The satellite radio service provider Sirius XM (NASDAQ:SIRI) recently released its Q1 2012 earnings. As we previously expected, the company added more subscribers that it previously guided and raised the subscriber outlook for the full year 2012 as well (see Sirius XM’s Earnings Will Be Fueled By Auto Market Strength). Q1 was very strong with respect to growth in the U.S. vehicle sales driven by good results from big automakers such as Honda (NYSE:HMC) and Ford (NYSE:F). The impact of price rise was negligible and in fact Sirius XM strengthened its churn compared to the last year. Given the good reception of price rise and improved auto sales outlook, Sirius XM now expects to gain about 1.5 million net subscribers in 2012 compared to its last guidance of 1.3 million.
Given Sirius XM’s track record of being conservative in its guidance, the continued strength in the auto market and based on existing investment plans, we expect that the radio company will gain about 1.6 million subscribers in 2012, slightly higher than its own guidance.
Despite the price increase, the company’s churn has come down compared to Q1 of 2011 while the new vehicle conversion rate remained stable. Furthermore, Sirius XM intends to invest significantly in sports programming and enhancing its online service with on-demand and personalization features. These elements, coupled with premium and quality content, will continue to attract new subscribers.
While other factors have been positive, the revenue sharing and royalty costs (as proportion of revenues) increased notably this quarter. How royalty rates trend in the future is going to be one of the key factors determining Sirius XM’s profits.
Currently we expect this cost to rise at a slow rate over the course of our forecast period as a result of mixed trends of price increment, SoundExchange’s push towards higher royalty fee and Sirius XM’s push to directly reach the record companies and artists.
Our price estimate for Sirius XM stands at $2.32, implying a premium of about 5% to the market price.