Sirius XM Earnings Preview: Steady Subscriber Additions And Bottomline Growth To Continue

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Satellite radio provider Sirius XM (NASDAQ:SIRI) is scheduled to release its Q4 2014 earnings on February 5th. 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. In the third quarter, as new vehicle sales increased 8%, Sirius XM’s revenues jumped 10% to $1.06 billion, driven by 5% growth in subscriber base and 7% increase in the number of self-pay subscriber.

We believe Sirius XM’s growth continued in the fourth quarter, driven by healthy growth in new car sales between October and December. However, we do not expect there was 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 will now be visible in its annual figures. 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 believe that  Sirius XM’s margins continued to improve in the quarter, due to the operating leverage that results from top-line growth. In the first three quarters of 2014, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved by 400 basis points, 570 basis points and 530 basis points, respectively.

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Our current price estimate for the company stands at $3.49, which is roughly inline with the current market price.

See our complete analysis for Sirius XM

Subscriber Additions To 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 trend continued in Q3 as new car sales in the U.S. increased 8%, making it evident that sales of new cars are indeed the primary driving factor for the satellite radio provider’s subscriber growth.

Annual growth figure for new car sales in the U.S. stands at 6%, which indicates healthy growth in Q4 as well, considering 2%, 7% and 8% growth, respectively, in the first three quarters of 2014. [1] Hence, we have sufficient reasons to believe that Sirius XM’s steady subscriber growth continued in the fourth quarter.

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 roughly the same in Q2 and Q3 2014, we are inclined to believe that it remained in the 1.8%-2.0% range in Q4 2014. Sirius XM’s total subscriber base jumped from 23.90 million at the end of 2012 to 26.7 million at the end of Q3 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 Steady Bottomline Performance

Sirius XM reported considerable improvement in its adjusted EBITDA margins during the first three quarters of 2014, driven by strong growth in revenues and comparatively weaker rise in operating expenses. In Q3, adjusted EBITDA soared 29% year over year to its record value of $381 million, with margins at 35.7%. We believe that strong rise in adjusted EBITDA and improvement in operating margins continued in Q4, even though Sirius XM had lowered its adjusted EBITDA outlook for the complete year marginally to $1.425 billion.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. U.S. automotive volumes 2014 []