Sometimes a strong quarter isn't strong enough.
Sirius XM Radio (Nasdaq: SIRI ) had a strong initial reaction to yesterday's first-quarter results. The stock opened unchanged at $2.26, but within minutes had climbed more than 2% higher to $2.31. The stock then turned negative a few hours later, closing lower at $2.23.
What went wrong?
It was an impressive quarter on the surface. Revenue climbed 11% to $804.7 million, just ahead of where the pros were perched. Earnings rose a more robust 38% to $107.8 million, matching Wall Street's expectations of $0.02 a share. Sirius XM added nearly 405,000 subscribers to its rolls during the first three months of the year and raised its 2012 guidance to 1.5 million net additions.
Let's dive into a few of the things that may have held the stock back.
1. 1.5 million net subscribers in 2012 isn't enough
The gem in Sirius XM's report was when it bumped its subscriber target from 1.3 million for all of this year to 1.5 million. Sirius XM now expects to have 23.4 million subscribers by year's end, and that's great.
However, it's easy to wonder why the company wasn't comfortable in going even higher.
New cars are the lifeblood of satellite radio, and CEO Mel Karmazin was encouraged in pointing out that automotive analysts now see 14.3 million new cars sold in this country in 2012. Three months ago -- when Sirius XM initiated its subscriber guidance -- automotive analysts were only banking on 13.7 million cars.
Here is where you have to do some simple math. Nearly two-thirds of all cars rolling off assembly lines for sale in this country now come with factory-installed Sirius or XM receivers. In other words, nearly 400,000 of the 600,000 cars added to this year's estimates will come with satellite radios. Sirius XM is reporting that 45% of car buyers are continuing to pay for the service. In other words, the difference in auto estimates alone accounts for more than 175,000 of the 200,000 increase in subscribers.
When you consider other positives in both the report and the company's conference call, bumping its 2012 guidance just 200,000 accounts higher isn't all that encouraging. After all, Sirius XM now sees monthly churn clocking in below the 2.1% it was targeting at the time of the initial guidance. The company also pointed out that its used car initiatives should result in a million self-pay activations on the used car end alone.
Yes, a lot of folk buying new cars will simply be replacing their existing subscriptions, but the subscriber guidance should have been stronger.
2. Revenue, adjusted EBITDA, and free cash flow guidance should've moved higher
Sirius XM is sticking to its February outlook for the line items outside of subscriber headcount.
Why? The media giant is seeing better-than-expected consumer acceptance to its January rate hike. Sirius XM sees programming costs continuing to decline on both an absolute and per-subscriber basis.
The only explanation for tweaking subscribers 200,000 heads higher but keeping revenue intact is if average revenue per user will clock in slightly below the implications of its earlier guidance.
3. Splitting pennies is an eye-opening experience
Sirius XM has more than 6.5 billion fully diluted shares outstanding. Now that it's profitable we have to factor in Liberty Media's (Nasdaq: LMCA ) 40% preferred share stake as common stock equivalents. This may be old hat to those who follow the company closely, but it also is a big number to divide any potential profits into.
Sirius XM reported earnings of $0.02 a share, matching Wall Street's target, but let's go out a few decimal points. Divide the quarterly profit of $107.8 million into 6.54 billion shares and Sirius XM earned $0.0165 a share.
Beyond the numbers
The stock has been trading higher since Liberty Media petitioned for the right to take de facto control of the satellite radio giant in March. There appears to be little action on that front since the March petition, and there was nothing in Sirius XM's report to indicate that Liberty Media will be buying more shares to pump up its position in the company.
Sirius XM isn't cheap by most trailing metrics, and that's also a concern to some investors. It gets better if we look out to 2013 and beyond, with Sirius XM fetching 22 times next year's earnings and just 13 times earnings if we go all the way out to 2015.
Then again, given Sirius XM's volatility and heavy share turnover, I also realize that few current buyers will have the patience to wait it out that long. It's a pity. There may be legitimate reasons for yesterday's subtle drop, but there's a quality company underneath all of the speculation and near-term noise.
Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.
XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next rule-breaking multibagger, a free report reveals all.
Editor's note: A previous version of this article stated the number of fully diluted shares outstanding as 6.5 million instead of 6.5 billion. The Fool regrets the error.