Shares of Sirius XM Radio (SIRI 0.98%) took a hit after the company reported third-quarter results this morning. It wasn't the miss on the bottom line. The satellite radio provider's $0.01-a-share profit -- shy of the $0.02 a share analysts were targeting -- included a one-time $107 million charge for early debt extinguishing. Back that out and Sirius XM would have earned nearly $0.03 a share.
However, the rest of the report did have a few hiccups. Let's go over some of the reasons the stock initially moved lower on the news.
1. Sirius XM is expecting negative net additions for the current quarter.
The media giant raised its subscriber guidance for all of 2013. Sirius XM now sees 1.6 million net additions this year, up from its earlier goal of 1.5 million. That's problematic because Sirius XM has already tacked on 1.68 million more subscribers through the first three quarters of the year.
Sirius XM actually lowered its self-pay net subscriber addition target from 1.6 million to 1.5 million, but that's not as bad as it sounds, since that still suggests a healthy uptick in the number of paying customers during the fourth quarter.
2. Revenue fell short of expectations for the quarter.
Sirius XM generated revenue of $961.5 million for the quarter. That represents a reasonable nearly 11% uptick, but analysts were holding out for $969.7 million.
There's a debt-related asterisk for Sirius XM's earnings miss, but there are no accounting excuses here. It's a miss. Despite healthy subscriber gains over the past year and growing average revenue per user since last year's 12% rate increase, Sirius XM failed to live up to Wall Street's top-line target this time.
3. Revenue guidance for next year is weak despite a surprise rate increase.
Sirius XM surprised the market by announcing that its core basic rate would increase to $14.99 a month in January, a 3.5% uptick from its last increase two years earlier.
The higher rate won't kick in for all subscribers right away, but it should boost average revenue per user again. Here is where Sirius XM's guidance of $4 billion in revenue for 2014 is a bit of a shock. Analysts were targeting $4.18 billion before the increase. Why is this lower?
If you want a scary metric, consider that Sirius XM is targeting $971 million in revenue for the fourth quarter. That translates into an annual revenue run rate of $3.884 billion. Despite a 3.5% basic rate increase in January, $4 billion in revenue next year is just 3% higher than that -- or 6% based on all of 2013. Naturally there are other factors here, and Sirius XM is historically conservative with its guidance. The market still doesn't like that.
4. Sirius XM's streak of double-digit growth is coming to an end.
The satellite radio darling bragged about cranking out seven consecutive quarters of double-digit revenue growth. That streak should stretch to eight as guidance calls for a 12% increase during the holiday quarter. However, eyeing just 6% in top-line growth for next year would mean an end to this streak unless it really blasts through that target.
5. The stock was on a huge run.
This wasn't a bad report. I've highlighted the shortcomings, but churn's holding steady and Sirius XM is generating record growth where it counts, with adjusted EBITDA up 21% and free cash flow surging 26% for the quarter.
However, the stock did hit a fresh six-year high yesterday. The strong run in recent weeks was raising the bar on what investors would expect to keep the rally going. Sirius XM will live to tackle new highs in the future after a normal correction.
