A recent article in the business section of my Sunday paper by Amy Thomson of Bloomberg News titled 'Connected' homes make life easier, but not safer was an eye-opener for anyone thinking about the opportunity for Sirius XM in the "connected car" space. The article began:
Come home to a hot iron and smoldering clothes this afternoon? Soon, it may not be a sign of forgetfulness, but rather evidence that you've been hacked.
In coming years, your smartphone will be able to lock your house, turn on the air conditioning, check whether the milk is out of date, or even heat up your iron. Great news, except that all that convenience could also let criminals open your doors, spy on your family or drive your connected car to their lair.
The article can be found on the Bloomberg site under the title "Even Toilets Aren't Safe as Hackers Target Home Devices". It included the story that had been on the local news about a couple in Ohio. A hacker had taken over their 10 month old daughter's baby monitor and was screaming obscenities and trying to wake up the baby.
The point? A future that will include as many as 26 billion devices connected to the Internet comes with a unique set of risks, and security will be one of those risks. If Sirius XM Holdings (NASDAQ:SIRI) really intends to be a key player in the connected car space, it will have to make certain that hackers and thieves won't be able to "drive your connected car to their lair" or compromise any of the other apps that will make driving safer. And this is only one of the issues with the connected car space.
Many investors in Sirius think that the company has some particular edge with respect to the connected car because the company has nearly 26 million subscribers using a satellite radio in their vehicle. Or, because there are 65 million vehicles with OEM-installed satellite radios on the road today that will double to 120 million within the next 5 years gives Sirius some particular inside track with the OEMs. I believe that such optimism is unwarranted.
Many of these older radios weren't designed with the connected car in mind, and the time it takes OEMs to migrate to new releases would seem to ensure that a significant installed base of "connected" satellite radios will be years down the road. On the recent conference call, CEO Jim Meyer once again repeated that this is a long term project.
We are executing extremely well. We are investing appropriately for long-term success in the connected car.
And, CFO David Frear later added:
Revenues increased 10% in the quarter, driven by subscriber growth, revenue from connected vehicle services and ARPU growth.
The connected vehicle services contributed $22,314,000 of the $95,235,000 of the year on year revenue growth in Q2 (more on this below). Later on, the following exchange took place:
Barton Crockett - FBR Capital Markets: ...First, I was wondering if you could just update us on progress with Agero in terms of consumer uptake and automaker deployment plans. And I'm kind of curious, you guys had announced five-year kind of net traffic navigation relationships I think with Quest [ph] going forward. If you could talk about if that plays into your relationships with the automakers and how that could affect the income statement going forward.
Meyer: ...So the first part of your question, I'm really happy of where the integration has gone. And second, I'm very pleased with the stature it's given us both in terms of its embedded technology and in particular, the access to those over 100 engineers that we can have working on our mid and long-term connected vehicle strategy.
And second, there's nothing like having a real working service when you go in to sell that you wanted to in the service business with OEMs. They've been shown so much short letter [ph], so much stuff that's going to happen, it makes dealing with them a whole lot easier when you actually have a real service. And so I would say that's the second part I'm really pleased with.
The third part, where is it going? I think I was pretty clear in my remarks, it's really moving around a lot right now. There's a lot going on and I think it's too early to answer your question where we're going to fall up. But I will say I'm confident; in the end, we're going to do really well here.
At which point, the call was abruptly ended. It was surprising that it ended without allowing a follow-up to the question and with no added color on the recently announced navigation package deals with Chrysler or Ford (NYSE:F). Or how the business would be impacted. Anyway, those remarks that Meyer referenced included the following:
Our connected vehicle business is a key part of our long-term strategy which increases our importance to OEMs and allows us to provide services like safety, security and convenient features to the same users as our audio business.
Most OEMs will be making connected vehicle architecture and service decisions within calendar year 2014 and 2015. And we are heavily involved with them in these discussions. However, due to automotive design and production lead times, most car manufacturers will gradually implement their embedded connected car strategy starting now through the 2019 timeframe.
I really like how things are going here. But I'd like to reiterate, investors will need to be patient here. As I've said before, this is a march, not a sprint. But it's very clear where this will end up. And we are confident that Sirius XM will be a leader in the connected vehicle.
The march that Meyer talks about was supposed to generate close to $100 million of revenue this year and double in the next three years. In order to get to $100 million, the pace of that march will need to be fairly quick.
How do I know this? One can find the revenue generated by the acquisition from Agero in the 10Q, but it requires a little digging. It is found by looking at the notes about the Average Revenue Per User, or ARPU, metric. ARPU is described as follows:
ARPU is derived from total earned subscriber revenue, excluding revenue derived from our connected vehicle services business, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period.
Since that description tells us that the connected vehicle services are excluded from the calculation, it becomes a relatively straightforward exercise to determine amount of subscriber revenue that was excluded and deduce that the result is the connected vehicle service revenue.
The subscriber revenue from the P&L published for the second quarter shows $878,160,000 for Q2 and $1,729,596,000 for the first half of the year. In the notes, one finds that the ARPU subscriber revenue - the figure that excludes connected vehicle services - is $855,846,000 and $1,688,649,000 for the same two periods. The difference between the two numbers is $22,314,000 for Q2 and $40,947,000 for the first half. We can also see that this revenue grew nearly 20% from $18,633,000 in the first quarter. That 20% growth rate each quarter will have to be maintained in the second half of the year, increasing to $32 million in Q4 to approach $100 million. At that point the march can moderate considerably (to less than 10% per quarter) in order to double to the three year target of $200 million.
Maybe connected vehicle services will be a growth driver in the future, but it is not the reason I would choose to invest in Sirius. Those reasons focus more on its loyal customer base that hates commercials, like its exclusive content and are willing to pay for radio.
Disclosure: The author is long SIRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to my long positions, I have January 2015 $4 covered calls written against portions of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis.