Sirius XM Earnings Preview: Subscriber Additions Could Slow Down

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Satellite radio provider Sirius XM (NASDAQ:SIRI) is scheduled to release its Q2 2015 earnings on July 28th. [1] Since the company reported compelling subscriber growth in the second quarter of 2014, it might have a tough time in surpassing its year ago performance. Sirius XM’s subscriber additions had picked up in the second quarter of last year after a lackluster Q1, driven by a 7% increase in new vehicle sales. It had reported 5% year over year growth in total paid subscribers and 7% growth in self-pay subscribers. [2] A tough comparable period and a relatively weaker rise in new car sales in the second quarter of 2015 weaker Sirius XM’s subscriber growth for the period to be reported.

While we believe Sirius XM’s growth continued in the second quarter, we do not expect there was any significant improvement in its new vehicle penetration rate, since it is already on the high side (at 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 first quarter of 2015, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved strongly, reaching a record high of 37%.

Our current price estimate for the company stands at $3.82, which is just below the current market price.

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See our complete analysis for Sirius XM

Subscriber Additions May Be Weaker Than Q1

In Q2 2014, Sirius XM added a total of 475,472 subscribers, driven by growth in new car sales and a modest improvement in new vehicle penetration. In the quarter before that, the company had struggled with subscriber adds as growth in new vehicle sales wasn’t as strong. In Q1 this year, by contrast, subscriber growth was strong at 431,000 additions, with new vehicle sales at growing at 5.6%. This clearly indicates that a rise in new vehicle sales is indeed the primary driving factor for its subscriber growth. The growth figure for new car sales in the U.S. for the first six months of 2015 stands at 4.4%, and for the first quarter it was at 5.6%. This indicates that new car sales would have improved at a rate less than 4.4% in Q2,which suggests that Sirius XM will report weaker subscriber gains for the quarter. [3]

Assuming that Sirius XM’s new vehicle penetration rate, conversion rate and churn rate remained stable, we believe that a 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 was less than 2% in Q2 2015. 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 and the first quarter of 2015, driven by strong growth in revenues and a comparatively weaker rise in operating expenses. In Q1, adjusted EBITDA soared 19% year over year to its record value of $399 million, with margins at 37%. We believe that strong rise in adjusted EBITDA and improvement in operating margins continued in Q2. Sirius XM had reported adjusted EBITDA of $370 million with margins at 35.7% in Q2 2014. Given its consistent improvement, it should not be difficult for the company to best its year ago performance.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Sirius XM Investor Relations []
  2. Sirius XM Reports Second Quarter 2014 Results, Jul 29 2014 []
  3. U.S. automotive news []