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Investment Overview for Sirius XM Radio (NASDAQ:SIRI)
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Below are key drivers of Sirius XM's value that present opportunities for upside or downside to the current Trefis price estimate for Sirius XM:
- Number of Sirius XM Subscribers: We currently forecast this figure to increase from an estimated 23.9 million in 2012 to about 35.6 million by end of the Trefis forecast period. If subscriber additions accelerate and Sirius XM reaches a subscriber base of about 40 million by end of the Trefis forecast period, there could be an upside of about 10% to the Trefis price estimate. This could happen if the company can further increase its penetration and success rate in new as well as used cars. On the other hand if competition from Pandora & other radio services increases and the subscriber additions slow down amounting to just 24 million by end of the Trefis forecast period, there could be little over 10% downside to the Trefis price estimate.
- Sirius XM's Average Revenue Per Subscriber: We currently forecast this figure to increase from an estimated $124 in 2012 to about $174 by the end of the Trefis forecast period. If more subscribers upgrade to higher priced tier and as a result, the average revenue per subscriber reaches about $190 by end of the Trefis forecast period, there could be an upside of about 10% to the Trefis price estimate.
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Sirius and XM merged in July 2008 to form Sirius XM Radio. The satellite radio service provider offers over numerous channels comprising of commercial free music, sports, talk shows, news stations and other channels in the U.S. Sirius XM radio channels are mainly available through receivers in automobiles but can also be accessed over the internet or through home stereos by using various accessories.
The firm's satellite radios are primarily distributed through automakers ("OEMs"), retail locations and through their website. Sirius XM has ties with major automobile manufacturers such as Ford, GM and Toyota. This helps drive its presence in the US automobile space. Additionally, satellite radio services are also offered to customers of certain rental car companies.
The firm's primary source of revenue is the subscription fee it charges customers for annual, semiannual, quarterly or monthly subscriptions. Additionally, the company derives revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories and other ancillary services such as weather, traffic, data and backseat TV services.
It is important to know that Liberty Media is Sirius XM's biggest stakeholder and recently converted half of its preferred shares to roughly 1.3 billion common shares. The company intends to convert remaining preferred shares as well in quest to acquire controlling stake in Sirius XM. Our estimated price reflects this conversion, and therefore the outstanding share count includes this dilution.
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Subscription fee
Sirius XM earns the majority of its revenues from the subscription fee it charges its subscribers. It offers various monthly, semi-annual and annual plans to customers. The company also offers discounts on long-term subscription and on multiple subscriptions. As of now, the Sirius XM Premier package is available for $17.99 per month and the other basic packages are available at $14.49 per month.
Sirius XM in Cars
Sirius XM has contracts with nearly all major automobile manufacturers. Every year the firm pays out over $200 million to their OEM partners to keep their radios flowing into the new car market, at around a 60% penetration rate. Of these 60% who buy a car with satellite radio, 46% of those people choose to keep it after the promotion trial runs out.
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General Motors:
Sirius XM has a deal with GM which allows it to install their satellite radios in GM vehicles. This deal is valid till September 2020.
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Ford:
Sirius XM has an exclusive deal with Ford Motor Company which allows it to install its satellite radios in Ford cars until 2016.
- Sirius XM is also partner for companies like Toyota, Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai and Mitsubishi.
- Many trucks, boats and recreational vehicles include Sirius XM radios as a standard fit.
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Used car market becoming important for Sirius XM
Companies like CarMax and Vehix, which sell used cars, report that satellite radio penetration in the used car market is around 30%. The used car market is turning attractive for Sirius XM and penetration could grow from current levels presenting a strong opportunity for Sirius XM to exploit in the used car market.
Increasing competition
Pandora is increasingly pushing into automotive segment, thus presenting a relatively new threat to Sirius XM. In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer to provide internet radio in cars. Companies like General Motors, Hyundai and Toyota have announced plans to launch vehicles with new systems that will stream online radio from Pandora. Pandora has also developed relationships with major automobile manufacturers, including Ford Motor Company, Mercedes-Benz and MINI (BMW Group), and with suppliers of major automobile manufacturers, to integrate the Pandora service into current and future automotive sound systems.
Ability to afford unique content
Sirius XM's business model is based on subscription fee, and therefore the company is able to afford unique and exclusive content that separates it from other radio services. The company will continue to sustain this ability and therefore, grow its user base.
Leveraging internet usage
Sirius XM has launched its product Lynx, to leverage the growing internet usage and boost its retail subscriber base. Listeners can use this portable device to connect to the internet and listen to on-demand music on Sirius XM internet radio. Therefore, the company has is becoming a hybrid radio service provider leveraging both satellite and internet media.
Trefis Forecast Rationale for Advertising Revenues
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Advertising revenue includes the sale of advertising on non-music channels, net of agency fees. Agency fees are based on a stated percentage per the advertising agreements applied to gross billing revenue.
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${forecast} increased from $34.19 million in 2007 to $47.19 million in 2008. This 38% increase was due to the merger with XM (amounting to $10 million increase) and also due to an increase in advertisers. In 2009, ${forecast} increased by 10% to $51.75 million. The increase was due to the inclusion of XM revenue from the Merger, which was offset by a decrease in ad revenue due to bad economic environment.
In 2010, ${forecast} increase by 25% to $64.5 million. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising. The years 2011 and 2012 saw growth of close to 14% and 12% respectively.
Going forward, we expect ${forecast} to continue to grow at a healthy rate during the Trefis forecast period.
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Advertising business depends heavily on the overall economic conditions in the country. Businesses try to cut down on advertising and marketing expenses during bad times. As the US economy regains its growth pattern, we expect Sirius XM's advertising revenues to increase in line with it.
Sirius XM is currently expanding its subscriber base and this is expected to help its advertisers gain more exposure and hence lure them towards Sirius XM for advertisements.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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