Sirius XM’s Rising ARPU Supports $2 Value
Sirius XM Radio Inc is the largest satellite radio company in United States, mainly distributed through automakers and retail locations as well as through Sirius’s own website. Sirius XM has ties with major automobile manufacturers such as Ford (NYSE:F), GM (NYSE:GM) and Toyota. This helps drive its presence in the U.S. automobile space. Sirius competes with traditional AM/FM radio as well as Internet radio offerings from Pandora and Rhapsody.
Sirius XM’s average revenue per subscriber, inclusive of subscription and advertising revenue, declined in 2008 due to a change in the mix of discounted OEM promotional subscriptions as well as the impact of the Sirius and XM merger which increased the number of subscribers by over 100% but only increasing revenues by 81%. In 2009, the average revenue per user (ARPU) increased back to $122 as the company increased rates on multi-subscription packages as well as the introduction of Internet subscription package.
Going forward, we expect the ARPU to increase steadily led by lower churn rate and increase in the royalty fee. While we expect Sirius’s ARPU will increase to $160 by the end of Trefis forecast period, Trefis members predict the ARPU will reach close to $180, implying an upside of 13% to our price estimate for SIRI stock.
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We currently have a Trefis price estimate of $2.00 for Sirius XM Radio’s stock, about 16% above the current market price of $1.73.
Subscriber Churn Rate Expected to Lower
Sirius XM had a churn rate of 1.7% in 2007 and 1.8% in 2008. However, due to difficult market conditions, churn rate increased to 2% in 2009. The churn rate for 2010 declined to 1.9%, driven by an improving economy, the success of retention and win-back programs as well as reductions in non-pay cancellation rates. As market conditions improve, we expect churn rates to go back to the 1.7% levels. This will help Sirius XM retain its customers and also help it to market new packages to them.
Royalty Fee to Increase in 2011 and 2012
Under the terms of the Copyright Royalty Board’s decision, Sirius XM paid royalties of 6.5% and 7.0% of gross revenues, subject to certain exclusions, for 2009 and 2010, respectively. For 2011 and 2012, Sirius XM will have to pay royalties of 7.5% and 8.0%. Increasing royalty fee will likely result in Sirius XM passing on these costs to the customers, thereby increasing ARPU.
Trefis Community Forecast
Trefis members forecast Sirius XM’s average revenue per subscriber will increase from around $132 in 2011 to $180 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $126 to around $159 during the same period. The member estimates imply an upside of 13% to the Trefis price estimate for Sirius XM Radio’s stock.