Sirius XM Holdings Inc. (NASDAQ: SIRI) is a satellite radio company with approximately 31.6 million subscribers. The company transmits music, sports, entertainment, comedy, talk, news, traffic, and weather channels in the United States using a subscription model. Although customers primarily use satellite radios installed in automobiles, subscribers may access content using mobile devices, home devices, and other consumer electronic equipment. Sirius also provides a variety of safety and security services for satellite-connected vehicles.
In addition to its U.S. operations, the company holds an approximate 37 percent equity interest and a 25 percent voting interest in Sirius XM Canada Holdings, which offers satellite radio services in Canada. As of March 31, 2017, Liberty Media Corporation owned approximately 68 percent of the outstanding shares of Sirius.
Products and Services
Sirius has agreements with every major automaker for installation of satellite radios in their vehicles. The company also has a variety of marketing partnerships with rental car agencies (which carry satellite-enabled vehicles), airlines (for in-flight entertainment), and companies that provide commercial-free music for businesses.
The company’s primary source of revenue is subscription fees, with most customers subscribing to annual, semi-annual, quarterly, or monthly plans. Sirius also derives revenue from activation and other fees, the sale of advertising on select non-music channels, direct sale of satellite radios and accessories, and various ancillary services.
As of March 31, 2017, the company reported a subscriber base of 31.6 million, which is further detailed in the table below:
Self-pay subscribers are generally defined as subscribers who are paying for their own subscription on a regular basis.
Paid promotional subscribers generally consist of customers on a prepaid subscription included in the sale or lease of a new or previously owned vehicle. Paid promotional subscriptions typically run between three and 12 months.
- On May 2, 2017, Sirius announced it would offer the first-ever Beatles-backed radio channel, which will feature a variety of programming related to the band’s music and history. The Beatles Channel was created in collaboration Apple Corps Ltd., which manages The Beatles’ intellectual property. The channel will launch on May 18, 2017.
- On April 27, 2017, the company announced that it had acquired Automatic Labs Inc. Automatic’s primary offering is an adapter for passenger vehicles that relays data to the user’s smartphone. The adapter plugs into the car’s standard diagnostics (OBD-II) port, and is compatible with most vehicles manufactured after 1996. Mobile applications allow the users to track a variety of metrics including engine efficiency and fuel consumption. On the most recent earnings call, Sirius CEO James Meyer noted that Automatic’s analytics platform could be leveraged into a very successful asset, but ultimately would not have a material impact (positive or negative) on the company’s full-year guidance for 2017.
- In May 2016, the company announced it would increase its ownership of Sirius XM Canada to a 70 percent equity interest and a 33 percent voting interest in exchange for 35 million shares of Sirius. The transaction is expected to be completed this month.
First Quarter Earnings Review
Revenue for the first quarter ended March 31, 2017, totaled $1.3 billion, climbing eight percent from the same period a year earlier, helped by a net increase in self-pay subscribers of 259,000 in the quarter. Operating expenses increased six percent to $900 million. First quarter net income was $207 million, 20 percent higher than the first quarter a year ago, yielding a profit of $0.04 per share.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which primarily removes the effect of share-based compensation and purchase price accounting from the original merger of Sirius and XM, was a record-high $502 million in the first quarter of 2017. The company’s EBITDA margin increased 200 basis points from the first quarter of 2016 to 38.7 percent.
The company’s free cash flow (cash from operations less capital expenditures) decreased 15 percent from the first quarter of 2016 to $249 million, primarily due to the timing shift of certain interest payments and payments for satellites. At March 31, 2017, Sirius had a cash balance of $230 million and a net working capital deficit of $1.9 billion, mainly attributable to a large current deferred revenue balance. Long-term debt totaled approximately $6.0 billion.
In the first quarter of 2017, Sirius spent $300 million to repurchase 62 million shares of common stock and paid a dividend of $0.01 per share.
Full-Year Earnings Guidance
Sirius issued the following guidance for the 2017 fiscal year in January:
- Revenue of $5.3 billion;
- Adjusted EBITDA of $2.025 billion;
- Free cash flow of $1.5 billion; and
- Net self-pay subscriber growth of 1.3 million.
On the first quarter earnings call, Sirius executives confirmed the previous guidance and remained confident in their ability to hit those targets, despite first quarter figures for subscriber growth and free cash flow slightly below that pace. It will be important to monitor these figures in the second quarter and beyond.
Auto sales, an important revenue driver for the company, are expected to remain stable. Weaker trends throughout the year could have an impact on subscriber growth, and lead the company to review its guidance. Other figures to watch in the coming quarters include paid promotional subscriber conversion rates (to self-pay subscribers), subscriber deactivations, and subscriber acquisition costs.
Overall, Sirius has solid fundamentals, including strong EBITDA and margins. Furthermore, the company is returning cash to shareholders through repurchases and dividends. However, Barclays analyst Kannan Venkateshwar notes that free cash flow has been helped in recent years by past net operating losses (NOLs) which have reduced taxes payable. As these NOLs expire in the next two years, free cash flow growth could drop off considerably. Sirius already commands a premium growth multiple, and it is possible that it could contract as the company enters a later stage in its growth cycle.
Still, the acquisition of Automatic Labs suggests that the company is looking to expand beyond its current markets. If Sirius can make significant strides in the connected vehicle space, the company could return to a high-growth track.
- Subscriber turnover and conversion metrics;
- Changes in the seasonally adjusted annual rate (SAAR) for vehicles;
- M&A in the connected vehicle space; and
- Agreements with marketing and hardware partners.
- The company faces substantial competition from online streaming services;
- The company’s ability to attract and retain customers is uncertain;
- The company is highly dependent on the auto industry; and
- The company is effectively controlled by Liberty Media, whose interests may differ from those of other common shareholders.
As of May 2, 2017, shares of Sirius closed at $4.84, down nearly 2.5 percent on the day, yielding a market capitalization of $22.6 billion. In the past year, the stock is up more than 22 percent after trading as low as $3.74 in June 2016. Shares have traded as high as $5.53 as recently as mid-March, but have since retreated. Short interest has generally increased over the past 12 months, and sat at 266 million shares at April 13, 2017, or approximately 13.7 days of trading volume.
Following are selected analyst ratings and price targets:
|Kannan Venkateshwar||Barclays||Equal Weight||$4.50||April 28, 2017|
|Bryan Kraft||Deutsche Bank||Hold||$5.00||April 27, 2017|
|Stan Meyers||Piper Jaffray||Overweight||$5.25||April 27, 2017|
Sirius has strong fundamentals and will likely continue to grow EBITDA. However, it appears that much of this growth is already priced in. Although the company may make significant gains in the connected vehicle space in the future, there is no clear indication of when this will happen. Accordingly, the midpoint price target of $5.00 seems most appropriate.
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