Sirius XM Radio Inc. (SIRI) operates in the Broadcasting Industry. Sirius Satellite had acquired XM Satellite in 2008 to benefit from cost, development and competition synergies. It provides radio services (channels for commercial free music, sports, news, talk and entertainment, comedy, traffic and weather) at home, in the car, on the go, through the internet and smartphones, in addition to providing a music service for businesses aimed at making an entertaining commercial-free environment for the customer. The company's operations are in the United States, with a minority stake in Sirius XM Canada. The company had 23 million subscribers as at June 30, 2012, and it has a market capitalization of $9.9 billion; its shares are currently trading at $2.59. SIRI doesn't pay any dividends.
As much as 95% of revenues come from subscriptions, while the company also derives revenues from advertising. The annual plan for premier service with an internet radio costs $199/year. On a monthly basis, the premier service (140+ channels) costs $17.99, while Sirius Select and internet radio cost (130+ channels) $14.49/month each. There are other specialty packages as well. Moreover, two-third of all vehicles sold in the U.S. come with the company's satellite radio and a free trial for the service. Satellite radios are also distributed through retail outlets throughout the U.S. and through their website.
Latest Quarterly Results
The company posted its quarterly results on August 12, showing an impressive revenue as well as earnings growth. SIRI generated revenues of $ 837.5 million, up 13% from the same quarter of the previous year, beating analyst expectations of $834.3 million. The company posted earnings of $3.13 billion ($0.48/share) in the quarter, significantly higher than 2Q2011's earnings of $0.17 billion. However, this massive surge in earnings was largely due to different accounting policy adopted by the company, and recognizing an approximately $3 billion tax benefit in the quarter. Excluding the effect of the tax benefit, the company posted EPS of 2 cents, which was at par with what analysts were expecting. Operating expenses increased, but were less than the growth in revenues.
The company's impressive revenue growth was helped by all of its segments; however, its major revenue contributor in the form of subscription fees outperformed others in terms of growth. Revenues from its subscriptions increased almost 15% from 2Q2011, largely due to subscriber growth and an increase in subscriptions rates. The company raised its price for its basic package to $14.49, which also helped boost revenues. Equipment sales decreased sequentially in the quarter largely due to fluctuations in OEM (original equipment manufacturer) production, however, this slowdown was largely offset by a rise in advertising revenues, which showed an impressive growth on account of greater number of advertisements sold.
Key Business Metrics
SIRS's key business metrics include gross subscriber additions, net additions and ARPU. Overall, they have all been on an improving trend, evident in the table below.
SIRI KEY METRICS
Gross subscriber additions
There were 622,000 net additions in Q2 (40% more compared to Q22011), which makes it the strongest subscriber growth quarter post merger. This was a 38% increase from the subscriber growth that we saw in last year's Q2. This was due to higher gross ads and vehicle sales. According to the latest data on U.S. auto sales, sales were soft for July 2012. If sales pick up again, the company is set to benefit more from vehicle radio subscriptions, which form a major portion of revenues. Despite sales for some U.S. auto manufacturers dropping in the recent quarter, the overall industry has performed well, with the current U.S. SAAR at 14.05 million. General Motors (GM) reported a 6% drop, while Ford (F) reported a 4% drop in July sales respectively. However Toyota (TM), Nissan (NSANY) and Volkswagen (VOW) all saw an improvement in their sales. Perhaps, a positive for SIRI is that it doesn't have significant exposure to one single customer, so for example if its business is being adversely affected by a drop in Ford and GM sales, Toyota and Nissan can help offset the losses. The company expects flat auto sales (which are still more than last year) for the second half of the year.
The company is under pressure from Liberty Media Corp (LMCA), its largest shareholder, for acquisition of control. Liberty Media currently owns over 360 million of SIRI's common stock, and according to the company's latest filings, the company is interested in gaining control of SIRI. The group is awaiting approval from the Federal Communications Commission. SIRI Chief Executive Mel Karmazin, however, is insistent that as long as Liberty Media's interests don't collide with the interests of the company's shareholders, they would go on with the acquisition. According to a news report, the chief executive also demanded a healthy premium for his shareholders as a prerequisite for the acquisition, which is perhaps going to give the stock, which has already traded up on speculation, a boost.
Financial Position and Guidance
The company had total cash of $868.33 million as of the most recent quarter. It had $439.3 million in cash as at financial year ended 2007, which increased to $774 million by the end of 2011. Cash flows from operations have also been on an upward trend, with a two-year CAGR of almost 12% since 2009. In the latest filed results, CFOs jumped 38% in the first half of the year compared to the previous half of 2011. Moreover, the company retired almost $189 million in debt and incurred capital expenditures of $49 million in the first half, well covered by its operating cash flows of $293.7 million. The company has historically posted high gross margins, which are consistently expanding, indicating its operational strength. In 2007, the company posted gross margins of 40%, which expanded to 54% by the end of 2011.
The company expects FCF, revenue and EBITDA to continue their rising trend, as the price change for its package encompasses more subscribers, including new ones. Currently, the plan has been rolled out to 50% of subs. The company raised its full year guidance of net subs additions to 1.6 million, which will take the subscriber base to the highest ever number of 23.5 million.
The company is also focusing on used cars to increase subscriptions from second owners of vehicles. The company sees no significant investments in satellites in the near future. This would lead to more free cash flow, which the company can even use to reward investors.
The company faces competition from IP and terrestrial radios, as well new audio services available to customers. The company's strength lies in its ad free music service and the content on offer.
The company has a long-term earnings growth rate of 22%. Using 2015 estimates for EPS (22c) and a P/E ratio of 25x, the price comes out to be $5.5, representing more than 100% upside. We think investors will start valuing the company on normalized earnings and multiples if they are able to post couple of earnings beats.
Based on a price to sales ratio of 3x, expected sales of $4.5bn in 2015 and 3.82 billion of shares outstanding, the valuations come out to be near $3.5.
We recommend buying Sirius XM Radio based on this upside. Long term, investors should be mindful of the subscriber growth and U.S. auto sales. Macroeconomic conditions are also important indicators of how the company will perform financially.