Sirius XM’s Strong Subscriber Growth Bolsters Outlook

Satellite radio provider Sirius XM (NASDAQ:SIRI) reported a strong increase in its new subscriber additions for the first quarter of 2015, building on its sturdy 2014 performance. The company added 431,000 net new subscribers during the quarter, a 61% improvement over 267,000 subscribers added in the same quarter last year. Self-pay subscriber additions for the quarter stood at 394,000, way ahead of the year ago figure of 173,000. The strong rise in the number of new subscribers even prompted the company to raise its full year subscriber guidance to 1.4 million from the earlier estimate of 1.2 million. Sirius XM’s diverse content, its aggressive foray in the used car market, and increases  in new vehicle sales are driving growth in not only the satellite radio company’s subscribers,But its top- and bottom-lines as well.

During the quarter, Sirius XM’s even stronger at 24%. However, despite the sturdy growth, the company’s results missed market estimates by a small margin. Revenues at $1.08 billion were just below the consensus estimate of $1.09 billion, and EPS at $0.02 was a penny behind estimates of analysts polled by Thomson Reuters. Even Company’s annual revenue guidance fell short of expectations. Sirius XM expects to generate $4.47 billion in revenues in 2015, while the market believed that it could garner $4.49 billion. ^[1] Nevertheless, the company’s growth is impressive and it still has a lot of growth avenues to progress upon.

Our current price estimate for the company stands at $3.78, implying a discount of about 5% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Sirius XM

New Car Market Driving Growth

Rising new car sales and increases in penetration rates have been the main growth drivers for Sirius XM’s subscriber base for a long time now. Though penetration rate has now stabilized around 70%, new car sales continue to increase at a decent pace, providing the company ample growth. During the quarter, sales of new vehicles in the U.S. rose 6% and car makers continued to adopt satellite radios. In fact, Sirius XM reported that it saw increase in penetration from leading car manufacturers such as Toyota, Nissan and Honda. Its overall penetration rate crossed 71% and churn rate declined to 1.8%, which is reportedly its best performance since Sirius and XM merger. Although improving penetration rate from this level is a little unrealistic, Sirius XM is confident that it can maintain this rate at 70%. Interestingly, there is speculation that Sirius XM is showing interest in Nokia‘s (NYSE:NOK) HERE unit, a service that could provide navigation solutions to its users. ^[2] If Sirius XM does bundle a navigation system along with its existing services (not necessarily Nokia’s HERE), its penetration rate in the car market can go up.

Used Car Market Provides Tremendous Potential

Sirius XM stated that the company’s conversion rate in new and used car markets was record high in the first quarter.  The company now has 16,000 franchise and independent  dealers registered in its pre-owned program, reporting sales data of used cars. This figure was just 100 back in 2010. Additionally, Sirius XM has enrolled more than 7,000 dealers in its service lane programs, wherein dealers offer trials to customers who bring in their cars for servicing. It has even signed several agreements with dealer management service providers and intermediaries, to facilitate more trials for used car owners. To the company’s delight, trials offered increased by more than 35% year over year in the first quarter of 2015.

Mobile App And Household Plans Targeting A Bigger Market

Sirius XM said that it is driving customers and “trialers” to its mobile app, enhancing engagement outside cars. A while back, the company had announced that it plans to introduce a streaming platform, with apps for iOS and Android, that will extend its services beyond cars. Sirius XM had began the the beta test phase of these apps in late 2014 and had planned to roll them out in the first half of 2015. It appears that the initial roll-out was able to garner significant attention, which paints a pleasing picture for its broader roll-out in the future.

Sirius XM has been testing a new household plan for its subscribers as a viable alternative for per radio pricing. The company’s CEO said that there are over 80% households in the country with more than one vehicle, which presents an incredible opportunity. This plan is still in its test phase and the company believes that when implemented effectively, it can positively impact subscriber growth as well as ARPU (average revenue per user). Sirius XM is combining its IP and satellite technologies to offer a broader spectrum of content to its users.

Connect Services And Next-Gen Platform Elevating Content Quality

During its earnings call, Sirius XM stated that its connected vehicle business, which offers added vehicle safety and security, vehicle health monitoring, remote access services etc., was improving strongly. It also announced the launch of Nissan Connect Services in 2016, and agreements with Jaguar Land Rover and Subaru. With the company looking to increase its scale in connect services, we believe that it stands a better chance of propelling its subscriber growth. ^[3]

Sirius XM is working with leading automakers to develop a next-gen audio entertainment platform, which will provider customers access to a greater variety of content as well as more control over the content. In addition, the satellite radio company is planning to offer other features such as customized music mixes, on-demand content and enhanced discoverability. Providing a wide array of small incentives in terms of content and features can help Sirius XM increase its new and used vehicle penetration rate and lower its monthly churn rate.

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1. Sirius XM Reports First Quarter 2015 Results, Sirius XM, Apr 28 2015 [↩]
2. Nokia Targeting Apple, Alibaba, Amazon in Maps-Unit Sale, Bloomberg, Apr 23 2015 [↩]
3. Sirius XM Q1 2015 earnings transcript, Apr 28 2015 [↩]