Back in January, Liberty Media (LMCA) chairman John Malone put up a $3.68 per share bid to buy the remaining portion of Sirius that Liberty does not already own. Essentially, Malone offered 0.076 shares of Liberty for each outstanding share of Sirius XM that Liberty didn't already own. With a 53% stake, Liberty already owns a majority of Sirius.
At the time, this offer represented a 3.1% premium to Sirius' closing price of $3.57. Given that this offer was (at the time) 12% below Sirius' 52-week high of $4.18, the offer was far from appealing. But with the stock trading down to $3.00 recently, investors are beginning to wonder if they wouldn't be better off had they accepted the offer. But the way I see it, the time to fret is over. And Sirius has (surprisingly) Pandora (NYSE:P) to thank. But I'll get to that later. For now, the good news.
On Thursday, the satellite radio reported results for the first quarter that showed strong growth in revenue, which topped analysts' expectations. Revenue jumped 11% year-over-year to $997.7 million. Note, consensus estimates called for revenue of $995 million. The surge was helped by an 8.7% increase in subscriber revenue, which advanced to $851.4 million. Remarkably, this was Sirius' ninth consecutive quarter of double-digit revenue growth. There aren't many companies on the market today that can boast this streak.
The company ended the quarter with 25.8 million total subscribers, which is more than 6% higher than at the same point a year earlier. For the quarter, Sirius posted 266,799 net subscriber additions. While growth of any kind is good, this figure, which was 11% shy of our 300K estimate, was somewhat weak. But the company offset this with a slight dip in churn, which registered at 1.9%.
In terms of profitability, the company posted a net income of $94 million. Again, any profit is better than a loss. But this, too, was weaker than our estimates. This represent a 24% year-over-year decline. Last year, Sirius earned a profit of $123.4 million. On a per-share basis, earnings were flat, at two cents. Management said that this was due to a one-time adjustment related to its Liberty Media stock buyback agreement. The figure also reflects an adjustment from Liberty backing out of the January deal.
Now, the bad news, operating expenses for Sirius continues to grow - this time, to the tune of 15% year-over-year to $750.3 million. This, more than anything, impacted the company's profitability, which has lead to critics questioning Sirius' business model. Royalty payments, which also impacted Pandora's earnings Thursday, continue to take a significant chunk off the bottom line.
The other issue is that Sirius pays a lot in subscriber acquisition costs. And given that subscriber growth was (relatively) weak this quarter, it begs the question if the company is getting a good enough return on these costs. Last month, Sirius was cheered after announcing that it will resume its share-repurchasing program, which was placed on hold pending the buyout offer from Liberty.
From the previous repurchase program, Sirius is now scheduled to buy back 93 million shares from Liberty on Friday for $340 million. Note, this will leave the company with $1.7 billion on its buyback authorization. While this is good news for shareholders, it does raise questions as to whether this is the best use for the company's cash, given its debt load of $3.6 billion.
All told, this quarter was a mixed bag of both good and bad bullet points, which now leaves that all-important question; What's next?
As I hinted above, I think Pandora's downfall will eventually become Sirius' gain. Pandora is demonstrating that "free" doesn't always work. With Sirius' ability to grow both cash and subscribers, Sirius, which is making inroads in the connected car, will become an acquisition target. While the business model remains a serious question, Sirius has content and the reach unlike any other company. The only question is, how much will it take for Malone to let go of the leash, say, if Apple (NASDAQ:AAPL) were to make a phone call?
This is the time for Sirius investors to start asking themselves these questions. Back in January, there was a resounding "No" to Liberty's offer. But no one could really explain what Sirius was worth. Liberty offered $3.68. Sirius recently dropped to $3.00. So, it's unfair to say that Liberty "lowballed." It would seem it was smart. Now if Apple, which has begun to take its own position in the automobile, were to offer, say, $4.50 or $4.75, which would be 25% to 30% above Liberty's $3.68 offer, would Sirius investors accept it?
For now, with Sirius stock trading at around $3.13, investors have to expected these shares to reach $3.50 in the near term and possibly $3.70 by the second-quarter conference call. The shares bottomed at $3.00, and analysts who rushed too soon to come to Sirius' defense with high price targets will appear more credible. This time, a buyback will help.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.