SiriusXM (SIRI, Financial) delivered its second-quarter earnings results July 26. The company delivered 10.54% change in sales to $2.44 billion and an amazing 65% profit growth to $344.35 million.
The $20 billion broadcasting company closed up 4.82% that day while the broader Standard & Poor's 500 index ended up 0.03%.
"SiriusXM's second-quarter results demonstrated continued strong demand for our content bundle and solid execution by our entire team. We grew net new subscribers by 587,000 in the second quarter, and our subscriber base, revenue, adjusted EBITDA and free cash flow have never been higher. We are pleased to once again raise our key guidance metrics for the full year.
"Our programming team has been hard at work developing new and exclusive content to power our unique service. From Town Hall specials with the cast of Broadway's Hamilton to a pop-up channel dedicated to the legendary Prince to full coverage of music festivals like Coachella, SiriusXM has something for everyone. For two weeks we have been providing 'gavel to gavel' coverage of the Republican and Democratic National Conventions, and we will follow the political action all the way to November. And stay tuned, because we are always working on exciting new content initiatives to please our subscribers."Â – Jim Meyer, CEO, SiriusXM
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Market performance
In the past five years, SiriusXM delivered 18.8% total return while the S&P 500 returned 14%. Year-to-date, the company provided 1.97% return, while the market performed 6.6%.
Valuations
SiriusXM had a trailing 12-month price-earnings (P/E) multiple of 37.7 times (industry median: 23) and price-sales (P/S) multiple of 4.5 times (industry median: 1.96). The company had negative book value resulting to no book value multiple. The broadcasting company also does not provide dividends.
Nonetheless, the company has been proud of its achievement in its free cash flow as will be discussed later.
(Annual Filing)
SiriusXM Holdings
SiriusXM, founded 26 years ago, is an American broadcasting company that provides three satellite radio and online radio services operating in the U.S.: Sirius Satellite Radio, XM Satellite Radio and SiriusXM Radio.
In its filing, SiriusXM is a wholly owned subsidiary of SiriusXM Holdings. Meanwhile, SiriusXM Holdings is mostly –Â 50% –Â owned by Liberty Media Corporation.
SiriusXM Radio Inc.
The radio company transmits music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the U.S. on a subscription fee basis. SiriusXM subscribers can also gain access to these contents on demand through different channels, such as through SiriusXM’s Internet radio service and mobile apps.
In December 2015, SiriusXM Radio had 29.6 million subscribers, representing an 8.42% growth from previous year. As of Sept. 30, the radio company had 31 million subscribers, representing 4.73% from December’s figures (3).
SiriusXM Radio primarily gains revenue from its subscription fees. In addition, the company also does business from advertising sales on its selected non-music channels. Other sales also are generated from activation and other fees, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic and data services.
SiriusXM Radio’s equipment, radios, are primarily distributed through automakers; retail stores nationwide; and through its website (siriusxm.com). Most automakers include a subscription to SiriusXM radio service in the sale or lease of their new vehicles. Same as in the case of previously owned vehicles with factory-installed satellite radios. The company offers a dynamic programming lineup of commercial-free music plus sports, entertainment, comedy, talk, news, traffic and weather (4).
SiriusXM Radio’s Internet radio service stream select music and nonmusic channels over the Internet. The service comes with access to its programming through smartphones and tablet computers.
The radio company offers two products: SiriusXM On Demand and MySXM. SiriusXM On Demand offers its subscribers listen with the company’s online media player and on smartphones on demand. While MySXM permits subscribers to personalize SiriusXM’s existing commercial-free music and comedy channels to create a more tailored listening experience. Both are offered to the Internet radio subscribers at no charge.
SiriusXM Radio is also working on a new product, SXM17, which is expected to deliver a combined satellite and Internet services in-vehicle entertainment experience and at the same time be mounted to the automaker’s deployment of advanced in-dash infotainment systems. The company expects the SXM17 product be in vehicles as early as 2017.
