A Snapshot Of Why Sirius XM Has Shown Such Impressive Growth

There is no doubt that Sirius XM (NASDAQ:SIRI) has done extremely well over the past few years. The stock has been on an uptrend for quite a while as Sirius XM continues to grow its revenues as well as margins. The company added over 2 million net subscribers last year and has grown its overall subscriber base from 19 million in 2008 to 23.9 million in 2012. This growth was primarily driven by improved auto sales, the company’s push in the used-car market and an increase in its number of partnerships with automakers and dealers. Besides this, Sirius XM has been able to keep costs under control which has resulted in a drastic improvement in its margins since 2007. In this analysis, we’ll look at how Sirius XM has grown so far and the key driving factors.

See our complete analysis for Sirius XM

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Growth In New Vehicle Sales Is Helping

U.S. auto sales for March 2013 stood at a little over 1.45 million, bringing total Q1 sales close to 3.7 million. ^[1] This implies growth of about 7% over the first quarter of 2012. For the full year, the consensus estimates have increased to 15.4 million. April’s sales were down compared to March but still grew at a healthy rate compared to last year. The growth in the U.S. automotive market is being fueled by an improving economy and greater availability of financing and lease deals. The situation bodes well for Sirius XM, which depends on new car sales for its subscriber growth to a great extent.

Sirius XM’s new car penetration rate stands at around 67% while the new vehicle conversion rate has remained in the range of 44%-46% for the past few years. ^[2] The company has stated that it expects more OEMs (original equipment manufacturers) to join the list of auto companies that install its equipment in their vehicles. In particular, there is an opportunity to sign up more Asian auto makers. Currently, Sirius XM’s radio equipment is installed in close to 52 million vehicles, which accounts for about 22% of total registered vehicles in the U.S. ^[3] The company expects this figure to grow past 100 million in the next five years and 150 million in the next decade. ^[3]

New Car Penetration Rate Is Growing

Sirius XM’s new car penetration rate has increased substantially over the past few years and seems to be stabilizing. This metric essentially refers to the number of new vehicles sold in the U.S. that come fitted with the company’s radio equipment. Needless to say, the figure depends on the extent of Sirius XM’s relationship with automotive companies and partnerships with dealer networks throughout the country. Every year Sirius XM pays a large sum to its OEM (original equipment manufacturers) partners to keep its radio equipment flowing into the new car market. The company has entered into long-term contracts with car makers such as General Motors, Ford, Toyota, Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai, and Mitsubishi. Several trucks, boats and recreational vehicles also include Sirius XM radios as standard installation. Currently, nearly two-third of new vehicles sold in the U.S. have Sirius XM’s radio installed. The table below shows how this proportion has trended over the past 5 years.

EBITDA Margin Growing, Could Become The Highest In The Media Industry

Sirius XM’s EBITDA margin (earnings before interest, taxes, depreciation and amortization) has grown substantially over the last few years driven by revenue growth and controlled expenses. Revenues have increased primarily due to subscriber growth and higher average revenue per subscriber. Besides capitalizing on the U.S. automotive market’s growth, the company has successfully tapped into the used vehicle market with an increasing number of pre-owned vehicle dealer partnerships. The average revenue per subscriber has grown due to price increases, and more subscribers are opting for Internet add-ons. As far as expenses are concerned, it appears that the economies of scale are kicking in. Several key cost components including subscriber acquisitions costs, general & administrative costs, marketing costs and billing costs have come down as a proportion of revenues.

Sirius XM’s adjusted EBITDA margin jumped from -44% in 2007 to about 33.5% in 2012. We further expect this figure to reach close to 42% by the end of our forecast period. If we look at other media and telecom companies, we conclude that Sirius XM is on track to become one of the highest margin businesses in this industry. Comcast’s EBITDA margin currently stands at just under 42%, and other media & telecom companies such as Time Warner Cable, Disney, Time Warner, Pandora, Dish Network etc., have lower margins.

However There Are Risks To Consider

Royalty Rates Are Rising

Under the terms of the Copyright Royalty Board’s decision, Sirius XM paid royalties of 6.5%, 7%, 7.5% and 8% of gross revenues, subject to certain exclusions, for 2009, 2010, 2011 and 2012 respectively. It is likely that the royalty fee will continue to increase in the near future and the company may try to pass on increased costs to subscribers in the form of higher prices. The Copyright Royalty Board has also set the royalty rates for Sirius XM Internet radio. These rates do not apply to satellite radio as it is a different medium. The rates are charged on a per-performance basis, implying that if 100 users listen to one song, it amounts to 100 performances. As the Internet radio royalty rates increase, Sirius XM is likely to pass on these increased costs to its customers, leading to growth in average subscription fee.

Competition Is Increasing

Sirius XM is going to face more competition in the future from players such as Pandora, Clear Channel Radio, Spotify and potentially Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). The U.S. radio market earned a little over $17 billion in revenues in 2011, and this figure is expected to grow past $22 billion by 2015. ^[4] The in-vehicle radio market accounts for roughly half of this, which is why several big players are likely to make efforts to get a share of this market. As competition increases, Sirius XM will find it difficult to grow its subscriber base and could resort to more promotional discounts.

Pandora is increasingly pushing into the automotive segment. In January 2013, it partnered with the Chrysler group, expanding its radio service to 85 vehicle models. Similarly, Apple is expected to launch its radio service somewhere in 2013 and is likely to push for integration in cars. The advantage that Apple has is that the integration of iOS in cars will have multiple benefits including navigation, on-demand music, Apple’s radio service, connectivity to other Internet apps and synching music from Apple devices. Therefore, the company has a strong marketing point and could threaten Sirius XM’s dominance.

Promotional discounts were the primary reason behind the slight decline of 0.8% in Sirius XM’s average subscription fee in 2011. The company stated in its SEC filings that an increase in subscription discounts offered through customer acquisition and retention programs could not be offset by a higher number of subscriptions to premium packages, data services and Internet add-ons. We believe that Sirius XM’s revenue growth will be moderated by the possibility of higher promotional offers as competition increases.

Our price estimate for Sirius XM stands $2.60, implying a discount of about 30% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. March U.S. New Car Sales Jump, The Wall Street Journal, Apr 2 2013 [↩]
2. Sirius XM’s SEC Filings [↩]
3. Sirius XM’s Q1 2013 Earnings Transcript [↩] [↩]
4. The State of the News Media 2012 [↩]