VALUATION HIGHLIGHTS

1. Advertising constitutes 80% of the Trefis price estimate for Sirius XM Radio's stock.
2. Equipment, Royalties and Other Revenues constitute 16% of the Trefis price estimate for Sirius XM Radio's stock.

WHAT HAS CHANGED?

1. Sirius Q4 Snapshot

The company's revenue clocked in at $2.3 billion in Q4, a mere 0.2% increase over the past year, but it's the first time that the satellite radio provider posted a top-line increase after three consecutive year-over-year declines. It also posted a slight uptick in self-pay subscriber additions. Its profit of $0.09 a share was also just ahead of expectations. It has now posted three straight beats on the bottom line.

Note: Sirius XM's FY'23 ended on December 31, 2023.

2. Sirius XM Posted its First Annual Revenue Decline Since Launching 22 Years Ago

Revenue declined 0.6% for the full year 2023, the first annual dip in Sirius XM's history. In addition, subscriber revenue, advertising revenue, operating profit, and pre-tax income declined for all of 2023. Also, the company's free cash flow of $1.2 billion was 23% lower than in 2022 -which itself happens to be 15% below where it landed in 2021.

3. Guidance for FY 2024

Sirius XM's guidance calls for $8.75 billion in revenue, 2% lower than the $8.95 billion it just delivered in 2023. The media giant sees free cash flow holding firm at $1.2 billion with a slight step down in adjusted earnings before interest, taxes, depreciation, and amortization

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Sirius XM's value that present opportunities for upside or downside to the current Trefis price estimate:

• Number of Sirius XM Subscribers: We currently forecast this figure to increase from 33.9 million in 2023 to about 36 million by the end of the Trefis forecast period. If subscriber additions accelerate and Sirius XM reaches a subscriber base of about 44 million by the end of the Trefis forecast period, there could be an upside of about 10% to the Trefis price estimate. This could happen if the company can further increase its penetration and success rate in new as well as used cars. On the other hand, if competition from Spotify and other radio/online audio streaming services increases and the subscriber additions slow down to around 31 million subscribers to current levels by the end of the Trefis forecast period, there could be a little over 5% downside to the Trefis price estimate.


• Sirius XM's Average Revenue Per Subscriber: We currently forecast this figure to increase from $203 in 2023 to about $217 by the end of the Trefis forecast period. If more subscribers upgrade to a higher-priced tier and as a result, the average revenue per subscriber reaches more than $240 by the end of the Trefis forecast period, there could be an upside of about 5% to the Trefis price estimate.

BUSINESS SUMMARY

Sirius and XM merged in July 2008 to form Sirius XM Radio. The satellite radio service provider offers channels comprising commercial-free music, sports, talk shows, news stations, and other channels in the U.S. Sirius XM radio channels are mainly available through receivers in automobiles but can also be accessed over the internet or through home stereos by using various accessories.

The firm's satellite radios are primarily distributed through automakers ("OEMs"), retail locations, and through their website. Sirius XM has ties with major automobile manufacturers such as Ford, GM, and Toyota. This helps drive its presence in the US automobile space. Additionally, satellite radio services are also offered to customers of certain rental car companies.

The firm's primary source of revenue is the subscription fee it charges customers for annual, semiannual, quarterly, or monthly subscriptions. Additionally, the company derives revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services such as weather, traffic, data, and backseat TV services.

As of Dec. 31, 2023, the business had a total of 39.9 million subscribers. This includes paid and promotional customers for both Sirius XM and Pandora. The issue, though, is that the subscriber count has remained flat. The Sirius XM service had 33.9 million customers at the end of 2023, slightly less than it did five years ago. And it's a similar situation for Pandora, which counts about the same number of self-pay subscribers now as it did at the end of 2018. For what it's worth, the customers who do pay for Sirius XM are sticky, as the service boasts a monthly churn rate of just 1.6%. Management is focused on improving the value proposition of the app with more differentiated content and better pricing.

