SiriusXM Radio (SIRI) will release earnings and hold its first quarter conference call on Tuesday, May 1st. Is there any significance to choosing May Day? It's International Workers' Day, commemorating the 1886 riots in Haymarket Square in Chicago. It's the celebration of the arrival of Spring. It's the day when the old Soviet Union would hold massive parades demonstrating their military prowess. It's the day when, as a third grader, our class danced a round a May-pole. It's a call sign used by pilots when a plane is in trouble.
Sirius management probably had none of these events in mind when the date was selected for this quarter's release. Will the earnings be a cause for Sirius investors to dance around and celebrate? Will the numbers be viewed as a disaster? Something in the middle? Last May was the month in 2011 when Sirius reached its post merger high of $2.44 per share. Is this likely to happen this year?
Anything is possible. The share price appears to move sharply on good news, bad news, rumors and no news. During the month of April the shares have traded as high as $2.41 and as low as $2.11. This occurred with news of the dismissal of the Howard Stern lawsuit, FCC filings over Liberty Media's (LMCA) request for de facto control of the Sirius licenses and the start of CEO Mel Karmazin's planned sale of 60 million of his Sirius shares as a backdrop.
There is a question investors must ask themselves. What news could Sirius release that would significantly move the share price?
Many are expecting subscriber guidance to be raised. After all, so many factors are pointing to a strong quarter, including high penetration rates, robust new car sales and a used car program that should start adding subscribers. There are also the Lynx, an improved smartphone app and additional stations targeted to the Hispanic market. Karmazin stated the subscriber guidance was conservative and that the impact of the price increase on cancellations was "very modest."
But if investors are expecting subscriber guidance to be increased, an increase may only have a very modest impact on the share price. And if subscriber guidance is not increased, the effect on the share price should be negative. This raises the question of how much of an increase is enough. It's a case of Goldilocks and the Three Bears where the collective wisdom of the market is trying to price how many new subscribers are "too hot" or "too cold" and determine the number that will be "just right."
Karmazin, like many CEOs, has repeatedly set low hurdles and the market knows this. The expectations of the market have been re-set to the point that Sirius must exceed guidance to justify the share price. Failing to exceed guidance and hit a "whisper number" becomes bad news.
The subscriber numbers are critical because they are the primary driver of revenues, earnings and free cash flow. I expect the number of net adds in the quarter will come in significantly greater than 325,000 (a figure that's 25% of the full year guidance of 1.3 million), and that the guidance will be raised. I also expect that management will not raise guidance enough to satisfy the market's expectations.
As noted above, subscribers eventually drive the revenue. Sirius revenue guidance for 2012 is $3.3 billion, an increase of only 10% over 2011. This is despite a price increase of nearly 12% in the basic monthly subscription fee that began phasing in on January 1st. In addition to the price increase, there was an increase in the number of subscribers by 8% during 2011 and a projected increase in the number of subscribers by 6% in 2012. This means that there will be, on average, 7% more subscribers and a phased in 12% price increase generating the incremental revenue of $300 million this year.
Clearly, it takes a lot to move the top line number. It also takes a lot of things to go wrong to miss the top line. Sirius already has received 40% of the $3.3 billion in the form of prepaid subscriptions.
I expect that there will be questions during the conference call about a number of issues and there will be no answers forthcoming. These include:
- The lawsuit against SoundExchange - Management will say they have been advised by counsel not to comment with regard to ongoing lawsuits.
- The issue with Liberty seeking de facto control of the FCC licenses. Management will simply respond that they are a valuable asset of the company and Sirius intends to vigorously protect the asset.
- The use of cash. There may be a statement about calling the 9.75% note in September. Other than that, there will be a statement that the board has had no discussions or that the board has yet to reach a decision.
- Has Liberty opened discussions about acquiring the company? There are a variety of noncommittal answers that are possible, and there will be no revealing answers.
I expect to see subscriber figures that are trending above 1.3 million net adds. It's a number that the company has been able to manage in the past with the use of retention discounting, and this year should be no different. There also should be no surprises with Q1 revenue. However, if management does not increase subscriber guidance, investors could see the share price come under selling pressure.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I have no position, or any plans to open a position in the next 72 hours, in Liberty Media