Sirius: The Next Apple Victim?

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 |  About: Sirius XM Holdings Inc. (SIRI), Includes: AAPL, NSANF, NSANY, P
by: Fusion Research

Like Pandora (P), its nearest rival Sirius XM (SIRI) is known to give considerable market returns to its shareholders. In the last 52 weeks, Sirius witnessed an approximately 57% increase in share prices. Whether this growth in the share prices will continue, depends upon how Sirius performs against the newly launched Apple's (AAPL) iTunes internet radio. Moreover, what could be the impact of Apple's entrance in internet radio service for cars.

Despite of the upcoming threat from Apple's internet radio, the company can expect considerable topline growth with increasing auto sales in the U.S. Sirius has agreements with every major automaker to offer satellite radios.

At the same time, Sirius is making some considerable changes to its debt structure, which can have some implications with respect to its interest cost in the long run.

Lets see what various changes in the internal and external environments hold for Sirius.

Rising Auto sales will drive the revenue growth

The annualized U.S. auto sales are expected to reach to 15.5 million units by the end of 2013 according to Kelley Blue Book. This will lead to a 7.5% increase in car sales year over year. The growth is mainly due to strong replacement demand and availability of cheap credits.

In the first half of 2013, Sirius's subscription revenue was around $1.59 billion, witnessing a 11.7% rise year over year. It experienced a net addition of 1.16 million subscribers for the same period.

Since Sirius's new vehicle consumer conversion rate stood at 45% for the first six months of the present fiscal, we expect that the company can add around 495 thousand new subscribers through new auto sales by the end of 2013. This addition will be from the increased number of auto sales for 2013, compared to the 1.1 million new auto sales in 2012.

Nearly 7 out of 10 new cars sold in the U.S. are equipped with Sirius XM Radio. With respect to the estimate for the car sales in 2013, we can expect that 10.92 million cars will have Sirius's satellite Radio service pre installed. At the same time, Sirius can expect 45% of these cars to be the future subscribers which will bring an overall addition of 6.975 million subscribers for Sirius.

Sirius already has considerable reach in the satellite radio service in cars since, according to its estimates, there are 54.4 million cars on the road with Sirius's radio service.

What lies ahead with launch of iTunes radio?

Recently, Apple's launch of iTunes radio lead to increased concern for the market of Sirius XM and Pandora Media in the internet radio applications market. We recently analyzed how the launch iTunes radio could hamper the market for Pandora in our report Pandora: The Next Apple Victim. This report discusses how this new application will decrease the total subscription of Pandora by 6.5% in September alone.

On the other hand, Apple's new internet service is also a threat for Sirius since it has been trying to make its presence in the music streaming business. To improve its customer base among Apple users, Sirius launched iPhone dock, which turns an iPhone or iPod Touch into a satellite radio. Moreover, Sirius provided a free one year subscription for its internet radio application. Its subcription fee is high at $14.49 per month, while Pandora's subscription fee stands at $36 per year. This means that Sirius should make some changes to its subscription fees in order to remain competitive.

Apple iTunes internet radio has one considerable edge over Sirius's internet radio. One can create Pandora like stations with iTunes internet radio from favorite artists, songs, and genres. Moreover, Apple iTunes radio fetched 11 million listeners in just 5 days of launch in September 2013. This increasing listener base for iTunes radio will hamper Sirius's market for Apple users.

At the same time, Apple is spreading its reach in the internet radio service for vehicles. It has teamed up with Nissan (OTCPK:NSANY) to launch Apple's iTunes radio for vehicles. This new service will be launched with three Nissan models, which includes the upcoming Rogue, the redesigned Versa Note, and the Leaf EV. Nissan will become the advertising partner for the launch of Apple iTunes Radio. Nissan believes that this new service will increase the exposure for Nissan's newly launched cars.

We already have our estimates of how many new vehicles subscriptions Sirius can expect in 2013. But, Sirius can expect some subscription revenue loss in 2014 since Nissan's Rogue will launch in 2014. Apple will integrate its mobile operating system iOS 7 into cars. These initiatives can significantly hamper Sirius's market since a major part of its subscription revenue comes from its radio service in cars. Apple users in particular will make use of this service since they won't have to subscribe to two different internet radio service providers.

Can Sirius justify new debt?

On September, 25, 2013, Sirius announced that it will retire all of its outstanding 7.625% senior notes on October 25, 2013. At the same time, the company has made an offering of 5.875% of senior notes for $650 million due in 2020 to generate enough cash to continue the redemption of the 7.625% senior notes.

If the company would have continued the 7.625% senior notes, than the interest expenses could have come to around $205 million until 2018.The interest expense which will be borne by the company with the issue of new senior notes will be around $267 million by the end of the redemption period.

Although the interest obligation by the issue of new secured notes will be higher, but it doesn't have to be paid off right away. The implication of this additional interest charge cannot hamper the company's cash flows in a significant manner; the additional charge will be borne in the next five to seven years time.

The company's performance in terms of profitability to payoff its interest in the last few quarters is given below

Quarter

Interest coverage ratio

Quarter Ended June, 2013

5.06 times

Quarter ended March 2013

5.38 times

Quarter ended December 2012

4.77 times

Click to enlarge

Source: Calculated on the basis of figures available in Yahoo finance

The company is generating enough profits to payoff its interest obligations. Moreover, its interest coverage ratio is increasing in the last three quarters. We believe that company has potential to meet its interest obligations with the issue of new 5.875% secured notes.

Conclusion

The change in the debt structure will foster some cash flow for the company, but in the long run, the implication of the interest cost should also be taken into consideration.

Moreover, the growth in car sales may deliver better results for Sirius, but whether this growth will be sustained in the years to come depends upon how Apple performs with its radio service in cars. Apple has deep pockets, and it can significantly hamper Sirius's market.

We give a hold recommendation for Sirius since its action to sustain its market will be witnessed in the coming times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.