Sirius XM’s Strong Q4 Results Confirm A Bright Future For Subscriber Growth

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Satellite radio provider  Sirius XM (NASDAQ:SIRI), reported its best fourth quarter results since 2007 in terms of paid subscriber additions. The company added 577,000 paid subscribers during the quarter and its total subscriber base grew 7% year over year to 27.3 million. Driven by this growth, its revenues increased 9.1% to $1.09 billion, just ahead of the market consensus of $1.08 billion. Sirius XM had initially projected subscriber additions for 2014 at 1.25 million, but it eventually added 1.75 million during the year, clearly implying that growth in new car sales and the natural turnover of the auto fleet is working very well in its favor. During the quarter, the satellite radio company’s new vehicle penetration rate ticked up a little to 71% and its monthly churn rate shrunk slightly to 1.8%.

A key highlight of Sirius XM’s results was the mismatch between its initial guidance for the year and actual results. The company’s net revenues for 2014 grew 10% to $4.2 billion, its adjusted EBITDA increased 26% to $1.5 billion and free cash flow surged 25% to $1.15 billion, all of them way ahead of the satellite radio company’s guidance at the start of 2014. While healthy growth in Sirius XM’s revenues can be attributed to strong subscriber additions, the comparatively weaker growth in expenses, attributable to tight expense management, drove the stronger growth in EBITDA and cash flows . [1]

With anticipated growth in new car sales and a strong focus on the used car market, the company’s subscriber growth is likely to continue in the future. Moreover, Sirius XM’s plan to launch mobile apps for streaming and its pilot household plans can also have a positive impact on subscriber additions going forward.

Our current price estimate for the company stands at $3.49, which is just below the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Sirius XM

Sirius XM Can Still Add Plenty Of Subscribers

Ad-Free Content Provides Incentives: Although free music streaming services have made the entertainment industry extremely competitive, Sirius XM has enough in its arsenal to convince users to pay. The satellite radio provider’s content goes way beyond music and includes talk shows, sports shows, women’s programming etc. Last year, Sirius XM added new and diversified content to these categories and it will look to do the same this year as well. In addition, the company is building new revenue streams with live traffic and weather updates, and is growing its connected vehicle services, providing users with security and safety features. A vast music library and aforementioned ad-free services at a paltry subscription fee will give users enough incentive to bypass ad-supported music companies and subscribe to Sirius XM.

New and Used Vehicle Sales to Drive Growth: New vehicle sales in the U.S. hit 16.5 million in 2014 and the figure is projected to reach 17 million this year. [2] Even with a stable new vehicle penetration rate, Sirius XM can expect 3%-3.5% growth in subscribers this year through new vehicle market. However, its growth will be stronger through the used car market, given that more than 15,000 used car dealers are now offering Sirius XM trials. Management stated during the earnings call that it expects satellite enabled cars count to increase to 100 million by the end of 2017, up from 70 million in 2014. Also, the company recently launched a service continuity program, that allows car users to easily move their subscriptions when they buy a new vehicle. This is likely to have a positive impact on Sirius XM’s retention rate.

Household Plans and New Apps to Help: Sirius XM is testing a new household plan for its subscribers as a viable alternative for per radio pricing. The company’s CEO said that there are over 80% households in the country with more than one vehicle, which presents an incredible opportunity. This plan is still in its test phase and the company believes that when implemented effectively, it can positively impact subscriber growth as well as ARPU (average revenue per user). Sirius XM is combining its IP and satellite technologies to offer a broader spectrum of content to its users. In the near-future, it plans to introduce a streaming platform, with apps for iOS and Android, that will extend its services beyond cars. These new apps are in the beta test phase and are expected to be rolled-out within the first half of 2015.

For the current year, Sirius XM expects net subscriber additions to be around 1.2 million, but judging by its 2014 performance and future plans, it may beat its own guidance yet again. [3]

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Sirius XM Q4 fiscal 2014 earnings transcript, Feb 5 2015 []
  2. Analyst forecasts 17 million U.S. sales in 2015, 20 million in 2018, Autonews, Jan 14 2015 []
  3. Sirius XM Reports Fourth Quarter and Full-Year 2014 Results, Sirius XM, Feb 5 2015 []
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