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3 Reasons Why Sirius XM Fell Yesterday

Rick Aristotle Munarriz
May 2, 2012

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.