SOURCES OF VALUE

Pandora Acquisition

Sirius XM completed the acquisition of Pandora for $3.5 billion in an all-stock deal in early 2019. Pandora was supposed to give Sirius XM a foothold in streaming and a way to consolidate two ad-supported platforms, but Pandora's audience has contracted in back-to-back years. As of Dec 31, 2023, Pandora and off platforms saw a 3% y-o-y dip in subscribers to approx $6 million.

Subscription fee

Sirius XM earns the majority of its revenues from the subscription fee it charges its subscribers. It offers various monthly, semi-annual, and annual plans to customers. The company also offers discounts on long-term subscriptions and on multiple subscriptions. As of now, the Sirius XM All Access package is available for $23.99 per month and the other basic packages are available at $18.99 and $13.99 per month.

Sirius XM in Cars

Sirius XM has contracts with nearly all major automobile manufacturers. Every year the firm pays out a large amount to its OEM (original equipment manufacturers) partners to keep their radios flowing into the new car market, at around a 75% penetration rate. Of this 75% who buy a car with satellite radio, 39%-40% choose to keep it after the promotion trial runs out.

• General Motors:

  Sirius XM has a deal with GM which allows it to install its satellite radios in GM vehicles. This deal was valid through 2027, and GM increased vehicles equipped with Sirius XM to nearly all Chevrolet, Buick, GMC, and Cadillac vehicles beginning with the model year 2021. In addition, the company also announced a significant expansion of its 360L platform at General Motors, this should further drive penetration.

• Toyota:

  Sirius XM has a deal with Toyota which allows it to install its satellite radios on all Toyota vehicles in the United States. This deal is valid until 2028.
• Sirius XM is also a partner for companies like Volvo, Mercedes-Benz, Honda, Ferrari, Kia, Bentley, BMW, Volkswagen, Hyundai, and Mitsubishi.
• Many trucks, boats, and recreational vehicles include Sirius XM radios as a standard fit.

KEY TRENDS

Used car market becoming important for Sirius XM

In FY 2023, Sirius XM's penetration rate in the used car domain was around 53%. The used car market is becoming attractive for Sirius XM and penetration could grow from current levels. This would present a strong opportunity for Sirius XM to exploit the used car market. The company expects used car trials to surpass new car trials in the foreseeable future and double in the next decade. These numbers suggest that the company is extremely confident about potential growth in the used car market.

Increasing competition

On-demand music streaming services are currently dominating the market, with Spotify being one of the leading players. Spotify had about 602 million Monthly Active Users (FY 2023) globally, far ahead of its nearest rival Apple Music, and continues to add more subscribers - driven by expansion into new markets. And they can satisfy all of the content needs that a person might have, whether it's music, news, sports, or podcasts. Further, connected cars that allow smartphone apps to stream seamlessly through Bluetooth should dampen the subscriber growth in premium-priced satellite-beamed platforms.

Ability to afford unique content

Sirius XM's business model is based on a subscription fee, and therefore the company can afford unique and exclusive content that separates it from other radio services. The company will continue to sustain this ability and therefore, grow its user base. An example of this front is its recently renewed contract with Howard Stern, which would probably keep him associated with Sirius XM through to his retirement.

Connected services

In addition to offering listening content through satellite radio sets factory-installed in cars, Sirius XM offers connected services to car manufacturers through its subsidiary – Sirius XM Connected Vehicle Services Inc. The company provides an array of features to enhance safety, security, and convenience. These include remote and assist services, automatic crash notifications, easy access to maps, weather, restaurants, and points of interest, scheduling service appointments, repairs, etc. Currently, Sirius XM provides connected services to Acura, BMW, Hyundai, Honda, Infiniti, Jaguar, Land Rover, Lexus, Nissan, Subaru, and Toyota. With new car sales increasing steadily, connected services should provide buyers an incentive to subscribe to Sirius XM services, which should keep its growth running. Coupled with the huge opportunity in the used car domain, this paints a pleasing picture for Sirius XM's future.