Satellite radio remains hot premium entertainment. Sirius XM Holdings (NASDAQ:SIRI) announced on Wednesday that it closed out the year with 32.7 million total subscribers by the end of 2017, 1.39 million more than it had when the year began. Self-pay subscribers clocked in at 27.5 million, a gain of 1.56 million in 2017. Sirius XM was only targeting 1.4 million net additions on that front.
Bears will argue that Sirius XM had 1.66 million net additions in 2016, making this potentially problematic deceleration for the media giant. The worrywarts are missing the point of the incremental growth. Sirius XM's business -- high on fixed costs and one where some of the variable costs including music royalties are passed on to subscribers -- is ridiculously scalable. Any growth is good growth, typically with more sizable growth as we work our way down the income statement. Sirius XM is also announcing that it expects to meet or exceed its earlier full-year guidance for revenue, adjusted EBITDA, and free cash flow.
Around the dial
Sirius XM's 1.56 million net additions for self-pay subscribers is a big deal. It was only targeting a gain of 1.3 million for 2017 when the year began, a figure that it would eventually lift to 1.4 million a few months later. Sirius XM exceeded its original growth goal by 20%. Revising its outlooks higher has been par for the course at Sirius XM, a good reason why it's been one of the market's biggest winners since bottoming out as a penny stock in early 2009.
The premium radio provider is also initiating its forecast for 2018.
- Self-pay net subscriber additions will be roughly 1 million.
- Revenue will clock in at approximately $5.7 billion.
- Adjusted EBITDA will be roughly $2.15 billion.
- Free cash flow will be about $1.5 billion.
The guidance itself may seem unimpressive at first glance. Closing out 2018 with 28.5 million self-pay subscribers would be continuing deceleration. We would also be looking at revenue growth of less than 6% along with a marginal increase in adjusted EBITDA and a slight decline in free cash flow. Sirius XM has been historically conservative with its initial forecast, but it suggests a break from previous years where a little growth on top goes a long way on the bottom.
Sirius XM has earned the right to aim low and ultimately shoot higher. As long as the subscriber count keeps moving higher with listeners paying more than before it's hard to bet against the model. There's also the potential of some welcome tailwinds in light of recent tax changes. Sirius XM points out that the recent tax reform act could boost its generation of cash by almost $900 million over the next four years with $200 million in annual tax savings after that.
Sirius XM stock has moved higher for nine consecutive years. As long as it sticks to the script of blowing through its conservative outlooks, it's a dangerous stock to ignore.