Sirius XM (SIRI) will release its Q4 2013 earnings on February 4th, and the results may be softer than expected given its recent disclosure on the full year subscriber additions. On the flip side, we expect margins to continue to improve as the company gains operating leverage due to growth in average revenue per user (ARPU). We also look forward to more color on Liberty Media’s recently proposed stock transaction to acquire the remaining 48% stake in Sirius XM.  The deal is valued at over $10 billion and the proposed share exchange ratio implies a small premium over the current market price. Our price estimate for Sirius XM stands at $3.45, implying a slight discount to the market price. Here is what to look forward to during the earnings call.
Subscriber Loss In Fourth Quarter Despite Strong Market Growth
Sirius XM already reported that it ended 2013 with 25.56 million subscribers, implying an annual net subscriber gain of 1.66 million.  While this report looks positive on its surface, a comparison with the third quarter metrics shows that the company actually lost subscribers during Q4 2013. At the end of September 2013, Sirius XM had 25.58 million subscribers that included close to 20.7 million self-pay customers.
The sudden loss of customers, however small, comes as a surprise for a firm that has been adding between 0.4 and 0.6 million net subscribers every quarter for the last couple of years. While the U.S. auto sales continued to surge in the fourth quarter, Sirius XM failed to take advantage of this growth. This is one of the reasons why the stock has pulled back in recent weeks. We suspect that the competition is catching up, and some of the customers may have disconnected at the end of their billing cycle, considering that the company is planning to implement another price increase this year. In 2014, Sirius XM expects to add roughly 1.25 million net subscribers. Looking at the figure for 2012 and 2013, it is clear that the annual subscriber gain is coming down significantly. This could put pressure on the company’s growth going forward unless it mitigates it with a periodic price increase.
Other Risks That May Further Put Pressure On Growth
Rising competition and the possibility of a substantial jump in royalty rates remain key risks besides the possibility of a slowdown in subscriber additions as mentioned above.
Under the terms of the Copyright Royalty Board’s decision, Sirius XM paid royalties of 6.5%, 7.0%, 7.5% and 8.0% of gross revenues, subject to certain exclusions, for 2009, 2010, 2011 and 2012, respectively. It is likely that royalty fee will continue to increase in the near future and that 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 customers, leading to growth in average subscription fee.
Sirius XM will face more competition in the future from players such as Pandora (P), Clear Channel Radio (CCO), Spotify, and potentially Apple (AAPL) and Microsoft (MSFT) as well. The U.S. radio market stands at around $15 billion. 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, contrary to its need to raise fees.
- Liberty Media Proposes Transaction to Acquire all SiriusXM Shares, Sirius XM Press Release, Jan 3 2014
- SiriusXM Exceeds 2013 Net Subscriber Target; Issues 2014 Subscriber And Free Cash Flow Guidance, Sirius XM Press Release, Jan 7 2014
Disclosure: No positions