Sirius XM Likely To Report Strong Subscriber Adds And Bottomline Growth

Satellite radio provider Sirius XM (NASDAQ:SIRI) is scheduled to release its Q1 2015 earnings on April 28th. Since the company didn’t perform too well in the first quarter of 2014, due to only moderate growth in new car sales, we expect Q1 2015 growth figures to be much better, benefiting from both a favorable comparable period and steady growth in new car sales. It must be noted that Sirius XM’s subscriber additions had picked up in the second quarter of last year, driven by a 7% increase 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 the subscriber base and a 7% increase in the number of self-pay subscribers. Sturdy growth for the satellite radio provider continued in Q4 2014 with 9% growth in revenues and 7% increase in the number of subscribers.

While we believe Sirius XM’s growth continued in the first quarter, we do not expect there was any significant improvement in its new vehicle penetration rate, since it is already on the higher side (71%). Also, we expect the monthly churn rate to remain roughly stable, as it has not changed much over the past several quarters. 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. For the full year 2014, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved a strong 430 basis points to a record high of 35%.

Our current price estimate for the company stands at $3.78, implying a discount of about 5% to 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 year ago period, 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 significant number of subscribers in the subsequent three quarters, driven by robust growth in new car sales and a marginal improvement in the penetration rate, indicating that a rise in new vehicle sales is indeed the primary driving factor for its subscriber growth. The company added a total of 1.75 million subscribers in 2014, easily surpassing its initial estimates of 1.25 million subscriber additions, and signalling its supremacy in the market.

The growth figure for new car sales in the U.S. for the first quarter of 2015 stands at 5.6%, implying that Sirius XM would have seen solid subscriber gains in Q1 as well. ^[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. 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 remained around 1.8%-1.9% throughout last year, we are inclined to believe that it would have been less than 2% in Q1 2015. Sirius XM’s total subscriber base jumped from 23.9 million at the end of 2012 to 27.3 million at the end of Q4 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 all the four quarters of 2014, driven by strong growth in revenues and comparatively weaker rise in operating expenses. In Q4, adjusted EBITDA soared 17% 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 Q1. In fact, given that Q1 2014 wasn’t such a good quarter for the company, we believe that the year over year growth figure for its adjusted EBITDA this time around would appear promising.

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