Sirius XM (SIRI): Expect More Upside After Q2 Earnings
Sirius XM (SIRI) reported robust second-quarter results last week. The company's adjusted EBITDA was $415 million in the second quarter of 2015, up 12% from $370 million in the prior-year period. Sirius' net income, however, dropped from $120 million to $103 million. But, this was due to the effect of a pre-tax $108 million charge to settle certain royalty litigations. After adjustments, the net income was $170 million, up 29% from $131 million in the second quarter of last year. The net adjusted earnings per diluted common share were $0.03 as compared to $0.02 last year.
What's even more impressive is that after announcing its results, Sirius XM also increased its guidance for the full year as shown below.
- Total net subscriber additions of approximately 1.8 million from 1.4 million
- Revenue of approximately $ 4.5 billion from $ 4.7 billion
- Adjusted EBITDA of approximately$ 1.62 billion from $ 1.6 million
- Free cash flow of approximately$ 1.3 billion from $ 1.25 million
SiriusXM CEO, Jim Meyer said, "Self-pay net additions of 519,000 were the strongest second quarter result since 2007, and our quarterly self-pay churn rate of 1.6% was outstanding."
Sirius XM has long established business ties with every major automaker for installation of satellite radio in their vehicles. Therefore, Sirius XM's subscription growth is strongly correlated with the U.S. automobile market's performance and outlook.
Now, the U.S. car market is on the boom once again, with hopes of surpassing even the pre financial crisis levels. Consumers in the U.S. are buying automobiles a faster rate than any time in a decade. The seasonally adjusted and annualized rate ((SAAR)) of vehicle sales was 17.99 million vehicles in June 2015, and is likely to reach 20.64 million units in July. The more cars people buy increases their exposure to Sirius' promotional offerings, therefore increasing Sirius' chances of converting them to paid subscribers.
This is because the company is rapidly increasing its new vehicle penetration rate, which increased to 72% in the second quarter, up from 69% a year ago. Looking ahead, Sirius forecasts long-term penetration rates of around 75% of total automotive production, up from its previous expectation of around 70%.
As far as content is concerned, Sirius XM recently reached a $210 million settlement with major record labels last quarter regarding pre-1972 recordings. This ensures that it can keep playing approximately 80% of the pre-1972 recordings they currently use through the end of 2022. It will be of great help to the company in providing unique content on its channels and attracting subscribers.
All in all, an improving economic climate, growing employment, and lower gas prices are likely to help Sirius see better demand and contribute to higher subscriber retention. Thus, in my opinion, investors should continue holding on to Sirius XM shares after its latest earnings report as the stock can deliver more upside.