SiriusXM (NASDAQ:SIRI) will report its Q2 2012 earnings on August 7, and we expect solid financial results backed by growth in auto sales during the quarter and price increase implemented by the company. SiriusXM has impressively managed to sustain its new vehicle conversion rate and that is partially the reason why it was able to add close to 600,000 subscribers in Q2. SiriusXM has already reported this metric and updated its guidance for full year 2012. It now expects full year subscriber additions to be close to 1.6 million and full year revenues to reach $3.4 billion.
Costs are Important
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With the above disclosures provided in advance, the earnings will provide more color into costs and expenses as well as the competitive scenario. Last quarter the company saw a notable increase in revenue sharing and royalty costs, and these are some of the key metrics that will govern the company’s profitability going forward.
SiriusXM has been trying to get direct licenses from music labels and artists so as to avoid the intermediary body SoundExchange. This hasn’t been successful yet and we’ll watch out for any update from the company on this issue. If SiriusXM manages to do this, it can control the future royalty rates, thus controlling costs better as well as offer more personalized experience to customers.
Outlook for Later Half of the Year
Given that SiriusXM is heavily dependent on the automotive channel, the number of automotive subscribers is the prime stock driver. We have already established that this metric is performing well so far. Even though Ford (NYSE:F) and GM (NYSE:GM) sales were down in July, overall vehicle sales increased as other car manufacturers are doing well.  Thankfully, Sirius XM has relationships with several car manufacturers, thus diversifying its risk. Therefore we expect subscriber additions to remain strong this year.
Risks To Consider
Sirius XM, although currently a very popular choice for vehicle owners, faces some threats in the future from radio services such as Pandora (NYSE:P) and Clear Channel Radio with their enhanced personalized service that will look to push further into the automotive market. The downside to Sirius XM is that it is heavily dependent on the automotive channel and therefore needs to watch out for any developments in this arena. Over time, even other services such as Spotify and potentially Apple (NASDAQ:AAPL) will try to establish their presence in in-vehicle systems.
Our price estimate for Sirius XM stands at $2.32, implying a premium of roughly 10% to the market price.Notes: