Sirius XM Beats Estimates As Subscriber Growth Picks Up

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In line with our expectations, Sirius XM‘s (NASDAQ:SIRI) subscriber growth picked up in the second quarter after a lackluster Q1 2014. Driven by healthy growth in new vehicle sales in the U.S., the company’s overall subscriber base increased by 5% year over year to 26.3 million, and the self-pay subscriber base increased 7% to 21.6 million. During the quarter, Sirius XM added a total of 475,472 subscribers, including 379,711 self-pay subscribers.

Fueled by robust growth in number of subscribers and a marginal increase in ARPU (average revenue per subscriber), the satellite radio provider’s subscription revenues jumped by 7.8% and overall revenues increased by 10% to $1.04 billion. This figure was slightly better than analysts’ expectation of $1.02 billion. [1] Following its Q2 2014 results, Sirius XM raised its full year revenue outlook to $4.1 billion from its previous forecast of $4 billion. For the total number of subscriber additions, the satellite radio provider reiterated its earlier guidance of 1.25 million. [2]

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

Used Car Market will Provide the Next Wave of Subscriber Growth

While gross subscriber additions suffered in the first quarter due to moderate growth in new car sales, they picked up in the second quarter as the new vehicle market performed better. Going forward, while we expect continued growth in Sirius XM’s subscriber base, it is likely to be slow. The satellite radio company has done well, but the brisk growth phase that it experienced over the last two years will not last forever. Its penetration rate in the new car market has somewhat stagnated at 70% and the total number of disconnections has gone up with the rising number of subscribers, aligning for a fairly stable monthly churn rate. In fact, Sirius XM’s monthly churn rate in Q2 2014 was 10 basis points higher than what it was in the same quarter last year. [3]

Although the new car market is saturating, the company remains hopeful about its growth prospects as it banks the next wave of growth on increased penetration in the used car market. There is some merit to this claim, though Sirius XM’s radio equipment is present only in about 20%-25% of the vehicles in the U.S. Moreover, there are about 65 million satellite enabled vehicles in the U.S. at present and Sirius XM’s conversion rate in this arena is low, at around 30%. The company is making some progress on the used car front as more than 13,000 dealers are now involved in its direct-to-dealer pre-owned program, up from 12,100 at the end of Q1 2014 and 100 in 2010. [3]

[Read:Sirius XM Turns To Used Car Market As New Car Market Matures]

To Investors’ Delight, Profitability Improved Despite a Slowdown in Subscriber Additions

The second quarter of 2014 turned out to be the best quarter ever for Sirius XM’s EBITDA (earnings before interest tax depreciation and amortization). The company’s adjusted EBITDA margin jumped 570 basis points from 30.0% in Q2 2013 to 35.7% in Q2 2014, despite 12% rise in operating expenses. Adjusted EBITDA soared 31% year over year to its record value of $370 million. [2]

So far, the year 2014 has been very good for the satellite radio provider’s EBITDA, given that it improved significantly in the first quarter as well. Sirius XM is gaining operating leverage with its steady top line growth, which is helping its margins. At the beginning of 2014, the company projected its adjusted EBITDA would be around $1.38 billion for the complete year, but it raised its guidance to $1.45 billion mid way through the year, encouraged by a couple of strong quarters.

In addition, Sirius XM’s net income, excluding the impact of certain purchase price accounting adjustments and loss on change in value of derivatives, increased almost 60% year over year to $131 million. Also, free cash flow increased by 42% to $335 million. [2] Although Sirius XM’s subscriber growth may not be as brisk as it was in the previous two years, significant improvement in income and cash flow should keep investors happy.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Sirius XM Profit Falls 4.4% as Expenses Rise, The Wall Street Journal, Jul 29 2014 []
  2. Sirius XM Reports Second Quarter 2014 Results, Sirius XM, Jul 29 2014 [] [] []
  3. Sirius XM’s Q2 2014 earnings transcript, Jul 29 2014 [] []