- Sirius XM will report its Q1 2013 earnings on April 30. We expect healthy subscriber additions driven by the growth in the U.S. automotive market.
- Revenue growth will also get some support from higher average subscription fee due to price increase implemented last year and increased adoption of Internet add-on.
- Royalty costs will continue to rise, but the company has been offsetting them by gaining operating leverage in other areas.
Sirius XM will report its Q1 2013 earnings on April 30. We expect another good quarter for the company driven by the growth in the U.S. automotive market, Sirius XM’s increasing penetration in used car market and the positive impact of Lynx, which offers on-demand audio via Internet. Last year the company added over 2 million net subscribers, growing its overall subscriber base to 23.9 million [Sirius XM’s SEC Filings]. Although we expect the subscriber additions in Q1 to remain healthy, they may not exhibit significant growth as the company seems to be conservative about its guidance for 2013, and expects to add 1.4 million net subscribers during the year. Q1 results will also show the positive impact of price increase that Sirius XM implemented last year.
Growth In The Automotive Market Will Drive Subscriber Additions
The U.S. auto sales for March stood at a little over 1.45 million bringing the total quarterly sales close to 3.7 million [March U.S. New Car Sales Jump, The Wall Street Journal, Apr 2 2013]. This implies growth of about 7% over the first quarter of 2012. The growth in the U.S. automotive market is being fueled by an improving economy and higher 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.
While growth in the automotive market 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 [Sirius XM’s Q4 2012 Earnings Transcript]. The new car penetration rate (the number of new vehicles equipped with satellite radio) remains at around 67-68%. As new vehicles slowly enter the used-car market, Sirius XM will have a greater opportunity to grab subscribers. The company added more than 1 million gross subscribers from the used-car channel in the last quarter and expects to increase this figure to 1.5 million in 2013.
The Impact Of Price Increase & Adoption Of Internet Add-On
Sirius XM increased the price of its basic tier in the beginning of 2012. The roll out was gradual, and therefore, the impact will be visible in the company’s Q1 results. We believe that all of Sirius XM’s subscribers have transitioned to the new pricing by now. In addition to this, higher adoption of the company’s Internet add-on service will aid the revenue growth.
While most of the radio listening occurs inside the vehicles that come fitted with satellite/terrestrial radio equipment, Pandora (NYSE:P) has proved that there is a big market for Internet radio as well. The company has over 65 million active users who use its Internet radio service on smartphones, tablets, computers and a variety of Internet-enabled devices [Pandora’s SEC Filings]. In 2009, SiriusXM started offering Internet radio add-on service, which is currently priced at $3.50 per month. We believe that over time, more Sirius XM subscribers will sign up for this service as it will provide them flexibility and convenience and expand their listening experience to multiple devices.
To strengthen its Internet offerings, Sirius XM launched an on-demand service in 2012 that allows its Internet subscribers to choose their favorite episodes from a catalog of more than 300 shows and over 3,000 hours of listening content on smartphones and online.
Royalty Costs To Continue To Rise
Sirius XM’s royalty costs (as % of revenues) have been increasing for the past few years due to periodic increase in royalty rates. However, the company has been able to mitigate this impact by gaining operating leverage in other areas such as customer service costs, general & administrative costs and subscriber acquisition costs.
Under the terms of the Copyright Royalty Board’s decision, Sirius XM paid royalties of 6.5%, 7.0%, 7.5% and 8% of gross revenues, subject to certain exclusions, for the years 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. The table below provides summary of preset royalty rates for the next few years.
|Royalty Rate Per Performance||$0.0016||$0.0017||$0.0018||$0.0020||$0.0021||$0.0022||$0.0024|
Our price estimate for Sirius XM stands $2.34, implying a discount of about 20-25% to the market price.
Disclosure: No positions