Siri

Source: Sirius XM.

Sirius XM Holdings (NASDAQ:SIRI) is making the most of drivers trading in their older cars for new rides with factory-installed satellite radio receivers. The media giant posted strong third-quarter results on Tuesday morning.

Revenue climbed 10% as a 7% increase in self-pay subscribers and an uptick in average revenue per user helped deliver a record $1.057 billion on the top line. Analysts were only holding out for an 8% advance.

A little growth on the top line often translates into big growth on the bottom line given Sirius XM's scalable model, but that didn't exactly happen this time around. Yes, reported net income more than doubled to $136.1 million, but the spike was largely the handiwork of a one-time hit for the early extinguishment of debt a year earlier. Sirius XM's operating profit merely inched 3% higher for the quarter with free cash flow barely failing to keep up with the top line by registering a 9% increase. 

A big drag on the bottom line was the 26% surge in the revenue share and royalties that Sirius XM shells out. There was also a 22% uptick in customer service and billing expenses. Higher music royalties are unavoidable with record labels successfully demanding larger chunks of Sirius XM's revenue with every passing year. However, it is a surprise to see some line items including customer service as well as the satellite radio provider's G&A costs grow faster than revenue.

Sirius XM's profit of $0.02 a share matched Wall Street expectations, just as it did during this year's first two quarters.

Rocking guidance
Sirius XM is offsetting the sting of contracting operating margins with an improved outlook. It's boosting its revenue, free cash flow, and total net subscriber additions guidance for all of 2014.

It now sees revenue of $4.15 billion, up from the $4.1 billion it was targeting three months ago. Its goal for net subscriber additions is growing from 1.25 million to 1.5 million. Its adjusted EBITDA target of $1.425 billion remains intact, but it now sees free cash flow of $1.12 billion. It was previously forecasting $1.1 billion in free cash flow.

Sirius XM has been making the most of its free cash flow and its ability to raise money at low rates by eating into its gargantuan share count. It has spent $2.1 billion so far this year on share buybacks, helping reduce its fully diluted share count by 5% over the past year.  

These are competitive times for Sirius XM. It may have swayed regulators into OKing its satellite radio monopoly six years ago, but the smartphone revolution also means that drivers are no longer limited to commercial-laden terrestrial radio or personal CDs if they don't want to pay for Sirius XM's premium platform. 

For now, Sirius XM is holding up just fine. Auto manufacturers may be making it easier for smartphone owners to stream audio through their car speakers, but it's never as seamless as satellite radio. Armed with an installed base of 26.7 million total subscribers, Sirius XM has the flexibility to pay for content and offer commercial-free music that sets it apart from terrestrial and streaming offerings. Investors will want to keep a close eye on the expense line items that are eating into its operating profit, but with the stock meandering in recent months on concerns that its popularity is being challenged it's great to see Sirius XM raise its guidance after posting better than expected top-line growth. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.