Sirius XM Radio (Nasdaq: SIRI) investors may be rubbing their eyes.
Did the satellite radio provider really just report a profit of $3.1 billion this morning? Is that even possible, with revenue clocking in with a better- than-expected 13% year-over-year gain to $837.5 million? Is CEO Mel Karmazin a miracle maker?
Well, the answer's "yes" to the first two questions. The jury's still out on the third.
Sirius XM really did post net income of $3.1 billion, but it comes with an even bigger asterisk than last year's $173.3 million profit, when nearly half of that came from the investment income it received after completing a deal for its Canadian partner. The jaw-dropping net income of $0.48 a share this time around is largely the handiwork of a nearly $3 billion one-time benefit related to a reversal of most of Sirius XM's deferred income tax valuation allowance.
Back that out, and the company's adjusted profit essentially hit the $0.02 a share that Wall Street was expecting. If you're holding out for a more accurate comparison, adjusted EBITDA and operating income climbed 28% and 32%, respectively. Record quarterly free cash flow of $230 million checked in 39% higher than last year's second quarter.
We've already known that Sirius XM closed out the quarter with 622,042 more subscribers than it had three months earlier. The media giant divulged that piece of good news -- as well as raising some parts of its guidance -- four weeks ago. The one metric that did get a welcome boost this morning is adjusted EBITDA. Sirius XM now sees that clocking in at $900 million this year, up from its earlier target of $875 million.
I did have three questions that I was hoping to see answered heading into the call. Let's see how things played out on that front.
1. Is churn holding up?
Sirius XM rolled out a 12% increase in its monthly rate in January. It would take time to roll out to its subscriber base, but we've seen mixed reactions by consumers to double-digit price increases when it comes to entertainment.
Coinstar's (Nasdaq: CSTR) Redbox seemed to have little resistance in pushing its DVD rental rates 20% higher last October, but Netflix (Nasdaq: NFLX) suffered millions of initial defections after last summer's move that increased prices by as much as 60%.
In an era of smartphone-friendly dashboards, and the booming popularity of Pandora Media (NYSE: P) and countless smaller streaming apps, would folks be willing to not only pay for satellite radio, but shell out 12% more?
Well, the answer is encouraging. Sirius XM's monthly churn -- the percentage of subscribers cancelling in any given month -- remained at 1.9%. Sirius XM's conversion rate -- the percentage of users that decide to pay for the service after their free trials expire -- also remained steady at 45%.
We may never know the full extent of Sirius XM's pricing elasticity, but it seems to be just fine at $14.49 a month now.
2. Is there any visibility on the Liberty Media saga?
Karmazin was asked about Liberty Media (Nasdaq: LMCA) as it aims to convert its effective 46.2% stake in Sirius XM into de facto control of the company.
"We really have nothing new to report," Karmazin said during this morning's call. "Liberty has to decide what they want to do."
"When we hear what Liberty wants to do, we will clearly respond."
In a nutshell, there isn't a lot of visibility here. When a decision is made, we'll probably hear it from Liberty Media first.
3. Is Sirius XM 2.0 gaining traction?
Sirius XM updated its platform with last year's Sirius XM 2.0 rollout.
It's been a work in progress. Chrysler is rolling out Sirius XM 2.0 in some of its models this year, but we're still waiting for other automakers to follow suit. There doesn't seem to be a lot of demand for the Sirius XM 2.0 retail receivers that have hit the market over the past year.
However, some of the more game-changing elements of Sirius XM 2.0 will benefit the company's fledgling Internet-based streaming service. Sirius XM is rolling out on-demand access to many of its shows now, and the plan to take on Pandora with its own customized streaming offering is still on track to debut later this year.
The satrad giant may not have had all of the answers that I was looking for, but there's no doubt that Sirius XM continues to move in the right direction.
Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.
I also just put out a premium report on Sirius XM Radio, detailing the challenges and opportunities that await investors that are both long and short the dynamic media giant. A year of updates is also included with the report. Check it out now.
