Are things turning around at Audible (NASDAQ:ADBL)?
The provider of downloadable spoken-word content reported rocky results for the first quarter, missing earnings estimates by a large margin and posting negative free cash flow. On the other hand, subscribers were up, churn was down, and we saw one of the implications of the new subscription model with a large increase in deferred revenue.
For the latest quarter, the company missed earnings estimates by a smaller margin and posted positive free cash flow. On a year-over-year basis, free cash flow jumped by more than 300%. Not including stock-based compensation, Audible actually beat estimates.
Revenue also missed estimates, climbing 25% from last year but dropping 3% from the first quarter. While I hate to see the 3% drop, deferred revenue actually climbed by 14% sequentially. Remember that deferred revenue is a liability from cash it has received for services it hasn't yet provided, in this case future downloads for subscribers. Because subscribers can roll over their unused book credits for up to six months, this liability will tend to grow. As Audible provides those downloads in the future when users use those credits or the credits expire, it recognizes that revenue. This is a good thing, especially as the liability grows with subscriber growth.
Audible's distribution is fairly extensive, and the company makes it easy for customers to play its downloads. In addition to its own sites, both domestically and abroad, it provides the spoken-word content for Apple's (NASDAQ:AAPL) iPod, where it is very popular. It also provides exclusive content for XM Satellite Radio (NASDAQ:XMSR). Its digital rights management technology is built into almost every MP3 player manufactured, meaning that users can play Audible content on those devices right away. Sony Ericsson's new smartphone is the latest example, and Audible is providing some preloaded content for it.
Interestingly, Citigroup (NYSE:C) just cut its rating on Audible to hold from buy, citing slowing subscriber growth. Looking at the data provided in the second-quarter earnings release, total AudibleListener membership (subscribers) increased by 11% quarter to quarter, compared with 14% in the first quarter, which was in line with the previous three quarters' sequential rates of 9% to 10%. On a year-over-year basis, both quarters this year had about 50% subscriber growth, down from the 77% levels seen in the first half of 2005. The churn rate dropped to 3.4% in the second quarter, the lowest level since the fourth quarter of 2004. In addition, the cost per new subscriber dropped to $45, the lowest level in at least the past two years. I'm not sure I agree with the Citigroup analyst; however, keep an eye on this.
I am cautiously optimistic about Audible and its stock. While the earnings release was not glowing (who likes to see a net loss, anyway?), there are several promising indicators and trends developing, such as the lower churn, lower cost per subscriber, and increased deferred revenue. Investors who are willing to take on a fairly risky, but potentially promising stock, might want to do some more digging to see if it will fit into their portfolios.
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Fool contributor Jim Mueller has owned shares in Audible for most of the past 2 1/2 years, including now, having first heard about it at The Motley Fool. That's something we love to hear. The Fool is investors writing for investors.
