Nothing Unexpected In Sirius XM’s Q1 2014 Earnings
Nothing surprising or spectacular came to light when Sirius XM (NASDAQ:SIRI) reported its Q1 2014 earnings. The company continued its subscriber growth as expected, albeit at a lower rate compared to the same period a year ago. It added 267,000 net subscribers during the quarter which stood substantially below the figure of 453,000 for Q1 2013. [1] However, an increase in average revenue per user (ARPU) helped the company register roughly 9% growth in its subscription revenues. [1] Sirius XM mentioned that it is on track to achieve its full year guidance of 1.25 million net subscriber additions and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.38 billion. [2] The satellite radio company has done well, but the brisk growth that it experienced in the last two years is not going to last forever. Sirius XM, however, remains defiant about its growth prospects as it banks the next wave of growth on increased penetration in used car market. There is some merit to this claim as the company’s radio equipment is present only in about 20%-25% of the vehicles in the U.S. [2]
Our current price estimate for the company stands at $3.44, implying a premium of about 10% to the market.
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Subscriber additions were down due to the absence of a significant change in gross additions, and there was higher number of disconnects due to larger base and only a slight decline in churn rate. Gross additions weren’t materially impacted as car sales in the U.S. grew by just 1% in the first quarter of 2014. [3] While new vehicle penetration rate was up from 67% in Q1 2013 to 70% in Q1 2014, it wasn’t enough to sustain the subscriber growth. [2] The stock price has fallen significantly over the last few months and the latest earnings results didn’t trigger any unusual trading activity. The market seems to have realized as well that Sirius XM’s honeymoon period is over and the company will need to resort to price increases to fuel its future growth.
However, the continued cost control is something that investors can be happy about. Sirius XM continued to grow its cash flow and EBITDA at a much higher rate than the revenues. Its adjusted EBITDA margin jumped 400 basis points to 33.5% due to operating leverage gain resulting from top line growth. [2] Another positive aspect was success of Sirius XM’s push into connected vehicle services where it expects to generate around $100 million in revenues in 2014. [2] Given the jump we saw in the company’s “other” revenues in Q1 2014, we believe that the target is achievable.
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