Sirius XM Reports 2011 Results: Were Investor Expectations Too High?

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) reported their 2011 results today and while the numbers did well, we have a mixed bag in terms of the street. The company hit revenue guidance, but missed street expectations slightly. They hit EBITDA and beat on Free Cash Flow, but projected a nearly a 20% drop in subscriber additions for 2012. The call went well, and CEO Mel Karmazin said the right things, it's just that this company has not managed to catch up to street expectations across the board, and has fallen well short of some investor expectations.

I do not want to pick on an individual reader, but I will say that this reader had the guts to post his expectation. Many passionate Sirius XM investors shared this viewpoint as to what to expect prior to earnings being announced:

Q4 2011

Revenue - over $800M
EBIDTA - $210-$220M
fcf - over $200M
profit - 3 cents a share

Churn 1.7%
ARPU $11.87
Conversion Rate 47%
SAC $53

2012 Guidance

Revenue - $3.35B
EBIDTA - $900M
fcf - $720M
profit - 12 cents a share
subs - 1.75M

The natural question now is whether or not investors with these types of expectations are disappointed with what they heard today. What I will term as a pretty typical SIRI bull saw the following on 2011 numbers:

  • A miss on revenue by $16 million
  • A miss on EBITDA of $43 to $53 million
  • A miss on Free Cash Flow by at least $10 million
  • A miss on EPS by 2 cents per share

That represents misses across the board. Were expectations too high? I would certainly say so. I oft receive a lot of criticism for being "overly bearish" from the passionate Sirius XM longs, but am I really being bearish, or simply realistic?

We can now shift to what a typical long term SIRI investor was expecting in guidance for 2012:

  • This investor was seeking guidance on revenue of $3.35 billion. The company put up a number of "approximately $3.3 billion. Certainly in the same ballpark
  • Expectations are $900 million in EBITDA. The company announced $875 million. Again, in the same ballpark, but the investors are seeking more than the company is offering.
  • Investors are looking for FCF guidance of $720 million. The company offered up $700 million
  • Investors were seeking subscriber guidance of 1.75 million. The company announced a goal of 1.3 million

This once again begs the question. Am I a bear or realistic? Better yet, are many Sirius XM investors seeking too much?

For my part, I outlined the following estimates:

  • Revenue of between $784 and $791 million. The company announced $784
  • EBITDA of between $180 and $190 million. The company announced $167
  • 2011 FCF of between $360 to $375 million. The company came in at $414
  • Churn at 1.8%. The company came in at 1.9%
  • ARPU at $11.73. The company came in at $11.61
  • Conversion rate at 45.2%. The company came in at 44%
  • SAC at $54. The company came in at $55

The bottom line here is that it is now time for Sirius XM to measure company performance and expectations against where you thought the numbers would be. I would venture to say that many of those who wanted these great numbers will not discuss any disappointment and will find a way to spin the results to something favorable. These people would say that my expectations were all within a reasonable margin of error, and instead of being bearish, are in line with what happened. In many ways I only come across as bearish to the most bullish of investors.

The big red flag in this report was the subscriber guidance for 2012. The company is anticipating only 1.3 million net additions, down from nearly 1.7 million in 2012. They are reporting this despite the fact that about 1 million more cars are expected to sell this year as compared to last.

Subscribers are the company's bread and butter. Yes the company will get more money out of each subscriber with a price increase, but they are now bringing fewer subscribers into the fold. It will certainly be interesting to see how analysts have to change their models based on this information.

In summary, there are many lessons to learn here. Sometimes tempered enthusiasm is warranted. Sirius XM longs who were highly critical of Barclays analyst James Ratcliffe for putting out a $2 price target ahead of earnings and calling him an idiot would appear to be off base. As I have stated, although Ratcliffe may be too conservative, what he offers in his opinion should be used to help temper enthusiasm that sometimes gets people thinking too bullishly. Investors that were looking for a "lock" across the board suffered and saw expectations dashed.

There is a sensativity to headlines. Reuters reported a revenue miss based on Street expectations. The fact is that coming in $1 million shy is a miss, but did the headline reflect the quarter? No, it did not. However, there are several bullish headlines that are off the mark as well. Sirius XM had a good quarter, and is expecting a good year in 2012. Let's not get carried away. Good is good, but not great. Great is hitting everywhere, and setting and meeting expectations that are above the street.

Disclosure: I am long SIRI.