3 Answers From Sirius XM

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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  ) 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.

General Motors and Google are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers recommendation. Apple and Ford Motor are Motley Fool Stock Advisor picks. The Fool has written puts on Apple. The Fool owns shares of Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2011, at 2:08 PM, bottomfisherman wrote:

    Good article raising vaild points and concerns.

  • Report this Comment On February 15, 2011, at 2:20 PM, jimmylegg wrote:

    nicely put, so much is missing...

    As they say in sales, its all in the mix, until they get back in the retail game, Q4 is not going to ever be stronger than any other, as retails devices are not what was being pushed...and honestly, only so many can give a car for the holidays...

    All holding for 2.0 and media distribution and delivery from all the content...

  • Report this Comment On February 15, 2011, at 3:22 PM, cewjr1 wrote:

    I just did some quick math using sirius's numbers.

    Which were 20.2m to start the year 21.6m to end a 20.9m avg for the year with a 13.00 per user monthly revenue which is price for a current subscription and come up with 3.26 billion revenue for the year 2011 . Is sirius's 3 billion rev. number used in the call this morning sandbagging to under promise then over deliver?

    Are my numbers accurate?

  • Report this Comment On February 15, 2011, at 3:34 PM, DirtyTomRackham wrote:

    Somehow this is the fault of all the shorters trying to drive the stock price down....

    I'm kind of wondering the same as cewjr1..... is there any reason to believe that SIRI is giving conservative guidance for 2011?

    Is the $13 per user accurate? I know there's partial plans, long term discount plans, and I got in with a lifetime subscription for $500 upfront many years ago so I haven't paid a penny in years (but some people are also probably paying a little more with Best of packages). Using $3 billion in revenue and the 20.9 million subscribers, that works out to be $11.96/subscriber/month.

  • Report this Comment On February 15, 2011, at 4:26 PM, superdave1459 wrote:

    ARPU is around $10.60. Th rest of revenue will be from advertising & sign up fees.

    This stock continues to prove it is a dog. There will always be something that results in less than stellar results. This time it was debt costs, next time it will be yet something else.

    And Mel said he would likely increase the debt? While at the same time he talks about share buy backs? Give me a break. this guy continues to sell snake oil.

  • Report this Comment On February 15, 2011, at 5:30 PM, kmacattack wrote:

    If SIRI had not paid down debt, they would have shown a profit. Mel has a history of not overstating expectations on sales and earnings since I've been watching the stock, but by setting conservative estimates, as the company continues to experience one of the greatest turnarounds in the history of America, the stockholders don't get hammered. I've been watchin SIRI for about 18 mos, bought in a about 9 mos ago and have doubled my money (on paper at least) plus I've been selling puts on price drops. I've written two puts since Dec. and made $4,500 CASH on them. I'm about to buy more shares, and clean up on another put option. The worst that can happen is that I'll own more stock in the $1.30 price range using the profit already gained from my put. There was just a report issued, by the way, that a new auto sales forecast was just released for this year, and it looks like a huge increase in auto sales is in the works worldwide. SIRI has a deal with TATA of India to supply radios in their cars, so they have a built in market in the world's most populated country. If Pandora proves to be a viable comptetor (which I doubtO) SIRI has the option of adding a second tier network of "free" or "bargain basement low priced" commercially supported programming packages. CBS just backed out of the "free" internet radio business. Pandora apparantly has issues with their bookkeeping according to the iNDEPENDENT AUDITOR that examined their financials prior to the IPO. They have never made money and this IPO could be an out for their investors to recoup their losses and run.

  • Report this Comment On February 15, 2011, at 6:11 PM, multi007 wrote:

    @dirtytomrackham - the numbers cant be accurate as I bought 2 lifetime subs for both of my vehicles at $550 per car in November 2010. As a result, I am not paying $12 per month any more and cant be included in the "paying subscriber" category. However after 35 months, the 2 subs start to pay for itself - so i guess one could argue that i am a paying subscriber until that 36th month? The way I see it, it must be a very small figure (a fraction of 1 % imo) of customers who have bought or plan to buy lifetime subscriptions. (after all, it IS pricey). These lifetime subs dont bode well for SIRI long term revenue.... or does it? I really dont know to be honest, but i think these are valid points i bring up.

    I am long SIRI in at 70c, 85c and $1.05 a share so either way im still happy. The question is, can I be happier?

  • Report this Comment On February 15, 2011, at 6:22 PM, multi007 wrote:

    You know, they could be issuing low lackluster guidance so they a beat with outstanding numbers.

  • Report this Comment On February 15, 2011, at 7:05 PM, David369 wrote:

    Good Job Rick! The facts (as confusing as they can be) are always welcome.

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