By Sven Olson
Sirius XM Radio Inc.(NASDAQ:SIRI) announced third quarter 2012 financial and operating results on November 1st, which included revenue of $867 million, up 14% from revenue of $763 million in the same quarter of 2011. Net income for the third quarter 2012 and 2011 was $75 million and $104 million, respectively, including a loss on extinguishment of debt of $107 million in the third quarter of 2012. Adjusted EBITDA for the third quarter of 2012 was $245 million, which was up 24% from $197 million in the same quarter of the previous year.
“Sirius XM Radio delivered a very strong third quarter for our shareholders, with 446,000 net subscriber additions, double-digit growth, and record levels of revenue, adjusted EBITDA, and free cash flow. The company has produced more free cash flow in the first nine months of this year than in any full year in its history, and we’ve used this cash to reduce our debt to its lowest level since the merger of Sirius and XM,” said Mel Karmazin, CEO of Sirius XM Radio.
Additional highlights from the third quarter included record subscriber growth. Self-pay net subscriber additions grew by 2% year-over-year to 371,000 and enhanced the self-pay subscriber base to an all-time high of 19 million subscribers. The total paid subscriber base reached a record high of 23.4 million subscribers. Strong auto sales helped to grow total paid and unpaid trial inventory by approximately 115,000 from the preceding quarter of 2012 to 6.2 million. Churn and conversion was stable: Self-pay monthly churn was 2.0% in the third quarter of 2012, compared to 1.9% in the same quarter of the previous year. The new vehicle consumer conversion rate was 44% in this quarter, which was the same as the third quarter of the previous year.
Free cash flow reached record levels at $195 million in this quarter of 2012, an increase of 159% from the $75 million generated in the same quarter of the previous year. The repurchase of approximately $868 million of debt during the quarter meant that the company ended the quarter with $556 million in cash on hand. Leverage has improved substantially over the past year and, at the end of the third quarter, was just 2.8 times adjusted EBITDA, down from 4.3 times at the end of the third quarter of 2011. By retiring the two most expensive debt instruments, the company will reduce its interest costs significantly and increase flexibility with no debt maturing in the next two years.
The increased subscriber guidance for the fiscal year 2012 of approximately 1.8 million net additions indicates that growth in the fourth quarter should continue to be strong. This is the third time that Sirius XM Radio has raised subscriber guidance during the current year. The company reaffirmed its 2012 subscriber, revenue, adjusted EBITDA and free cash flow guidance. It expects net subscriber growth to approach 1.8 million, revenue to touch $3.4 billion, adjusted EBTDA of approximately $900 million, and free cash flow of approximately $700 million.
Sirius XM Radio is the largest radio broadcaster in the world as measured by revenue, and has over 23 million subscribers. It creates and broadcasts commercial-free music, premier sports talk and live events, comedy, news and much more. Sirius XM Radio is available in vehicles from every major car company in the U.S., from retailers nationwide. Programming is also available through the Sirius XM Internet Radio App for Android, Apple, and BlackBerry smartphones and other devices. The company also holds a minority interest in Sirius XM Canada, which has more than 2 million subscribers.
In any analysis of Sirius XM Radio, a key figure is the number of net subscriptions that will be added in the fourth quarter. 1.5 million subscriptions were added over the first three quarters, and to meet the 2012 guidance of 1.8 million, the company should add another 300,000 subscribers. When you consider that over the last nine months the net additions have grown 27% over last year and that net subscribers added in the same quarter of the previous year were 540, 000, the fourth quarter target appears to be eminently achievable. In fact, if the 27% growth continues, net subscriber addition would be in the region of 685,000.
Sirius XM Radio CEO Mel Karmazin remarked that Hurricane Sandy could have a negative impact on new car sales, which would restrict subscriber growth for the fourth quarter. That is possible, but I believe most people who were planning on buying a car in this quarter would merely defer the purchase by a few weeks. And they would be offset by the sales to people replacing damaged cars. Paradoxically, despite the CEO’s remarks, there is a good chance that revenues could be higher than the guideline from the company.
There have been recent reports that Apple (NASDAQ:AAPL) is accelerating plans to enter the free Internet radio space currently dominated by Pandora Media Inc. (NYSE:P). According to some insiders, Apple and major music labels have commenced negotiations to kick off an Internet radio service supported by advertising sometime next year. Talks are focusing in part around advertising revenues, and Apple could launch a few months after an agreement has been reached. The share prices of both Sirius XM Radio and Pandora took a beating, but Sirius XM Radio soon recovered while Pandora continues to languish. It has also been recently reported that Microsoft (NASDAQ:MSFT) is planning to launch a free streaming music service. There are other players in the Internet radio space to contend with, such as Spotify, Slacker, and MOG.
However, there is only one single satellite radio company in the U.S., Sirius XM Radio, and there are significant barriers to entry for new competition. For one thing, it would involve securing licenses for spectrum that simply do not exist. Even if the licenses could be secured, huge amounts of capital would be required to launch satellites and line up content adequate to compete with the already established Sirius XM Radio. All this provides Sirius XM with a large amount of protection. I think that Sirius XM Radio is going to continue to be an impressive growth story. It is currently trading at around $2.70. I recommend buying the stock in the expectation of capital appreciation as a result of continuing growth.
Disclosure: Long SIRI