Sirius XM Earnings: Diverse Content And Used Car Progress Brighten Up The Future

Sirius XM (NASDAQ:SIRI) concluded another strong quarter with its Q3 profits meeting estimates, revenues beating expectations and total paid subscribers growing 8% year over year. The company even raised its full year guidance for revenue, EBITDA and net subscriber additions, encouraged by its performance during the first three quarters. ^[1] A strong rise in new vehicle sales, a surprising increase in new vehicle penetration rate and inroads into the used car market, helped Sirius XM post strong quarterly results. The four percentage point year-over-year rise in new vehicle penetration rate to 75% can be attributed to the satellite radio company’s growing popularity, that stems from its diverse content. ^[2]

Looking ahead, as Sirius XM continues to add more depth to its content by expanding its horizon, it could maintain its penetration rate in the high 70s. It is worth noting that many expected the satellite radio company’s new vehicle penetration rate to saturate at around 70%. Also, with a consistent push in the used car space, Sirius XM expects to keep its subscriber additions running, which will directly impact its topline. In fact, during the third quarter, the company added 525,000 subscribers, which is about 21% more than the number of subscribers added in the same quarter last year. Backed by the improving penetration rate, growth in new car sales and expansion in the used car market, subscriber growth appears to be accelerating.

Our current price estimate for the company stands at $3.94, just below 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

Third Quarter Highlights

Sirius XM’s Q3 revenues increased 11% to $1.17 billion, driven by a rise in the number of subscribers that now total at 29 million. Its adjusted EBITDA grew 17% year-over-year to a record value of $447 million with margins at 38%, a two percentage point year over year improvement. Net income climbed to $167 million from $136 million in the year ago period, and earnings per share of $0.03 increased 50% year over year. In addition, Sirius XM repurchased 144 million shares worth $553 million during the quarter, bringing its total share repurchases over the last three years to $6 billion. ^[1]

Diverse Content Is Still Pushing New Car Penetration Rate

While Sirius XM’s new vehicle penetration rate was hovering around 71% for the past several quarters, it surprisingly jumped to 75% in Q3 2015. Along with the 6% rise in new vehicle sales in the third quarter, the four percentage point rise in penetration rate played an instrumental role in the company’s topline growth. Sirius XM’s growing reach in the new car segment still appears to be growing, which can be explained by its strong content portfolio.

Sirius XM’s key selling point is that it offers diverse and unique content spread over numerous channels comprising commercial free music, sports, talk shows, news stations, etc. Since the satellite radio provider’s business model is based on subscription fees, it is able to afford unique and exclusive content that separates it from other radio services. An example of its high quality content is The Howard Stern show hosted by the National Radio Hall of Famer, Howard Stern.

During the third quarter of 2015, Sirius XM renewed its longstanding agreements with NFL and NHL, which is likely to prompt a number of sports fans to tune in its radio channels. Also, the satellite radio company provided end-to-end coverage for Pope Francis’s U.S. visit, and launched FOX News Headlines 24/7, a channel that provides all the daily news in less than 15 minutes anytime during the day. Sirius XM has already started covering 2016 elections with several channels broadcasting news and headlines. The company covered several music events during the third quarter, including Austin City Limits and Lollapalooza, and held exclusive interviews with a number of music personalities. Sirius XM has top-grade content along several verticals which is bound to garner listeners’ attention, propel subscriber growth and improve penetration rate in new as well as used car market.

Exploring Opportunities In The Used Car Space

The used car market is almost two-and-a-half times in size as compared to the new car space, and Sirius XM’s penetration there is still in low 30s. This clearly indicates a significant scope for expansion and the company appears to be progressing well on this front. In fact, CEO Jim Meyer has said that by 2025, 180 million cars in the U.S. will have Sirius XM services running. At present, there are about 240 million cars in the U.S. and Sirius XM’s equipment are installed in just 75 million.

A few years back, Sirius XM introduced its “direct-to-dealer pre-owned program” authorizing franchise dealers to offer Sirius XM subscription to used car buyers. Franchise dealers represent a third of the used car market and this is the area where Sirius XM has been doing very well. Back in 2010, only 100 dealers were included in the direct-to-dealer program, but the figure has rapidly gone up to 18,000. Also, in 2013, the company launched its Service Lane program, in which it offers a two-month free subscription to car owners who bring their cars for servicing at particular stations. At present, 8,000 dealers participate in this program. During the recently concluded quarter, Sirius XM signed an agreement with an insurance company for co-marketing of its subscription to used car owners. Jim Meyer stated recently that the company’s biggest growth opportunity in the used car market lies in the franchise space at least for the next four years. However, It is still struggling to find used car buyers in the “independent dealer” and “private deals” segments, which account for about two-thirds of the used car market.

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1. Sirius XM Reports Third Quarter 2015 Results, Sirius XM, Oct 22 2015 [↩] [↩]
2. Sirius XM Q3 2015 Earnings Transcript, Oct 22 2015 [↩]