Sirius XM (SIRI) has had some impressive numbers for the last several quarters. The company has exhibited great cost controls while finding ways to improve the balance sheet at the same time. The street has noticed this, and the share price of Sirius has appreciated substantially.
In the Q1 conference call, CEO Mel Karmazin stated:
I think the only timing that we have announced (re:price increase) and I think we're going to stick with that is that the FCC's restriction or our voluntary offer (three-year price cap) to the FCC expires the end of July. And that's the only date that we're prepared to comment on right now.
His comments regarding a potential price increase was not a matter of if it would happen, but when. The assumption was sometime this year. That news changed a bit with a proposed settlement in the Blessing vs. Sirius XM lawsuit, which has Sirius XM continuing a price freeze throughout 2011.
Now that the street has digested the issues surrounding a price increase, it is time to look at another nugget of information from Sirius XM's Q1 conference call. During the call, Sirius XM essentially kept existing guidance in place with the exception of raising free cash flow from "approaching $300 million" to "approaching $350 million." What the company did say was that due to the disaster in Japan, it was holding off on changing guidance until it could get a better handle on the potential impacts in the OEM supply chain.
Before going any further, it is important to understand what existing guidance is:
- Full-year revenue of approximately $3 billion.
- Adjusted EBITDA projection of approximately $715 million.
- Full year self-pay churn similar to that seen in 2010.
- Net subscriber additions of 1.4 million.
- Free cash flow in 2011 should approach $350 million as compared to previous guidance for free cash flow approaching $300 million.
During the conference call, Karmazin painted a win/win scenario:
If they (OEM partners) encounter no serious issues as an industry (due to Japan disaster), we may deliver more subscribers in 2011 than we are currently forecasting. If they encounter difficulties and auto sales are lower than we anticipate, we will deliver more adjusted EBITDA than we anticipate to date as our SAC will likely be lower.
A few weeks have passed now, and May auto sales are anticipated over 1 million, but with a Seasonally Adjusted Annualized Rate rate lower for the first time in months. On its face, and based on the now-anticipated May auto sales, this would seem to indicate that Sirius XM will be increasing the EBITDA guidance and leaving the subscriber guidance in place. However, the analysts that follow the auto industry have essentially left their overall 2011 sales estimate of 13 million cars in place, lending merit to the argument that it is the subscriber number that will be adjusted upward.
Sirius XM will likely be announcing Q2 results during the first week of August. At that point it will certainly have auto sales for June and July in hand and should be able to adjust guidance at that point. It is always possible that it makes an adjustment ealier after it digests the June numbers, which should have some flavor by the third week of the month.
Given that the current guidance is good already, the fact that some metrics will get upgraded is great. If 2011 does deliver the 13 million in auto sales that is widely anticipated, we should see Sirius XM increase the subscriber number to somewhere in the neighborhood of 1.7-1.8 million sometime in the coming months. That would be impressive.
What investors are not anticipating at this point is that there is a distinct possibility that the company can increase both the subscriber and EBITDA guidance. The company reported 375,000 subscribers in Q1. Multiply that by 4 and you get 1.5 million, already 100,000 above its guidance of 1.4 million. As we all know, Sirius XM typically has strong quarters later in the year.
A similar exercise can be applied to EBITDA. In Q1, Sirius XM reported EBITDA of $181 million. Again, with simple math we could anticipate $724 million in EBITDA in 2011, already above the $715 million that the company guided for. We do need to understand that certain quarters impact EBITDA more than others due to costs, but overall, the company is able to grow EBITDA throughout the year. It would not surprise me to see Sirius XM adjust EBITDA guidance up to "approaching $750 million."
Given that the auto sector's overall numbers will not change substantially one way or the other, it is reasonable to think that the company is well positioned to increase guidance in both subscribers and EBITDA. This would be a relative double positive, in that at this point the street is already happy with the guided performance and the possibility that only one metric will be raised. Another indication that the company has the wiggle room to increase EBITDA was that it already increased the Free Cash Flow (FCF) guidance by $50 million. Some thought it odd that FCF was increased while EBITDA was not adjusted.
Knowing the numbers, and knowing what May delivered in car sales, gives me confidence in my thought process that we will see two metrics in the guidance updated instead of just one.