in light of that uneasiness, I would have to offer Sirius a pass on this one. However, many investors (including myself) were expecting the company to raise subscriber projections and this has to be viewed as somewhat of a disappointment. The company said it is on track for its full-year revenue to be about $3 billion this year, which is slightly shy of analysts' estimates of $3.07 billion. But I suspect these numbers will at some point be revised as well.

On the positive side, it reported net income of $78.1 million, or 1 cent per share; a significant increase from $41.5 million, or 1 cent per share last year. While adjusted earnings per share was 4 cents compared to a loss of 1 cent a year earlier, revenue rose 9 percent to $723.8 million. I think the revenue figure may be perceived as a disappointment since analysts were expecting revenue of $736 million, but when compared to 2010 Q1 revenue of $664 million, investors can appreciate it a little bit more. This fact also applies to its report of $181 million in adjusted EBITDA; which is up 15% from $158 million in the first quarter of 2010.

Metrics that matter

Let’s look a little more closely at the company’s key metrics. As noted, due to strong auto sales, subscription numbers was one of the pleasant surprises. It reported net subscriber additions in the first quarter of 2011 to 373,064, which was up 118% from 171,441 in the first quarter of 2010. Ending subscribers as of March 31, 2011 were 20,564,028, up 9% from the 18,944,199 subscribers reported as of March 31, 2010.

Subscriber acquisition cost (SAC) per gross subscriber addition was reported at $57 in the first quarter of 2011, a 3% improvement from the $59 reported in the first quarter of 2010. I was somewhat disappointed in that number as I was expecting $55 to $56, but $57 is an improvement nonetheless. The average self-pay monthly customer churn was 2.0%, which was in-line with the first quarter 2010 number.

Sirius ended the first quarter with $434 million of cash and cash equivalents after deploying approximately $135 million to repurchase debt. In April, the company repurchased approximately $74 million of its 3.25% Convertible Notes due 2011 via a cash tender offer. According to Sirius's Executive Vice President and Chief Financial Officer, "We continue to make progress toward reaching our leverage target. Our net debt to adjusted EBITDA declined to 4.1 xs at the end of the first quarter of 2011 from 6.6 xs at the end of the first quarter of 2010."

2011 Guidance

By and large, other than the increase of 50MM in FCF, the company’s outlook for 2011 remained unchanged. Sirius continues to expect full-year revenue of approximately $3 billion. Adjusted EBITDA projection remains at approximately $715 million. Full year self-pay churn and conversion rates for 2011 should be in-line with 2010 figures and while net new subscriber additions for 2011 remained unchanged at 1.4 million.


I have to say this was one of the best conference calls that Sirius has produced. Though I was somewhat disappointed by the vague mentioning of Sirius 2.0. Mel dropped some hints as to the company’s plan to in fact raise its base subscription rate at some point this summer upon the FCC-imposed price freeze. He also left some very interesting nuggets just before the call wrapped up. He was quoted as saying:

... right now, if we were at a board meeting today and we had this end of year cash on hand, I would be telling the board that we don't see anything out there that we would want to acquire and we should invest in the business and I would be inclined to think about a stock buyback.

This should be an indication of where the company feels its model is going. The stock reacted favorably and reached another new 52 week high of $2.09 as of 2PM Tuesday 5/3.

For those of you keeping score at home, to stay in-line with my own trading strategy, I sold my SIRI position on Monday 5/2 at a price of $2.02. I missed out on an extra 7 cents, but I learned that in order to make money, one has to be fearless and be willing to leave money on the table. I will re-evaluate once the dust settle a little bit. Right now let the longs rejoice, as it is well deserved!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SIRI over the next 72 hours.

Additional disclosure: I have no positions in any stocks mentioned, but author may initiate a long or short position in the next 72 hours