Sirius XM Earnings Preview: Expecting Another Quarter of Steady Subscriber Adds

As Sirius XM (NASDAQ:SIRI) comes out with its Q3 2015 earnings on October 22nd, it may find it hard to surpass its year ago performance, when it reported a compelling rise in the number of subscribers. ^[1] Following its steady performance in Q1 and Q2 2014, the satellite radio company had reported 5% year over year growth in total paid subscribers and 7% growth in self-pay subscribers in Q3. Though the prior year comparison is tough, a relatively stronger increase in new car sales in Q3 2015 can help Siriux XM report mid-single digit growth in subscribers and strong rise in revenues. On the other hand, we do not expect any notable improvement in its new vehicle penetration rate which is already stable at a high of 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 bottomline front, we expect continued improvement in Sirius XM’s margins on account of operating leverage gain that results from top-line growth. During the second quarter of 2015, the company’s EBITDA (earnings before interest tax depreciation and amortization) had increased 12% year over year (four percentage points faster than revenues) to a record high of $415 million. Also, we expect net income growth to be much better as compared to the previous quarter, because Sirius XM had accounted for certain lawsuit settlement charges in Q2 2015.

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

See our complete analysis for Sirius XM

The Company Is Likely To Report Strong Subscriber Adds

In Q3 2014, Sirius XM had added a total of 432,817 subscribers, backed by rise in new car sales and a moderate improvement in new vehicle penetration rate. Subscriber additions reflected a year over year increase of 5%, with 7% growth in self-pay subscriber base. While the comparable period appears tough, we believe that Sirius XM can report a sturdy rise in subscribers, for to two reasons. Firstly, the company’s performance on the subscriber front has been very good this year, against tough odds. In Q1, subscriber growth was strong at 431,000 additions, with new vehicle sales growing 5.6% year over year. In the subsequent quarter, even though new car sales growth slowed down, the company added a total of 692,000 subscribers. And secondly, growth in new car sales in Q3 has been better than the first and the second quarter combined. The growth figure for new car sales in the U.S. for the first six months of 2015 stood at 4.4%, and for the first nine months, it is at 5%. ^[2]

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 Q3 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.

Consistent Rise In Profits

Sirius XM has been reporting consistent rise in EBITDA margins for the past several quarters on the back of strong operating leverage. In Q1 this year, adjusted EBITDA soared 19% year over year to its record value of $399 million, with margins at 37%. In the subsequent quarter, margins remained stable at 37%. In Q3 last year, Sirius XM reported its EBITDA margins at 36%, so we expect some year over year improvement in margins this time around. Also, the company’s net profit growth is expected to be back on track after a lackluster Q2, when it had accounted for $108 million paid in a pre-1972 royalty dispute.

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1. Sirius XM Investor Relations [↩]
2. U.S. automotive news [↩]