Why JANA Partners exits position in SiriusXM

Market Realist

Overview: JANA Partners' positions in 2Q14 (Part 4 of 6)

(Continued from Part 3)

JANA Partners and SiriusXM

JANA Partners’ new positions in the second quarter include FMC Corp. (FMC) and Charter Communications (CHTR). JANA sold its positions in SiriusXM (SIRI), Juniper Networks (JNPR), and Golar LNG (GLNG).

JANA Partners disposed of a position in SiriusXM (SIRI) that accounted for 2.72% of the fund’s 1Q14 portfolio. The position was initiated in the fourth quarter last year.

SiriusXM broadcasts music, sports, entertainment, comedy, talk, news, traffic, and weather channels, and infotainment services. It’s available in the U.S. on a subscription fee basis through its two proprietary satellite radio systems. Subscribers can also receive music and other channels, and features like SiriusXM On Demand and MySXM, over the Internet. SiriusXM can also be received through mobile device applications. It holds a minority interest in Canada with more than two million subscribers.

Its primary source of revenue is subscription fees. Most of its customers subscribe on an annual, semi-annual, quarterly, or monthly basis. It also generates revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services like weather, traffic, data, and Backseat TV services.

The company has agreements with every major automaker to offer satellite radios in their vehicles. Satellite radio services are also offered to certain rental car company customers. It also provides connected vehicle applications and services. The segment was boosted more by the acquisition of the connected vehicle business of Agero Inc. last year.

SiriusXM sees 10% revenue growth, but earnings are flat

The company posted revenue of $1.035 billion—up 10% from 2Q13. Net income was $120 million in 2Q14—down from $125 million in the same period last year. Earnings per share (or EPS) was flat year-over-year (or YoY) at $0.02 per share. Revenue share and royalties, including distribution and content provider revenue share, royalties for broadcasting performance content and web streaming, and advertising revenue share increased 28% YoY. Total operating expenses were up 12% to $750.77 million from $672.37 million a year ago.

Adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) climbed 31% while adjusted EBITDA margin reached 35.7% in 2Q14—up ~570 basis points from 2Q13. It raised its revenue forecast for 2014 to ~$4.1 billion and adjusted EBITDA forecast to ~$1.425 billion.

The total paid subscriber base reached 26.3 million—up 5% from a year earlier. Self-pay net subscriber additions were 379,711, and the self-pay subscriber base reached 21.6 million—up 7% from 2Q13. Paid and unpaid trials combined to produce a total trial funnel of 7.3 million at the end of 2Q14. For 2014, Sirius expects net subscriber additions of ~1.25 million.

Connected vehicle business sees increasing competition

The company said on its earnings call that its new car business certainly benefited from a healthy rate of auto sales—up 7% to 16.5 million in 2Q14. Year-to-date (or YTD) vehicle sales were up ~4% versus last year. Vehicle penetration was nearly 71% of new car sales—up about two points versus last year’s second quarter. Management added that “SiriusXM Radios are now installed in 27% of the cars on the road today. And over time, this will climb toward our new car penetration rate of 70%.”

SiriusXM said it had its strongest quarter ever for new car trial starts at more than 2.8 million. Used car trial starts also set a record at nearly 1.2 million. It said its used car efforts represent a significant growth opportunity. It has over 13,000 dealers reporting sales information in the used car market.

Conversion rates in the second owner business was in the low 30s. Management said that, “Our connected vehicle business is a key part of our long-term strategy which increases our importance to OEMs and allows us to provide services like safety, security and convenient features to the same users as our audio business.”

The company’s churn rate was 1.8% the second quarter—up slightly from last year’s rate of 1.7%. Management added that vehicle related turnover was the primary driver of increases in churn.

The connected car space sees competition from entrants such as Apple (or AAPL) with its CarPlay, Microsoft (or MSFT), Google (or GOOG), and Blackberry (or BBRY) with its QNX platform.

To buyback additional $2 billion worth shares

Sirius’ approved an additional $2 billion common stock repurchase program in July. The new approval increases to an aggregate of $6 billion—the amount of common stock SiriusXM has been authorized to repurchase. The release said the approval reflects the board’s desire to continue to return value to stockholders and its confidence in the long-term growth prospects of the company’s business.

 

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