I guess you can say that the market wasn't sure how to react to Sirius XM Radio's (NASDAQ:SIRI) quarterly report this morning. Shares of the satellite radio provider initially moved lower after offering up fresh financials for the first quarter, only to move higher an hour and change into the trading day.
Revenue climbed 11% to $997.7 million, fueled by a 6% uptick in subscribers and recent price hikes that have pushed average revenue per user higher. Analysts were only settling for $994.6 million on the top line. Adjusted earnings soared 46% to $121.4 million, but given Sirius XM's more than 6 billion shares outstanding, the cruel division math here leaves us matching Wall Street's forecast of $0.02 a share.
It's not a surprise to see adjusted earnings -- and free cash flow, up 56% for the quarter -- continue to grow faster than Sirius XM's revenue. This is a scalable model with high fixed costs and low variable expenses. As long as subscriber growth is increasing, that should change as programming and other content and servicing costs remain relatively fixed.
Sirius also impressed with low churn and healthy subscriber growth, but it wasn't a perfect performance. The percentage of car buyers with free trials staying on as paying subscribers remained at a historical low of 42%. More important, Sirius XM didn't revise any aspects of its guidance higher.
- Last year at this time it bumped up its outlook for free cash flow for all of 2013.
- A year earlier it raised its forecast for net new subscribers for all of 2012.
- The year before that we saw Sirius XM boost the free cash flow component of its guidance for 2011.
You have to go back four years to find the last time that a first-quarter report didn't have at least one piece of its guidance bumped higher. That isn't enough to penalize Sirius XM on a day when there are plenty of positives in its report. But Sirius XM had spoiled investors by being conservative in issuing its forecasts in recent years, juicing them up as the year would play on. Is that over?
Sirius XM paints a promising picture of its business. It pointed out during this morning's earnings call that there are just 62 million cars out there with installed Sirius or XM receivers. That figure should nearly double to 120 million in five years. But we know that it isn't that easy. The percentage of those receivers that are activated seems to decline every year, and even though Sirius XM plays up the connected car as more of an opportunity than a threat, it is something that we can't ignore if the game of conservative guidance that we've been playing has changed.
It was a good report out of Sirius XM. It's just a shame that it wasn't a great report.