Sirius XM Could Report Steady Subscriber Adds Yet Again

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Sirius XM

We expect the satellite radio company Sirius XM (NASDAQ:SIRI) to report another quarter of sturdy subscriber growth, when it comes out with its Q4 2015 earnings on February 2nd. [1] Steady growth in new car sales and inroads into the used car market are expected to have driven subscriber growth for the company during the quarter. While new vehicle penetration in the new car market remains stable at 71%, a rise in vehicle sales should have transitioned proportionally into an increase in the subscriber base. For used car market, even though vehicle sales growth is comparatively slower, its big size and Sirius XM’s constantly increasing penetration rate should have bolstered subscriber growth here as well. 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 third quarter of 2015, the company’s EBITDA (earnings before interest tax depreciation and amortization) had increased 17% year over year (six percentage points faster than revenues) to a record high of $447 million.

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

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Strong subscriber Additions Expected

In Q4 2014, Sirius XM had added a total of 576,689 subscribers, backed by an increase in new car sales and a moderate improvement in the new vehicle penetration rate. This was the company’s best Q4 performance since 2007, which makes the comparable period appear tough. However, we believe that Sirius XM can report a sturdy rise in subscribers for two reasons. Firstly, the company’s performance on the subscriber front has been very good throughout the 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 paid subscriber base grew 8% year over year in Q3. Secondly, growth in new car sales in Q4 has been better than the first three quarters combined. The growth figure for new car sales in the U.S. for the first nine months stood at 5.0% and for the year it was 5.7%. [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 Q4 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.

Profits Should Keep Improving

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%, with a marginal increase to 38% in Q3. For last year, Sirius XM reported its EBITDA margins at 35%, so we expect some year over year improvement in margins this time around.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Sirius XM Investor Relations []
  2. U.S. Automotive News []