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Sirius XM's Quarterly Miss Doesn't Matter

By Rick Munarriz - Apr 24, 2019 at 11:55AM

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The Pandora acquisition is blurring reported results, but with pro forma revenue rising 10% and guidance largely intact, it's hard not to like the new look for the satellite radio giant.

We are finally getting our first financial snapshot of how Sirius XM Holdings (SIRI 0.83%) is doing since injecting streaming music pioneer Pandora Media into its bloodstream earlier this year. The satellite radio giant posted its first-quarter results on Wednesday morning, but you have to dig beneath the surface a bit to get an accurate read of the combined company.

Revenue rose 27% to $1.744 billion -- its largest top-line burst in nearly a decade -- but the double-digit spike is entirely the result of adding two whole months of Pandora's business to the satellite radio service's organic increase in the mid-single digits. The Pandora deal closed at start of February. That earnings per share were cut in half to $0.03 a share also needs some more context, as red ink at Pandora -- and, to a greater extent, one-time acquisition-related costs -- weighed on Sirius XM's reported profitability. 

Dolly Parton at a Sirius XM Town Hall interview.

Image source: Sirius XM Holdings.

Fine-tuning the frequency

Shares of Sirius XM opened lower on Wednesday following the earnings release and subsequent conference call. Analysts were holding out for a 29% surge in revenue, making this a legitimate miss on the top line. However, modeling Sirius XM's performance this quarter is hard because of the need to stack the results of the two companies. 

The bottom-line miss is less of a concern. Analysts were modeling a profit of $0.05 a share, but the undershooting there is largely the result of the one-time hits totaling $76 million related to the Pandora acquisition and other charges.

The next four quarters will be misleading if taken at face value. The addition of Pandora will pad top-line results and sandbag profitability through the next 10 months. If you think the first quarter's revenue growth is bonkers, wait until it accelerates in the current quarter with three months of Pandora left to unleash. Pandora is moving the needle -- on both ends of the income statement -- something you might not have expected to see with an acquisition that cost Sirius XM just 8% of its outstanding shares

Pandora continues to lose its audience, but it's more than making up for it through gains in advertising and converting more of its freeloaders into premium subscribers. Sirius XM is already trying to squeeze as much as it can out of its new toy by cross-selling each music platform, pricing its namesake streaming platform more aggressively, and launching the Pandora NOW channel on Sirius XM receivers. 

The most comforting thing in Sirius XM's report is how its full-year guidance is holding the line with the outlook it initiated in January despite the Pandora drag on operations. Sirius XM continues to expect adjusted EBITDA and free cash flow to clock in at roughly $2.3 billion and $1.6 billion, respectively, for all of 2019. It also continues to see self-pay net subscribers to its satellite radio approaching a million. There were 29.1 million self-pay subscribers and 34.2 million total subscribers at the end of March for its flagship satellite radio service. 

Wall Street wasn't impressed with the report. The stock opened down 3% and was trading nearly 6% lower minutes into Wednesday's trading day. But the market will come around, just the way it always seems to do with Sirius XM Holdings.

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