FBR Capital Comments on Sirius XM (SIRI) Following FY14 Outlook Update, FY15 Guidance
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FBR Capital is updating its model on Sirius XM (Nasdaq: SIRI) after the company announced that it ended 2014 with 27.3 million subscribers, reporting 1.75 million net subscriber additions in the year, exceeding the company's increased guidance of 1.5 million net additions. Self-pay net additions in 2014 were 1.44 million, exceeding the company's 2014 guidance of 1.25 million and resulting in ending self-pay subscriptions of over 22.5 million.
Analyst Barton Crockett noted:
- 2015 guidance. Sirius XM is introducing 2015 guidance for total net subscriber adds of 1.2 million, revenue of $4.4 billion, adjusted EBITDA of $1.6 billion, and free cash flow of $1.25 billion. The subscriber growth guidance is better than our formerly published estimate for 1.07 million. With a solid new car sales trajectory and growing penetration of used cars, a positive reception to the new Joel Osteen channel, we are taking our 2015 subscriber growth estimate up to 1.3 million. Our revenue, EBITDA, and free cash flow projections remain slightly above guidance. The history of conservative guidance provides a measure of comfort for our estimates.
- The terminal value debate. For Sirius, the stock swings on debate about the terminal value, which is heavily influenced by subscriber trends. Bears will focus on guidance for a slowdown in subscriber growth. But we note slowing car sales, and the fact that as subscribers grow, churn becomes a bigger headwind. Plus, the company's recent history argues for the ability to beat guidance.
- Reasons for macro optimism. We believe that demand for subscription entertainment services among broader consumer segments is growing because of new app/smartphone technologies, perhaps benefiting from lower gas prices, while other consumables, like apparel, may not be. Sirius, with a solid app, can be a beneficiary from this trend. We also see a cost structure reset to much higher music rights fees as a likely outcome of Pandora's upcoming CRB process. If we are right, Pandora could be forced to switch its model to a subscription focus, like Spotify, which would be positive for Sirius, as the scale leader in subscription radio. We continue to see high probability that Howard Stern renews.
Sirius XM Radio closed at $3.35 yesterday.
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