Sirius XM Earnings Preview: Subscriber Additions May Moderate

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Sirius XM (NASDAQ:SIRI) will report its Q1 2014 earnings on April 24. The satellite radio company has grown its profits and cash flows at an impressive rate over the last few quarters, primarily due to strong subscriber additions. However, this quarter’s results might just be the beginning of the end of this brisk growth phase. While we expect margins to continue to increase, the net subscriber gain may come down due to lack of meaningful growth in gross subscriber additions. Additionally, the impact of the price increase that the company implemented in the beginning of the year is likely to be minimal due to different billing cycles for customers. Our assessment assumes that there will be no meaningful change in some of the metrics such as new vehicle conversion rate, penetration rate or churn percentage.

Our current price estimate for the company stands at $3.45, implying a premium of about 10% to the market.

See our complete analysis for Sirius XM

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Subscriber Additions Will Moderate

Car sales in the U.S. stood at 3.75 million in the first quarter of 2014, registering a growth of just 1% over the same period last year. [1] Assuming that Sirius XM’s new vehicle penetration rate, conversion rate and churn rate remained stable, we believe that higher number of disconnections would have pushed net subscriber additions down. Churn rate refers to percentage of total subscribers discontinuing the service in a given time period. Sirius XM’s total subscriber base jumped from 23.90 million at the end of 2012 to 25.56 million at the end of 2013. As the overall subscriber base increases and churn rate remains stable, the absolute number of disconnections will go up. This conclusion, coupled with our previous observation that gross subscriber additions will not change meaningfully due to barely any growth in U.S. car sales, implies that net subscriber additions will suffer. The market seems to have realized as well that Sirius XM’s honeymoon period is over and the company will need to resort to price increases to fuel its future growth. The stock has fallen significantly over the last two months.

Small Impact Of Price Increase

Sirius XM increased the price of its mid-level package (Sirius Select/XM Select) by 50 cents per month beginning 2014. Priced at $14.99 per month, this subscription plan is most popular among the company’s subscribers. Going forward, we believe that the incremental subscriber additions will continue to slow down and price increase will become a periodic phenomenon driving Sirius XM’s topline growth. Our back-of-the-envelope calculation shows that roughly 65% of Sirius XM subscribers are using its mid-level subscription plan, which implies that overall ARPU (average revenue per user) will see an increase of $0.33 for every 50 cents increase in mid-level subscription pricing. This further implies that quarterly revenues will go up by approximately $20 million, assuming that the new pricing is rolled out to everybody. However, that’s not the case, as the new pricing implementation will depend on when the billing cycle ends for a customer. Therefore, the first quarter will see minimal impact from this move.

Here are the calculations that suggest that ARPU can increase by $0.33 if the new pricing is rolled out to all the subscribers:

The prices (per month) for three subscription levels that Sirius XM was offering were $9.99, $14.49 and $18.99 at the end of 2013. However, choosing annual payment instead of monthly payment results in savings of $8.99 and $28.89 for mid and premium level packages. Assuming 50-50 split between annual and monthly customers, we arrive at an average monthly pricing of $13.87 and $17.79 respectively for these subscription plans. We further know that mid-level subscription plan is the most popular one, as Sirius XM has mentioned so on several occasions. We believe that over 50% of the subscribers are using this service.

Assuming a rough bell curve for distribution, we conclude that one possible subscriber distribution could be: 20.5% of them using base plan, 65.5% using mid-level plan and remaining 14% using premium plan. Besides roughly satisfying the criteria of bell distribution curve, this combination also results in ARPU (average revenue per user) that closely matches reported ARPU. The average number of self-pay subscribers stood at 20.876 million for Q4 2013 (average of quarter-beginning and quarter-end count). Additionally, the subscription revenue totaled $853 million for the same period. This gives us monthly ARPU of $13.61, which is close to $13.62 ARPU we get from our calculated subscriber split. Therefore, if the prices of mid-level subscription plan jump by 50 cents, overall ARPU will see an increase of $0.33 (65.5% of $0.50).

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. U.S. Auto Sales Data, autonews.com []