Revenues jumped 11.5% and adjusted EBITDA climbed 20% as Sirius XM (NASDAQ:SIRI) reported another strong quarter.  The company gained 715,000 net subscribers in Q2 2013, thanks to its strong performance in both new and used car segments, marketing campaign aimed at reactivating radio, and lower self-pay churn. 
Sirius XM has raised its full year subscriber guidance to 1.5 million net additions and expects its adjusted EBITDA to grow by 24%.  However, we believe that it may yet again beat its guidance as the fundamentals driving the business remain strong and the company continues to invest in enhancing its content, service and dealer partnerships. The first two quarters saw net subscriber additions of 1.17 million.  The company’s full year guidance suggest that it will see a quarterly subscriber gain of close to 165,000 in the latter half of 2013. Now this seems a bit low given Sirius XM’s recent history and the ongoing strength in the U.S. automotive market. Don’t be surprised if the company’s full year results blow past its current expectations!
It is reassuring that Sirius XM’s topline growth hasn’t come at the expense of its margins, thanks to the popularity of its subscription model. The company’s price increases have been well received and the content quality and variety keeps customers interested. This has helped Sirius XM in managing its content costs much more efficiently than some other radio services operators such as Pandora (NYSE:P). We expect the company to gain operating leverage as it grows, and expect that its overall margins will continue to increase.
Sirius XM launched two new channels in the second quarter – Entertainment Weekly Radio and Comedy Central Radio. These are very popular brands in media and entertainment industry and will help the company attract more customers. In addition to this, it has also launched World Radio, which is focused on rural American life, the western lifestyle and agribusiness.
Favorable Vehicle Mix Is Helping
Sirius XM’s new car penetration rate has increased substantially over the past few years. Although it appeared that the figure had stabilized in 2012, the second quarter of 2013 saw another jump. Sirius XM saw its new car penetration rate growing to 69%, the highest in the company’s history.  This can be attributed to favorable vehicle mix, implying that automakers with strong relationship with Sirius XM gained market share in the second quarter.
New car penetration rate essentially refers to the number of new vehicles sold in the U.S. that come fitted with the company’s radio equipment. Needless to say, the figure depends on the extent of Sirius XM’s relationship with automotive companies and partnerships with dealer networks throughout the country. 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. The company has entered into long-term contracts with car makers such as General Motors, Ford, Toyota, Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai, and Mitsubishi. Several trucks, boats and recreational vehicles also include Sirius XM radios as standard installation. Currently, more than two-third of new vehicles sold in the U.S. have Sirius XM’s radio installed. The table below shows how this proportion has trended over the past 5 years.
The U.S. Automotive Market Showing Strength
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.  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. 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.  Sirius XM stated during its Q2 2013 earnings announcement that the vehicle sales in the U.S. could reach 15.5 million this year, thanks to the gradual improvement in the economy and better financing deals.
As of August 2012, Sirius XM’s 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, and about 150 million will have it in the next 10 years. However, we don’t expect Sirius XM’s subscriber base to triple in this manner over the next decade as that would imply no changes in the market scenario and the level of competition. Nevertheless, an expectation that the subscriber base doubles over the next decade suggests an upside of about 25% to our current price estimate.
Our price estimate for Sirius XM stands $3.20, implying a discount of about 15% to the market price.Notes: