Sirius XM Q2 Earnings Preview: Expect Better Subscriber Additions than Q1

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Satellite radio provider Sirius XM (NASDAQ:SIRI) is set to report its Q2 2014 earnings on July 29. While the company’s brisk growth phase came to a halt in Q1 2014 with subscriber growth slowing down meaningfully, we expect the second quarter to be slightly better in terms of subscriber additions on account of healthy growth in new vehicle sales. However, we do not expect significant improvement in Sirius XM’s new vehicle penetration rate since it is already on the higher side (70%). Also, we expect the monthly churn rate to remain roughly stable, as it hasn’t changed much over the past several quarters.

In addition, 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 cycle for customers. Several customers prefer annual billing cycle over the monthly billing cycle because they can save upto $28.89 by paying annually instead of monthly. On the profitability side, we expect Sirius XM’s margins to continue to improve due to operating leverage gain resulting from topline growth. In the first quarter of 2014, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved by 400 basis points to 33.5%.

Our current price estimate for the company stands at $3.44, which is roughly in line with the market price.

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See our complete analysis for Sirius XM

Subscriber Additions can be Better than Q1

In Q1 2014, Sirius XM added just 267,000 subscribers as compared to 463,000 added in the same quarter last year. This can be attributed to two factors. First, the company’s subscriber base is getting big and appears to be nearing saturation. While Sirius XM has enjoyed strong growth in the number of subscribers over the past couple of years, it cannot expect similar growth from its current level of 25.6 million subscribers. Secondly, much of the company’s subscriber growth is dependent on new vehicle sales in the U.S., and they barely increased in the first quarter.  New vehicle sales in the U.S. stood at 3.75 million for the first quarter of 2014, registering a growth of just 1% over the same period last year.

While significant growth in number of subscribers in Q2 2014 is unlikely, due to an already large subscriber base, a healthy increase in car sales in the second quarter can help Sirius XM post better results than Q1. New vehicle sales in the U.S. in Q2 2014 increased by 7% to 4.41 million from 4.12 million in the same quarter last year. [1] Although we expect the company’s subscriber additions to go up as compared to the first quarter, they are less likely to match Q2 2013’s subscriber additions (715,000).

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. Since the company’s monthly churn rate was 1.9% in Q1 2014, and was around the same level in Q2 2013, we are inclined to believe that it remained in the 1.8%-2% range in Q2 2014.

Sirius XM’s total subscriber base jumped from 23.90 million at the end of 2012 to 25.60 million at the end of Q1 2014. As the overall subscriber base increases and churn rate remains stable, the absolute number of disconnections will go up. This will have an offsetting impact on gross subscriber additions resulting from healthy growth in U.S. vehicle sales.

Price Increase to have only a Marginal Impact

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, which Sirius XM has mentioned on several occasions. Making a conservative assumption that roughly 50% of Sirius XM subscribers are using its mid-level subscription plan, we arrive at an overall ARPU (average revenue per user) increase of $0.25 for every 50 cents increase in mid-level subscription pricing (50% x $0.50). This further implies that quarterly revenues will go up by approximately $18 million (3 x $0.25 x 25.6 million subscribers), if 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. Since many customers choose the money saving annual billing cycle, we do not expect a significant impact of the price increase on second quarter results.

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