Sirius XM Continues Strong Business Trend, Must Overcome Liberty Media Situation

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) reported solid earnings on August 7th, and the stock is up 3.6% at the time of this writing to $2.28 per share. Record subscriber and free cash flow growth fueled results. Subscriber additions improved 28% year over year to 463,000 for a total base of 22.9 million subscribers, an all time high. Meanwhile, churn rate of 1.9% is flat. But the headline EPS number of $.48 per share is not quite comparable to analyst expectations of $.02. The reason: a near $3 billion tax credit impacting the bottom line. If we back out the tax gain, EPS is actually at $.02, in line with analyst expectations.

Moving beyond the headlines is essential for any quarterly review, and a breakdown of important lines from the income statement (and balance sheet and cash flow statement) issued can be helpful and allow investors to develop a deeper picture of the company's competitive position:

Q2 2012

Q1 2012

% Change





EBIT (Operating Income)




Operating Margin




Income Before Income Taxes




Here, revenues and operating income are the most important items, as the company is illustrating that it is still growing strongly with significant gains in total revenues and operating income.

Operating margin has increased. Costs to operating expenses have increased but not as much as revenues have grown, with much of the increasing costs stemming from revenue sharing and royalties expenses, subscriber acquisition costs, and slighter increases in sales and marketing and general and administrative expenses. All of these increases appear normal to me, as the company continues to grow it will cost more to gain more customers on the margin, and as such marketing and subscriber acquisition costs should naturally increase. Revenue sharing and royalties' expenses are related to improving the product by creating more offerings, and this also lures more customers in. These three items should in turn be fueling that higher revenue growth. Finally, SG&A will go up as the company grows, but be wary of continually increasing or large SG&A expenses.

Income before income taxes decreased on a comparative quarter basis, largely due to an $80 million investment income in Q2 2011 compared to Q2 2012. Secondly, total other expense in Q2 2012 was -$90 million, compared to income in this metric of $3 million in Q2 2011. Looking back at Q2 2010, the other loss was also a large negative (108 million) and in Q2 2009 it was -$195 million, so Q2 2011 was a one-time event creating comparison issues. I've chosen to omit net income due to the dramatic variance based on the tax benefit.

Beyond the income statement, free cash flow has grown significantly and the company continues to build its balance sheet. Some analysts may note that no further stock buybacks or dividends were referenced, but I believe that Sirius paying down its debt and deleveraging some of its business is a sounder business move and will create higher EPS for Sirius investors in the long-term. The company has been improving its balance sheet, and pocketing cash, as illustrated below:

Cash and Cash Equivalents Absolute Gain Percent Gain from Prior Period
2007 $474,000,000 - -
2008 $380,000,000 -$94,000,000 -19.83%
2009 $383,000,000 $3,000,000 .79%
2010 $587,000,000 $204,000,000 53.26%
2011 $773,990,000 $186,990,000 32.86%
2012 $868,330,000 $94,340,000 12.19%

Recent declines in absolute and percent gains can be attributed to utilizing free cash flow towards other business means (such as paying down debt). The important note is that the company has been improving the cash position while handling other business matters well and reducing liabilities and leverage.

Moving forward, Sirius XM notes that it has recently begun providing the new Sirius XM On-Demand service to subscribers over the internet and smart phones. Included in this offering is a personalized music feature offered through these channels, slated to begin by the end of the year. While improvements can be made in the app, the company is creating loyal customers by allowing more and consistent access to content, even when the customer does not have radio access.

Significantly, Sirius is paying down its debt (recalling debt due in 2015 on September 1st), which will help reduce interest expense in the long-term and will deleverage the company to 3 times its EBITDA, a significant drop from prior 4.4 times EBITDA levels. Keep in mind that auto sales will continue to impact the company, evidenced by the fact that in this quarter Sirius was boosted by strong auto sales, increasing inventory of the radios by 400,000 to 6.1 million, or a 14.25% boost.

Finally, and importantly, the company has increased 2012 guidance. Through increased subscribers, Sirius anticipates revenues of $3.4 billion, EBITDA of $900 million, and free cash flow of $700 million. While this is an increase compared to company guidance, it is largely in line with analyst predictions of $3.4 billion revenues for 2012. However, it is important to keep in mind that Sirius generally keeps its estimates on the low-end, so revenues may be higher and beat expectations.

All of this indicates growing business momentum and strength, but investors must keep in mind the ongoing frustration plaguing the stock through Liberty Media (LMCA), which owns 46.2% stake in Sirius XM. The varying outcomes stemming from how Liberty Media could influence the stock price and company have weighed heavily on the stock. For those unfamiliar with this dilemma, Seeking Alpha Author New Orleans explains the concept and potential impact of a Reverse Morris Trust well, and Spencer Osborne clearly defines many of the options Liberty has in its pursuit of Sirius.

In sum, the recent earnings release spells good news for Sirius XM. Moving forward, investors can expect solid earnings momentum, as Sirius creates customer loyalty through online and app capabilities and continues to attract subscribers. This is also indicated by Sirius increasing its guidance for the year. Despite a strong and growing business, the stock has its own issues stemming from the situation with Liberty Media and the implications of a Reverse Morris Trust. Ultimately, investors must be aware and at least have some knowledge of the range of outcomes for the stock, as there is a lot of unknowns and variability stemming from Liberty Media. If investors are comfortable with the range of outcomes created by Liberty Media's potential choices regarding the stock, then the underlying business strength illustrated by Sirius makes a strong long case as a growth play. Based on the recent momentum of the stock, I believe that the highs of April ($2.40 per share) can be tested in the near-term, which represents a 5.26% upside from the current price of $2.28.

Disclosure: I am long SIRI.

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Tagged: , Broadcasting - Radio, Earnings
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