Sirius XM Scorecard

2013 has been an eventful year for Sirius SX Holdings (SIRI). The year began with the company issuing 2013 guidance on January 9th, and was followed two weeks later by Liberty Media (LMCA) taking control of the company and installing its own Board of Directors. The following month, Sirius XM began its previously announced $2 billion share repurchase program.

Throughout the year there were a variety of other newsworthy items. Jim Meyer, who had been acting as the interim CEO became CEO. The company changed its corporate structure to a holding company and was renamed Sirius XM Holdings. The share buyback authorization was increased by another $2 billion and Liberty agreed to sell $500 million of its Sirius XM shares back to the company. Almost all of the company's high interest debt was refinanced, the only exception being the 7% Notes.

Content agreements with Major League Baseball and Fox were renewed and broadened. In addition, the company expanded its offers aimed at gaining market share among Hispanics, signing radio personality Piolin and offering an extended free trial program and a low priced monthly subscription fee of just $5.99 per month. And it wasn't only about more entertainment content.

In August, the company announced that it would be purchasing the Connected Vehicle Unit from Agero, Inc. for $530 million. And, last month the company announced that it had closed on the transaction:

NEW YORK, Nov. 4, 2013 /PRNewswire/ -- Sirius XM Radio today announced that it has completed the previously announced acquisition of the connected vehicle services business of Agero, Inc.

...In connection with the transaction, the business unit will change its name to Sirius XM Connected Vehicle Services Inc.

This acquisition has remained shrouded in mystery. Often mysteries can be entertaining. Who wants to know whether or not the butler did it at the start of a murder mystery? However, when it comes to an investment, I would rather know every last detail that could affect the stock price. Perhaps, now that this transaction has closed, management will speak more openly about it at the next analyst presentation, or on the year-end conference call that will take place within the next two months.

Until then, we are left to try and draw inferences from the data that has been released, and there isn't very much of that. At the Bank of America Merrill Lynch Media, Communications and Entertainment Conference earlier this year, CEO Jim Meyer said:

When we make the acquisition I think we'll pick up somewhere around another 140 engineers, which are dedicated to this connected car, architecture, mostly software driven, most of our engineers are much more platform hardware driven. We think this is just a really, really good marriage of technology assets and then it gives us a service base in the telematics to grow from.

Assuming these engineers will remain at their current geographic location, there will be an increase in expenses not only for personnel, but also for facilities, hardware, IT support, etc. Software developers earned an average of more than $90,000 in 2010 and would probably carry a loaded cost of at least $120,000-$150,000. With incremental expenses that I estimate at less than $30 million, that wouldn't appear to put much of a damper on earnings for a company that has already guided to 2014 revenue of over $4.0 billion, and adjusted EBITDA of approximately $1.38 billion. It's also unlikely to be contributing much in the way of incremental revenue or free cash flow, even if we don't have confirmation because the company hasn't disclosed anything yet.

We do have a few clues. Sirius XM is a company that has a history of issuing conservative guidance at the beginning of the year, increasing that guidance at various times throughout the year and beating that guidance by year-end. At the beginning of the year, Sirius XM issued guidance of:

• Revenue of over $3.7 billion,


• Adjusted EBITDA of over $1.1 billion,


• Free cash flow approaching $900 million,


• Self-pay net subscriber additions of approximately 1.6 million, and


• Total net subscriber additions of approximately 1.4 million.

At the end of the first quarter, free cash flow guidance was increased from "approaching $900 million" to "approximately $915 million" and was reiterated at the end of Q3. At the end of Q2, the Adjusted EBITDA was fine tuned to "approximately $1.14 billion." And, at the end of Q3, revenue of "over $3.7 billion" became revenue of approximately $3.77 billion. Also, the total subscriber net addition figure was increased twice, to 1.5 million and later to 1.6 million. However, the self-pay net adds total was reduced to 1.5 million (covered in a prior article).

Note that the revenue guidance was fine tuned from more than $3.7 billion to approximately $3.77 billion. This is not too surprising. The company's revenue is fairly predictable with much of it having already been received, but not yet recognized in the income statement. In fact, the company had nearly $1.7 billion in deferred revenue at the end of Q3.

Since the transaction with Agero closed on November 4th, almost two weeks after the Q3 conference call, one of three inferences can be drawn from the revised revenue guidance:

1. The company was not including the anticipated revenue from the acquisition in its revised guidance and the base business is running at about the levels originally anticipated with 2013 guidance,


2. The revenue from the base business is running at about the levels expected, the acquisition was included and its revenue is not very large, or


3. The revenue from the base business is less than expected, the acquisition was included and its revenue is significant.

Similar inferences can also be made about profitability of the acquisition and its contribution to free cash flow.

We know the company anticipated that the transaction would close in the fourth quarter, so it would have made sense for some portion of the revenue, free cash flow and EBITDA contribution to have been included. And, since no mention has ever been made that the acquisition would be accretive to earnings, it probably won't be for either 2013 or 2014.

Summary

It would be beneficial for investors to know how much revenue and profit this acquisition will be adding to Sirius XM. From the data that has been released, it doesn't appear that it is adding much. It also doesn't appear as though it will have a noticeable negative impact either.

Meyer believes "...that the connected car is the key part of [Sirius XM's] future. " He further positioned the acquisition from Agero as something that is important and "... is clearly in [Sirius XM's] strategic interest to be particularly included in that connected architecture that rolls out."

Unfortunately, Meyer really hasn't made much of a case as to why Sirius XM needs to be a part of the connected car, or how Sirius XM intends to profit from it. And from an investor point of view, it's the profit, if any, that will be important.

Source: Sirius XM Scorecard

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I am long SIRI. In addition to my long positions, I have January 2014 $3.50 and January 2015 $4 covered calls written against many of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis.

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.