The recovery in the macroeconomic scenario has benefited a good number of industries that were facing the heat. In the U.S., the boom in the auto industry has pleased the giant auto makers who are pulling out of tough circumstances. However, it is not just the giant automakers who have been happy about the revival of auto sales in the U.S. because Sirius XM holdings (SIRI, Financial) is one company that has been equally happy about this recovery. Sirius XM’s success is largely attributable to auto sales as the company has itself stated that its radio services are available in 26% of the cars plying in the U.S. Well, these claims have been proved by the company in its third-quarter earnings wherein it has delivered solid revenue along with an upped guidance.
The earnings
The company’s net income rose 117% to $136 million in the third quarter. Adjusted EBITDA rose 29% to a record $381 million. Sirius XM added 432,817 net subscribers during the quarter, which increased the company’s subscriber base 5%, bringing it to 26.7 million. Self-pay net subscriber additions were 379,598, an increase of 7% that brought the company’s total self-pay subscriber base to 22 million. Sirius had about 7.4 million trial subscriptions under way at the end of the third quarter, which is the largest amount in the company’s history and compares to 6.9 million at the end of last year’s third quarter. More big news for the quarter was a drastic reduction in subscriber acquisition cost from $45 to $35 this year. Such a favorable reduction has resulted in a reasonable increase in the EBITDA margins.
In the earnings call, the management also increased its full-year guidance for revenue, net subscriber additions and free cash flow. It now projects net self-pay subscriber additions of about 1.25 million and total net subscriber additions of about 1.5 million for the year. They’re expecting about $4.15 billion in revenue and adjusted EBITDA of about $1.425 billion. Sirius XM management projects about $1.12 billion in free cash flow for 2014.
Caring about the content
At its core, Sirus XM is a radio business, and it is not tough to deduce that a radio service provider can stay in business and earn big bucks only if it has good content. The company completely understands this and hence it added a host of new channels, new hosts and new shows in the quarter. To give you an example, the company has added full-time Bleacher Radio –Â Bleacher Report Radio channel, a new daily show on Mad Dog Sports Radio with Stephen A. Smith, the popular sport media personality, and added a show by Hall of Fame golfer Freddie Couples to the growing lineup of our PGA TOUR Radio.
Besides focusing well on the content, Sirius XM is also making credible efforts in targeting the drivers who are exchanging their old cars for new machines. Each year, a growing portion of preowned vehicles sold will include a satellite radio, and Sirius XM has made great progress this year in executing its preowned business. Every major automaker offers a SiriusXM trial with its certified preowned vehicle sales at every franchise deal location. And in addition, there are more than 14,000 auto dealers providing SiriusXM trialers –Â trials to their noncertified customers. This is up from 11,000 at the end of last year.
Any concern?
One of the concerns that still surrounds Sirius XM and was evident in this quarter’s results is the contracting margins. It is to be understood that Sirius XM has a highly scalable model and therefore, a considerable topline growth should translate into similar bottomline growth. However, as this earnings report points out, Sirius XM's operating profit merely inched 3% higher for the quarter with free cash flow barely failing to keep up with the top line by registering a 9% increase.
A big reason behind the contraction of margin was a reasonable uptick in operating expenses especially the royalties paid to music labels. Yes, this is a big downside of getting better and engaging content because the record labels are keeping on demanding higher royalties and since the company has to be content-centric, it has no other option but to pay. Please note that I am not terming this issue as a major concern but still, the company will have to find an optimum balance between content generation and the pressure it puts on its operating margin.
Takeaway
Going solely by the earnings report as well as the rock-solid guidance given by the company, it is an appealing buy. Also, the business model of the company has a big factor of scalability attached to it, which ensures investors of comfortable financials in the future. A look at the free cash flow generated by the company in the quarter, it can be safely concluded that Sirius XM is a cash cow. Therefore, I reiterate a buy position on this stock.
