Sirius XM Radio (NASDAQ: SIRI ) initiated its subscriber guidance for 2014 last week, and that 1.25 million target seems disappointing at first glance. After all, didn't it just close out 2013 with 1.66 million more accounts than it had before the year began? It was 2 million net additions the year before that, making this seemingly the second straight year of decelerating growth.
It gets worse. If we eye the 1.4 million in net additions for 2010 and the 1.7 million net adds in 2011, we're looking at what could be the satellite radio provider's weakest showing since 2009, when the auto market was imploding after the recessionary economic crisis. Forget the fact that growth on a percentage basis gets smaller as the user base expands. We're talking about its lowest absolute number of net additions in five years at a time when more cars than ever are rolling out with factory-installed receivers.
So, is it that bad, Sirius XM? It's not, and there are two important things to keep in mind here.
The first soothing nugget is that Sirius XM has historically been conservative with its guidance. Outside of its ambitious targets in late 2008 that came undone in 2009 when auto sales cratered, Sirius XM typically finds itself revising its outlook higher as the year plays itself out.
Last week we found out that Sirius XM closed out 2013 with nearly 1.7 million subs. Well, last January it was only expecting to increase its user base by 1.4 million in 2013. That figure got bumped up to 1.5 million and then 1.6 million before ultimately settling at 1.66 million.
It was the same story in 2012. Sirius XM was initially settling for just 1.3 million net additions, and a few upward revisions later it wound up having its best year as a combined company in terms of net additions, with 2 million accounts. In short, Sirius XM is a serial lowballer. Unless the economy and auto markets take a serious hit this year, you can expect that to happen again.
The other soothing nugget to keep in mind here is that, as uninspiring as 1.25 million net additions may seem, it's still incremental for this scalable model. So much of Sirius XM's costs are fixed that every new subscriber is worth more than the one that came before. Sure, there are variable costs when it comes to showroom commissions or revenue-based music licensing payments, but this is still a model where earnings and free cash flow should continue to grow faster than revenue and subscriber growth.
So don't let Sirius XM's cautionary subscriber target get you down. Key in on what would be a record 1.1 million in free cash flow, $1.38 billion in adjusted EBITDA, and $4 billion in revenue this year. As long as Sirius XM keeps moving in the right direction, that will be more than enough to expand its role as a media giant with more than just premium radio aspirations in 2014.
Satellite radio is a $4 billion market in 2014, but now let's talk trillions
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