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Sirius XM Radio (Nasdaq: SIRI ) opened 6% lower this morning, after hosing down a reasonable quarter with uninspiring guidance for the year ahead.
The quarter itself was solid. Revenue climbed 9% to $736 million. Sirius XM mustered a profit of $0.01 a share after backing out charges related to debt extinguishment and satellite gear restructuring. Free cash flow climbed 11% to $167 million.
That showing met Mr. Market's expectations -- but the satellite radio provider's initial outlook for 2011 sadly did not. Sirius XM expects revenue of approximately $3 billion, and adjusted EBITDA of $715 million.
Revenue growth of 6% falls short of analysts' predictions. EBITDA growth of 14% also feels light relative to the ballyhooed synergies. When you command an enterprise value approaching $15 billion, there isn't a lot of room for ho-hum guidance.
I had three questions heading into the report. Let's see whether they all received answers.
1. How are subscribers holding up?
Sirius XM hit 20 million subscribers at the end of November, so surpassing its earlier target of 20.1 million would be no surprise. The satellite radio star fared slightly better, tacking on 328,789 net new subscribers to close out the year with nearly 20.2 million accounts.
The media giant's weak top-line guidance hints at slow growth in the near term, but we'll cross that bridge when we get to it.
Sirius XM issued conservative guidance at this point last year for 2010. It wound up far exceeding its original expectations.
2. Are streaming accounts finally moving the needle?
Sirius XM is no longer tied solely to its specialized receivers. The company has been selling streaming subscriptions for Apple's (Nasdaq: AAPL ) iPhone, Research In Motion's (Nasdaq: RIMM ) BlackBerry, and devices fueled by Google's (Nasdaq: GOOG ) Android operating system since 2009.
Yet the company's always faced a tough challenge here: getting consumers to pay for streaming content when Pandora and its smaller cloud-based music rivals are available cheaply, or for free. Howard Stern's new five-year deal with Sirius makes his show available in streaming form this year, which will hopefully lure in more paying customers.
I was hoping for a little clarity on whether streaming accounts have started to take off, but Sirius XM didn't offer any hard data there. Once again, the light revenue guidance indicates that Sirius XM is isn't expecting a whole lot of stand-alone subscribers to pay $12.95 a month for streaming, or for existing receiver-based accounts to pay an additional $2.99 for smartphone streaming.
The marketplace is changing. CBS' (NYSE: CBS ) last.fm will no longer be available for free through smartphones and home-entertainment devices. Pandora's upcoming IPO may force it to embrace premium subscriptions from more of its users to drum up more tantalizing financials. In that light, Sirius XM and its top-tier content could have a better chance to stand out from the crowd.
3. How's the model holding up?
Sirius XM investors know to keep an eye on the auto market. All of its growth is coming from new auto sales; the fourth quarter delivered yet another quarter of net defections on the retail side.
It's not a surprise that Sirius XM suffered its darkest days in early 2009, when the auto industry bottomed out. As soon as Ford (NYSE: F ) , General Motors (NYSE: GM ) , and rival carmakers began to bounce back during that summer's "cash for clunkers" rebate program, Sirius XM's fortunes also shifted out of reverse.
The one troubling metric in Sirius XM's fourth quarter is that its conversion rate -- the percentage of owners who become paying subscribers after their free trials run out -- took a rare year-over-year dip during the period. Sirius XM's conversion rate of 45.1% during the fourth quarter fell short of the 46.4% rate it achieved a year earlier -- the first time that we've seen that since the recession ended.
Sirius XM more than made that up in volume. Churn is also holding up nicely, so this dip in conversions may be more of a red herring than a red flag. Still, it will bear watching in the coming quarters.
The rest of the metrics largely looked positive. Subscriber acquisition costs fell. Average revenue and ad revenue per user improved. However, the major catalysts that may get the stock moving higher again -- a potential hike in monthly prices and the release of Sirius XM 2.0 -- won't materialize until the latter half of the year.
Investors can always hope for magnetic programming deals to be inked, or for new distribution channels to open up between now and then. It's also a healthy possibility that Sirius XM will raise its guidance in three months if the first quarter plays out well.
However, Sirius XM's answers this time around weren't exactly what the market wanted to hear. The long-term bullish thesis remains intact, but now Sirius XM has to win over the short-term skeptics.
What did you think about this morning's report? Share your thoughts in the comment box below.