Satellite radio service provider Sirius XM (NASDAQ:SIRI) reported impressive revenue and subscriber growth in its Q4 2012 earnings results. During the year, the company added over 2 million net subscribers and grew its revenues by close to 13%.  Growing U.S. vehicles sales, an improvement in subscriber retention, Sirius XM’s sustained new vehicle conversion rate and push into the used-car segment are driving these subscriber additions. Even though the royalty rates are set to rise each year, Sirius XM will continue to grow its cash flow on the back of its robust subscription based business model. Adding unique programming, making its internet-based service more appealing and greater push in used car segment are going to be some of the focus areas for the company. In 2013, Sirius XM expects more than $3.7 billion in revenues and roughly 1.4 million net subscriber additions.
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Sirius XM’s growth has primarily come from automotive subscribers, and this largely depends on the broader trend in vehicle sales in the U.S. The automotive market growth is being helped by higher availability of financing and lease deals. The overall auto sales in the U.S. stood at around 14.5 million in 2012 and is expected to cross 15 million in 2012. 
While automotive market growth has helped, Sirius XM has also done well because of its sustained new vehicle conversion rate. This figure stood at around 44% for the fourth quarter, and is likely to remain within 44-46% range for the next few years.  The company has been able to strike deals with a host of auto manufacturers and as a result, close to 50 million vehicles in the U.S. are currently equipped with satellite radio. Management expects this figure to double over the course of next 5 years. 
The new car penetration rate (number of new vehicles equipped with satellite radio) remains at around 67-68%.  As these new vehicles enter the used-car market slowly, Sirius XM will have a greater opportunity to grab subscribers. The company added more than 1 million gross subscribers from used-car channel, and expects to increase this figure to 1.5 million in 2013. 
Internet & Personalization
Sirius XM is making some serious effort to branch out to internet medium and promote its online streaming app. This will help it broaden its subscriber base and defend itself against internet-based competitors that are expanding into in-vehicle systems. With its new service called MySXM, Sirius XM intends to give its subscribers a personalized radio experience, similar to Pandora’s (NYSE:P).
The company believes that satellite and internet radio are likely to coexist in vehicle entertainment systems for a long time to come. While having a streaming app and personalization feature will draw more subscribers and help in keeping the churn low, Sirius XM will have an added advantage in terms of its content over Pandora. Besides offering music, the company also offers talk shows, sports programming and other content that is not available on free services. Being the only satellite radio provider in the U.S. and having established itself in vehicles, Sirius XM can look forward to another strong year.
We are currently in the process of updating our price estimate for Sirius XM in the light of recently reported results, and will have an update ready soon.
Our price estimate for Sirius XM stands $2.34, implying a discount of about 25% to the market price.Notes: