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Sirius XM (SIRI) Q4 Earnings Match Estimates, Revenues Up Y/Y

Zacks Equity Research

Sirius XM Holdings Inc. SIRI reported fourth-quarter 2018 earnings of 6 cents per share that came in line with the Zacks Consensus Estimate. The company had reported a loss of 1 cent per share in the year-ago quarter.

Total revenues increased 6.4% from the year-ago quarter to $1.47 billion and beat the Zacks Consensus Estimate of $1.46 billion. The increase was driven by growth in subscriber base and higher average revenue per user (ARPU).

In the reported quarter, ARPU increased 1.6% year over year to $13.64. The new revenue recognition standard (ASU 2014-09) negatively impacted ARPU by 2 cents. Notably, ARPU excludes the impact of revenues from Sirius XM’s connected vehicle services.

Sirius XM Holdings Inc. Price, Consensus and EPS Surprise

Sirius XM Holdings Inc. Price, Consensus and EPS Surprise | Sirius XM Holdings Inc. Quote

Segment Details

Subscriber revenues (78.6% of total revenues) increased 2.4% year over year to $1.18 billion. In the fourth quarter, Sirius XM added 346K net new subscribers. As a result, total number of subscribers in 2018 was slightly more than 34 million, better than 32.7 million as of Dec 31, 2017.

Sirius XM added 414K net new self-pay subscribers in the fourth quarter to end with approximately 28.9 million self-pay subscribers in 2018, better than 27.5 million as of Dec 31, 2017. However, paid promotional subscribers declined 1.9% year over year to 5.1 million in 2018. In fourth-quarter 2018, Sirius XM lost 68K paid promotional subscribers.

Additionally, self-pay monthly churn rate of 1.8% in fourth-quarter 2018 remained flat year over year. However, management noted that full year churn rate of 1.7% was the lowest in the past decade.

New car conversion rates were 39% and used car rates were in the high-20s for the year.

Advertising revenues (3.5% of total revenues) increased 22% year over year to $52.1 million. Equipment revenues (2.8% of total revenues) were up 5.8% year over year to $42.3 million.

Music royalty fees and other revenues (15.1% of total revenues) rose 30% year over year to $226.2 million.

Average subscriber customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, in fourth-quarter 2018 declined 5.3% to $0.9.

Automotive Drives Growth

At the end of 2018, about 117 million vehicles on road were equipped with Sirius XM-enabled radios, up 12% year over year and representing approximately 44% of all the cars in the country currently. Moreover, in the same period, auto sales were 17.2 million.

New car penetration for 2018 decreased 75% year over year, down 130 basis points (bps) due to reduced penetration in high fleet sales with few automakers. However, used car penetration was 40%, an increase of 500 bps from the year-ago quarter.

Management stated that total trial starts in 2018 increased 5% to 22.4 million, including used car trial starts growth of 10% to over 9.3 million. At the end of the year, total trial funnel was more than 9.1 million, up 3% from the year-ago quarter. Installations during the quarter increased 4.2% year over year to 3.6 million.

Sirius XM stated that the auto market in 2018 was remarkably strong as solid demand for trucks and SUVs was offset by softness in the car sedan segment. Moreover, the company expects the strength to continue well into 2019.

Moreover, during the quarter, Sirius XM extended its partnership with Toyota Motor Corporation TM to install SiriusXM in all the latter’s vehicles in the United States including cars, trucks and SUVs. The companies inked a long-term agreement, which extends till 2028, starting with 2020 Toyota models.

Notably, a three-month introductory subscription offer of SiriusXM All Access will continue to be valid for all Toyota customers who “purchase or lease Toyota Certified Pre-Owned vehicles.”

Moreover, Steve Basra, vice president of Toyota Motor North America noted that the extended partnership was primarily due to increased demand for Sirius XM services from both its dealers and customers. This depicts Sirius XM’s strength, which may further increase with the close of Pandora’s acquisition.

Sirius XM is also benefiting from the expansion of 360L with General Motors GM vehicles, which are expected to be rolled out by the year end. Moreover, the company extended connected vehicle agreements with Nissan and Infiniti till 2022.

Recent Updates

On Sep 24, Sirius XM announced the acquisition of Pandora Media P in an all-stock deal worth $3.5 billion.

On Jan 29, 2019, Pandora's stockholders voted in favor of the merger, which is expected to be closed by Feb 1.

Post the acquisition; the combined entity will have 100 million subscribers in North America of which 40 million will constitute self-paying subscribers and the rest “trailers and ad-based listeners.” Sirius XM expects cost synergies to be more than $50 million/year by the end of 2020.

Moreover, Pandora’s continuing efforts to make the platform attractive to both users and advertisers is expected to give Sirius XM a competitive edge in the North American audio market. Further, the company is using Pandora’s huge user base to understand user preferences and cater customized services. This is expected to aid Sirius XM’s subscriber growth. The company is also looking to create unique audio packages and cross sell content across both the platforms.

Expanding relationships outside original equipment manufacturers (OEMs), Sirius XM noted that it will continue to use smart speakers to penetrate into home. The company stated that it will soon bring additional content and features to Amazon Echo and is also looking to partner with other big players in the smart speaker’s market to expand its reach and user engagement.

To bolster its content offerings Sirius XM continues to add content from all spheres including music, politics, news and sports to its platform. Moreover, in the coming weeks the company will add 100 streaming channels to its app.

Further, the company will expand its video offering later this year given increased user engagement for Howard show.

Operating Details

Contribution margin for 2018 was 70%, down 90 bps on a year-over-year basis, with lower customer service and billing expenses, and cost of equipment and the accounting change partially negating higher revenue churn and royalty expenses.

Revenue share and royalties cost decreased 2.1% from the year-ago quarter to $336.4 million and customer service & billing cost almost remained flat year over year at $98.5 million. However, satellite and transmission cost was up 19.4% year over year to $25.3 million.

Engineering, design and development expenses increased 8.6% from the year-ago quarter to $34.1 million. Sales and marketing expense increased 16.7% from the year-ago quarter to $139.6 million.

However, subscriber acquisition costs (SAC), excluding connected vehicles, declined 7% from the year-ago quarter to $118.4 million. SAC per installation declined 16.7% year over year to $23.37, primarily due to reductions in OEM hardware subsidy rates, lower chipset costs and installations.

Adjusted EBITDA increased 6.3% from the year-ago quarter to $575.8 million due to reduced subscriber acquisition costs. Adjusted EBITDA margin contracted 10 bps to 38.5%.

Operating income increased 15.7% from the year-ago quarter to $459.2 million. Operating margin expanded 240 bps to 30.7%.

Balance Sheet & Cash Flow

Cash and cash equivalents in the fourth quarter were $54.4 million compared with $46 million at the end of Sep 30, 2018. Long-term debt in the reported quarter was $6.88 billion compared with $6.56 billion in the prior quarter.

Cash flow from operating activities in fourth-quarter 2018 was $1.88 billion compared with $1.35 billion in third-quarter 2018. Free cash flow was $416.8 million in the fourth quarter compared with $287.6 million sequentially.

Sirius XM repurchased over 209 million shares worth $1.3 billion and paid nearly $200 million in dividends to stockholders in 2018. The company’s board recently approved another share repurchase program worth $2 billion.

Full Year Guidance

Revenues are expected to be approximately $6.1 billion while adjusted EBITDA is expected to be roughly $2.3 billion. The company anticipates adding about 1 million self-pay net subscribers.

Free cash flow is expected to be around $1.6 billion. The abovementioned guidance does not consider Pandora’s results post its acquisition.

Currently, Sirius XM carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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