SiriusXM also has its satellite radio systems that provide clear reception in most areas despite variations in terrain, buildings and other obstructions. The radio station uses eight orbiting satellites in total with no insurance coverage (5,6). SiriusXM’s satellites are designed to last 15 years. In addition to the satellites, the company also had over 1,100 terrestrial repeaters, which improves the signal in crowded areas such as cities.
SiriusXM’s Federal Communications Commission (FCC) licenses for its Sirius satellites expire in 2017 and 2022 while XM satellites expire in 2018, 2021 and 2022. The company believes that absent significant misconduct on its part, the FCC will renew the corresponding licenses. Terrestrial repeaters’ FCC license are set to expire in 2027.
In 2015, SiriusXM allocated 2.1%, or $94.6 million, of its total sales in satellite and transmission costs, such as operation and maintenance costs.
SiriusXM also has studios situated in New York City, Washington and Los Angeles. Further, the company does not manufacture its own radios; authorized manufacturers and distributors perform these tasks. SiriusXM also offers connected car services (7).
SiriusXM also owns 37% equity of SiriusXM Canada Holdings, subscribers for the latter are not included in the former’s count. SiriusXM also had other services to offer: Commercial Accounts, Satellite Television Service, Travel Link, Real-Time Traffic Services and Real-Time Weather Services.
Segments and margins
SiriusXM reports four segments: subscriber revenue, advertising revenue, equipment revenue and other revenue (8).
Subscriber revenue includes subscription, activation and other fees. The segment contributes the most to SiriusXM’s sales at 83.7% of total revenue, or $3.8 billion, representing 7.6% year-on-year growth in 2015. Nine months into 2016, the subscriber segment grew 10.1% to $3.1 billion compared to the same period last year.
Advertising revenue, meanwhile, contributed 2.7%, or $122.3 million while growing 21.1% year on year in 2015. None months into 2016, the segment grew 11.8% to $99.3 million.
Equipment revenue contributed 2.4%, or $110.9 million while growing 6% last year. The segment grew 7.9% to $86.3 million in sales from January to September this year.
Other revenue contributed 11.1%, or $512 million, and growing 21.6% last year. The segment delivered 9.7% to $415.9 million in sales up to third quarter this year.
Company specific metrics
SiriusXM reports several metrics to further understand its business operations. These metrics are average self-pay monthly churn, new vehicle consumer conversion rate, ARPU, SAC, Per Installation, Customer Service and Billing Expenses, Per Average Subscriber (9).
For the average self-pay monthly churn, I assume the lower the figure, the better for SiriusXM (10). In 2015, the company had 1.8%, lower than 2014’s 1.9%. Nine months into 2016, the figure held steady at 1.8%.
New vehicle consumer conversion rate should supposedly deliver steady growth over time, as SiriusXM transfers to a new vehicle should ideally carry the radio services as well, reflecting satisfaction in the brand. In 2015, the figure was 40%, compared to 2014’s 41%. Three quarters into 2016, the figure was at 39%.
ARPU should also be expected as a growing figure as SiriusXM earns more from its subscribers over time. In 2015, ARPU was $12.53, compared to 2014’s $12.38. Nine months into 2016, ARPU grew by 3.05%Â year on year to $12.83.
SAC, Per Installation, meanwhile, should at least be expected to be lower or sustained over a certain period as these are costs for SiriusXM. In 2015, SAC, Per Installation was $33, compared to 2014’s 34. In 2016’s latest report, the figure stood at $31.
Customer Service and Billing Expenses, Per Average Subscriber figures should as well be expected to be similar to SAC, Per Installation performance, over time. In 2015, the figure was at $1.01, compared to 2014’s 1.07. Nine months into 2016, the figure went lower than $1 at 98 cents.
Overall, SiriusXM had a five-year sales and profit growth rate of 10.16% and 63.93%, respectively.
