Sirius XM Continues Conservative Path Upward

Feb.10.12 | About: Sirius XM (SIRI)

Yesterday, Sirius XM Radio (NASDAQ:SIRI) announced earnings results for 2011 and their guidance for 2012. Immediately following the conference call articles were everywhere with too many negative headlines to mention. Almost every one of them said Sirius did not meet expectations. It made me wonder if I had listened to a different conference call than the rest of the world.

So, in the interest of clarity and so that I will not be accused of putting a "bull spin" on the results I will quote CEO Mel Karmazin:

We are very pleased to report our 2011 results met or exceeded the guidance we gave you at the beginning of the year, and I'm even more excited about our prospects for accelerating revenue and adjusted EBITDA growth in 2012. We expect to deliver a very good year across the board in 2012. In 2011, we delivered the best year of subscriber growth since the merger of Sirius and XM by adding 1.7 million net new subscribers. Revenue reached a record of over $3 billion. Adjusted EBITDA climbed 17% to a record $731 million, beating our guidance of $715 million. Free cash flow essentially doubled to a record $416 million, beating our forecast of $400 million.

What part of this am I supposed to be disappointed with? I will admit that when Mel gave the guidance for 2012 I was disappointed in the fact that the company is forecasting only 1.3 million net sub additions for an all time high of 23.2 million by the end of 2012. However, even with this extremely prudent sub guidance the 2012 revenue is expected to be $3.3 billion up 10% and the adjusted EBITDA is expected to come in at $875 million up 20% (this is up $15 million over previous 2012 guidance).

2012 fcf is expected to be $700 million up 70%. So that means if the subs are higher than 1.3 million the revenue will also be higher than this guidance. I have said in the past, and I am sticking to it, that the subs for 2012 could be over 2 million which will add millions of additional dollars to the bottom line.

One thing we need to remember is that these are net sub additions. These are not subs that will be taken away. Several articles have said that the 2011 subs (1.7 million) are baked into the current stock price. And yes they definitely are. But we must remember the guidance is saying that these will still be there next year in addition to 1.3 million more. In other words, the subs continue to spiral upwards.

And the stock price continues to spiral upwards along with these sub numbers. Even though Sirius XM stock is considered to be very volatile it still continues onward and upward. You really notice it when you back away and look at the price over the last 3 years since the merger. The graph below shows the stock compared to Apple (NASDAQ:AAPL) and the Nasdaq. This represents all the sub net additions and subsequent revenue from the past three years that have been "baked in". Although some investors think it is progressing too slow, Sirius XM stock will be over $40.00 per share in three years if it continues at this same rate.

As far as what the company plans to do with the $700 million in fcf, in 2012 Mel said:

There is an opportunity for the Board of Directors to consider a return of capital to shareholders beginning later this year. The board has not taken up this topic, so obviously no decision has been made as yet.

Frear went on to say:

Based on this guidance, the company's liquidity profile will improve dramatically. Cash will expand to nearly $1.5 billion and net debt to EBITDA will fall to about 1.8x. During the course of the year, we will begin to evaluate returning capital to shareholders through dividends or stock buybacks. We expect to discuss our plans with you later in the year.

There are many who think the money should be used to pay down the debt. But listening to the call it is apparent that is not part of the plan. The consensus seems to be that the earnings will become so high that they will out shadow the debt which will continue to shrink with lower interest rates. If there is some sort of return of capital to shareholders the stock will react positively.

In summary, there were a lot of good things in this call. But the biggest disappointment might actually be the most positive thing in the long run. If the company can make 10% more revenue and 20% more adjusted EBITDA on 24% less net sub additions then this actually might be good news. And in spite of some disappointed investors the stock closed unchanged yesterday at $2.19. It will probably continue its volatility as it continues upward which will provide some buying opportunities.

Disclosure: I am long SIRI.