Sirius XM Earnings Preview: Subscriber Additions Can Pick Up

+26.91%
Upside
3.88
Market
4.92
Trefis
SIRI: Sirius XM logo
SIRI
Sirius XM

Satellite radio provider Sirius XM (NASDAQ:SIRI) is scheduled to release its Q3 2014 earnings on October 28th. While the company didn’t perform too well in the first quarter, due to only moderate growth in new car sales, its subscriber growth picked up in the second quarter, driven by a 7% rise in new vehicle sales. We expect this trend to continue in the third quarter, as new vehicle sales in Q3 have grown at a faster pace than the second quarter. 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 has not 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 cycles for customers. Some customers prefer an annual billing cycle over the monthly billing cycle, because they can save up to $28.89 by paying in one increment up front instead of twelve. On the profitability side, we expect Sirius XM’s margins to continue to improve, due to the operating leverage that results from topline growth. In the first two quarters of 2014, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved by 400 basis points and 570 basis points, respectively.

Our current price estimate for the company stands at $3.49, which is about 10% above the current market price.

Relevant Articles
  1. Down 10% Since 2023, Will Sirius Stock Recoup These Losses After Q4 Results?
  2. What To Expect From Sirius’ Q3 After Stock Down 28% This Year?
  3. What’s Next For Sirius Stock After A 26% Fall This Year?
  4. Sirius Q2 Earnings: What Are We Watching?
  5. What To Expect From Sirius XM’s Stock Post Q1?
  6. Sirius Stock Down 30% So Far in 2023, What’s Next?

See our complete analysis for Sirius XM

Healthy Subscriber Additions may Continue

In Q1 2014, Sirius XM added just 267,000 subscribers as compared to 463,000 added in the same quarter last year, due to slow growth in new car sales. Given the company’s large subscriber base and the likelihood that it is nearing saturation, healthy subscriber growth had seemed less likely. However, Sirius XM added a total of 475,472 subscribers in the second quarter of 2014, as new car sales in the U.S. jumped 7%. As a result, the company’s overall subscriber base increased 5% year over year to 26.3 million at the end of Q2. This makes it evident that sales of new cars is the primary driving factor for the satellite radio provider’s subscriber growth. During the third quarter of 2014, new vehicle sales in the U.S. increased by 8% to 4.27 million, from 3.96 million in the same quarter last year. [1] Hence, we have sufficient reasons to believe Sirius XM’s subscriber growth may have picked up a little in Q3 2014.

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. The churn rate refers to the 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 slightly higher in Q2 2014, we are inclined to believe that it remained in the 1.8%-2.0% range in Q3 2014. Sirius XM’s total subscriber base jumped from 23.90 million at the end of 2012 to 26.3 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.

Expect Marginal Impact from Price Hike

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 would go up by approximately $20 million (3 x $0.25 x 26.3 million subscribers), if the new pricing is rolled out to everybody. However, that shall not be 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 third quarter results.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid CapMore Trefis Research

http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Monthly Sales Table, Automotive News []