Cash, debt and book value
Unaudited financials as of Sept. 30 revealed that SiriusXM had $572.4 million in cash and $6.1 billion in debt. The company also had 56.5%, or $4.76 billion, of its total $8.4 billion assets in goodwill and intangibles. The company had a book value of $-506 million.
Cash flow
(SiriusXM Holdings, Quarterly Filing)
Nine months into 2016, SiriusXM grew its operational cash flow by 34.98% to $1.2 billion. The company spent $132.2 million in capital expenditures leaving it with $1.08 billion. SiriusXM also had debt cash intake of $638.4 million minus repayments.
SiriusXM also allocated 113%, or $1.23 billion, in share buybacks for the period while for the past three years it allocated 197%, on average, of its free cash flow in share buybacks.
Conclusion
Good news keeps coming into SiriusXM’s business operations. As observed, SiriusXM is able to generate a bit more revenue from its subscribers on an ongoing basis. Subscribers are also growing and the company had about a 7.6% growth year on year since 2013, and 6.6% growth from December 2015 to September.
Costs are down as per metrics provided at the same time. This was reflected in the company’s earnings release where it had 29.7% operating margin, compared to 26.2% in the same period last year.
Contrary to the positive findings was that SiriusXM probably had a much-leveraged balance sheet. Being owned mostly by Liberty Media, that is run by media mogul John Malone, I doubt SiriusXM would default on its loan or lose credit access nonetheless.
The company also spends good amount of its cash flow buying back its shares.
(SiriusXM Holdings, Google Finance)
Analysts RBC Capital Markets and Wunderlich had sector perform and and buy recommendations on the company’s shares, having $4.75 and $5 target prices. Meanwhile, using a five-year earnings multiple and profit growth rate along with 20% margin discount gave me a value of $5.8 a share.
SiriusXM is not a buy right now, but there may be a good upside from the current price it has.
In summary, SiriusXM is a speculative BUY with a target price of $5 per share.
Notes
(1) Morningstar data.
(2) GuruFocus data.
(3) Annual filing: SiriusXM Radio subscribers include:
- Subscribers under our regular and discounted pricing plans.
- Subscribers that have prepaid, including payments made or due from automakers for subscriptions included in the sale or lease price of a vehicle.
- Subscribers to our Internet services who do not also have satellite radio subscriptions.
- Certain subscribers to our weather, traffic and data services who do not also have satellite radio subscriptions.
(4) Annual filing: SiriusXM Radio additional offerings include an extensive selection of music genres ranging from rock, pop and hip-hop to country, dance, jazz, Latin and classical; live play-by-play sports from major leagues and colleges; a multitude of talk and entertainment channels for a variety of audiences; a wide range of national, international and financial news; exclusive limited run channels; and local traffic and weather reports for 21 metropolitan markets throughout the U.S.
(5) Annual filing: Three of the Sirius satellites (FM-1, 2 and 3) were launched in 2000 and reached their depreciable lives in 2013 and 2015 but are still being used by SiriusXM. All other satellites, including XM satellites are roughly have an extended depreciable lives to 2024, in my estimation.
(6) Annual filing: SiriusXM stated that the premium cost for the insurance is uneconomical.
(7) Annual filing: SiriusXM’s connected vehicle services includes two-way wireless connectivity including safety, security, convenience, maintenance and data services, remote vehicles diagnostics, stolen or parked vehicle locator services, and monitoring of vehicle emission systems
(8) Annual filing: SiriusXM’s other revenue are amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our connected vehicle business and our Canadian affiliate and ancillary revenues.
(9) Annual filing:
Average self-pay monthly churn is defined as the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period.
New Vehicle Consumer Conversion Rate is the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after an initial promotional period. The metric excludes rental and fleet vehicles.
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.
SAC, Per Installation, is derived from subscriber acquisition costs and margins from the sale of radios, components and accessories, excluding purchase price accounting adjustments, divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period.
Customer Service and Billing Expenses, Per Average Subscriber, is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period.
(10) Me: fewer subscribers leaving SiriusXM.
Disclosure: I do not have shares in SiriusXM.
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