Sirius XM Earnings: Can Subscriber Gains Beat Guidance Again?

Sirius XM (NASDAQ:SIRI) will report its Q2 2013 earnings on July 25. We expect strong results driven by healthy subscriber gains and higher average revenue per subscriber. U.S. car buyers purchased roughly 1.4 million cars and light trucks in June, bringing the half year new vehicle sales to about 7.8 million. ^[1] This implies growth of roughly 7.7% over the first half of 2012 which suggests that the U.S. automotive industry could see another record year as sales continue to climb since the recession of 2008-2009. As a result, Sirius XM had another good quarter and recently reported net subscriber gain of 715,000, which prompted it to raise its full year guidance to 1.5 million net subscriber additions. ^[2]

The company, which added over 2 million net subscribers last year, has grown its overall subscriber base from 19 million in 2008 to 23.9 million in 2012. This growth was primarily driven by improved auto sales and the company’s push into the used-car market and an increase in the number of partnerships with automakers and dealers. These factors continue to be Sirius XM’s prime business drivers. In Q2 2013, the company reached 10,000 dealer partnerships in pre-owned market.

See our complete analysis for Sirius XM

Economic Recovery & Dealer Partnerships Are Boosting Subscribers

Every year Sirius XM pays a large sum to its OEM (original equipment manufacturers) partners to keep its radio equipment flowing into the new car market at around 60% penetration rate. Of these 60% who buy a car equipped with satellite radio, just under half (45-46%) tend to convert to self-pay subscribers after the promotion trial runs out.

That’s a healthy rate, and so Sirius XM will continue to benefit from its relationships with car makers. For instance, the company has a deal with General Motors (NYSE:GM) which is valid till September 2020. It has also entered into long-term contracts with other car makers such as Ford, Toyota, Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai, and Mitsubishi. Several trucks, boats and recreational vehicles also include Sirius XM radios as standard installation.

Car sales in the U.S. are picking up with a gradual improvement in the economy. This automotive market growth is being further helped by higher availability of financing and lease deals. Overall auto sales in the U.S. stood at around 14.5 million in 2012 and seem to be on track to cross 15.5 million in 2013. Vehicle sales for Q1 2013 reached about 3.7 million, implying growth of roughly 7% over the first quarter of 2012. However, this growth accelerated slightly in the second quarter with June sales increasing by more than 9% over the same period last year. ^[1]

Growth In Average Revenue Per Subscriber Will Help

Sirius XM raised the price of its basic tier beginning 2012. Although the roll-out was gradual, we believe that all of Sirius XM’s subscribers had transitioned to the new pricing by Q1 2013, and the impact on Q2 will be negligible. However, the higher adoption of the company’s Internet add-on service will aid revenue growth.

While most of the radio listening occurs inside the vehicles that come fitted with satellite/terrestrial radio equipment, Pandora (NYSE:P) has proved that there is a big market for Internet radio as well. The company has over 65 million active users who use its Internet radio service on smartphones, tablets, computers and a variety of Internet-enabled devices. In 2009, SiriusXM started offering Internet radio add-on service, which is currently priced at $3.50 per month. We believe that over time, more Sirius XM subscribers will sign up for this service as it will offer them flexibility and convenience and expand their listening experience to multiple devices. To strengthen its Internet offerings, Sirius XM launched an on-demand service in 2012 that allows its Internet subscribers to choose their favorite episodes from a catalog of more than 300 shows and over 3,000 hours of listening content on smartphones and online.

Estimating Future Growth

For the last three years, Sirius XM’s subscriber base has grown at an average annual rate of about 8%. The growth rate hasn’t fluctuated much, and in fact slightly grew to 9% in 2012, which was a record year for the company. If we look at the absolute numbers, the company gained on average 1.7 million subscribers annually. However, this count has been increasing each year, amounting to 2 million in 2012. Does that mean the subscriber gains will be even higher in 2013?

We feel that overall subscriber additions may drop slightly. The company seems conservative about its guidance and expects to gain 1.5 million net subscribers in 2013. Growth in the U.S. car market is also expected to slow down this year. In addition, Sirius XM’s new vehicle conversion rate has dropped slightly from 46% in 2010 to 45% in 2012. Furthermore, competition is likely to increase from companies such as Pandora (NYSE:P) and Apple (NASDAQ:AAPL). Driving is a popular time for listening to music  and traditional Internet music companies will try to get a bigger share of this market. While we expect the percentage growth to come down, we believe that Sirius XM will gain 1.7 million subscribers annually over the long term, similar to what it has done in recent years.

As of August 2012, Sirius XM satellite radios were installed in 50 million cars. However, only a fraction of these are active. The company expects that over 100 million cars will have factory-installed Sirius XM radios by 2018. However, we don’t expect Sirius XM’s subscriber base to double in this manner as that would imply no changes in the market scenario and the level of competition.

Our price estimate for Sirius XM stands $2.61, implying a discount of about 25% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. U.S. Car Sales Pace Hits Five Year High, The Wall Street Journal, July 2 2013 [↩] [↩]
2. SiriusXM Surpasses 25 Million Subscribers, Sirius XM Press Release [↩]