Why Sirius XM's Fourth Quarter Results Were A Mixed Bag?

Feb 5 2014, 12:58pm CST | by

Sirius XM‘s Q4 2013 financial results were a mixed bag. While the new car penetration rate increased and the company continued to perform well in terms of getting more self-pay subscribers to its platform, its guidance for 2014 implied a material slowdown in the growth. In addition, the fourth quarter profits shrank due to some one-time charges. The company also mentioned that it has formed a special committee to review Liberty Media’s recently proposed stock transaction to acquire the remaining 48% stake in Sirius XM. We are in the process of reviewing our price estimate for Sirius XM in the light of recent earnings and will have an update ready soon. Our current price estimate for the company stands at $3.45, implying a slight discount to the market price. Here are the key takeaways from the earnings.

See our complete analysis for Sirius XM

Here Is What Was Good About Sirius XM’s Q4 2013 Earnings

The subscriber loss in the fourth quarter was not indicative of a trend. Sirius XM ended the year with 25.56 million subscribers, implying an annual net subscriber gain of 1.66 million. Given where the company was at the end of the third quarter, the subscription base shrank slightly in the fourth quarter. However, as it turns out, this was an exceptional event resulting from change in OEM (original equipment manufacturer) contracts. Paid promotional subscribers declined by 434,240 as a key OEM shifted to unpaid trial.

Sirius XM’s new car penetration rate reached an all time high of 71% due to a penetration increase in Toyota and Honda. For 2014, the company expects to maintain a figure of 70% as a result of these deals and agreement extension with Nissan, which will also expand satellite equipment to its full range of models. A 70% penetration rate will imply that approximately 11.2 million vehicles with Sirius XM equipment will be sold in 2014 in the U.S. This represents a growth of about 4.7% over 2013, and 15.5% over 2012. Presently there are around 60 million vehicles in the U.S. with a factory installed satellite radio, and and the company expects this figure to reach 110 million over the course of next five years.
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In addition to the above, the continued cost control is something that investors can be happy about. Sirius XM grew its cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) at a much higher rate than the revenues. Subscriber acquisition costs declined, which is an expected result of more brand visibility and word-of-mouth marketing. Sirius XM is also pushing into connected vehicle services which it expects to generate around $100 million in revenues in 2014.
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Here Is What Worries Us
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The overall growth is likely to slow down materially this year as evident from Sirius XM’s guidance. The company is taking a cautious approach and expects its full year net subscriber additions to amount to 1.25 million in 2014, down 25% from 1.66 million in 2013. Additionally, the growth in revenue, EBITDA and free cash flow will also decline. To counter this and sustain revenue growth, Sirius XM is implementing a price increase and it remains to be seen how well this change is absorbed by its customers. Given that competitors including Pandora and Apple are trying to make inroads in in-vehicle market, customers will have more options to choose from and this could impact Sirius XM’s growth going forward.

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