Sirius XM Radio (SIRI -1.36%) posted quarterly results on Thursday morning. It was a decent report in most regards. Revenue rose 8% to $1.3 billion, as it's serving 5% more subscribers that are paying nearly 2.3% more than a year earlier.
Satellite radio remains the ultimate scalable business model. The high fixed costs and low variable costs have historically translated into widening margins, and we're seeing more of the same this time around. Net income soared 20% to $207 million. Earnings on a per-share basis grew even faster -- up 27% to $0.04 a share -- as Sirius XM continues to aggressively repurchase stock.
Sirius XM seems to be in a good place with record EBITDA margins and a whopping 31.6 million subscribers on its platform. Now let's get into a few things in the report that may be problematic for the stock, which has been one of the market's biggest winners over the past eight years.
1. Subscriber growth is slowing
Sirius XM closed out the quarter with 259,000 more self-pay subscribers than it had three months earlier. The pace might seem off from what is required to hit its goal of 1.3 million self-pay net additions for all of 2017, but that in of itself isn't a deal-breaker. Like many businesses, there's seasonality to this business, so it's wrong to extrapolate.
However, if we look at just the first quarter, this winds up being Sirius XM's worst showing in years. Let's look at total net additions, the figure that includes self-pay and paid promotional accounts. You won't like the comparison.
- Q1 2010: 171,000 net additions
- Q1 2011: 373,000
- Q1 2012: 405,000
- Q1 2013: 453,000
- Q1 2014: 267,000
- Q1 2015: 431,000
- Q1 2016: 465,000
- Q1 2017: 257,000
You have to go all the way back to 2010 -- and then to 2009 when net additions were negative -- to find the last time Sirius XM closed out the first quarter with fewer total subscriber additions. It did land fewer self-pay adds in 2014, but the overall trend isn't comforting. Percentage growth is always a challenge as a company gets bigger, but we're now talking about absolute growth also decelerating.
2. Guidance didn't get adjusted higher
Sirius XM has spoiled its shareholders in recent years. The satellite radio star puts out an outlook that proves to be conservative in retrospect, nudging it higher most quarters, but we're not seeing an upward revision this time. Sirius XM is sticking with its full-year projections, calling for 1.3 million net additions in self-pay subscribers, $5.3 billion in revenue, $2.025 billion in adjusted EBITDA, and $1.5 billion in free cash flow.
One can rightfully argue that there are things far worse than merely sticking to your initial forecast. However, this is a stock that has been a world beater in investor portfolios because it routinely lowballs its projections. A year ago during its first-quarter report, Sirius XM bumped its guidance calling for 1.4 million net new total subscribers being added for all of 2016 up to 1.6 million. The year before that, it pushed its subscriber and revenue targets for 2015 higher in that year's first-quarter report.
You have to go back to 2014 to find the last time Sirius XM held firm to its earlier forecast, and that was the year the stock went nowhere. Sirius XM shares began the year at $3.49, closing at $3.50. Weak self-pay net additions and stagnant guidance metrics may make it seem as if Sirius XM investors are partying like it's 2014, but that's not a good thing.
History buffs will point out that Sirius XM went on to recover in the second quarter of 2014 with strong sequential subscriber growth and increasing its full-year guidance for revenue, adjusted EBITDA, and free cash flow. However, even then, the stock went nowhere. Sirius XM investors better hope that guidance gets revised higher in three months, because as we've already argued, there are fates far worse than merely standing still.