Sirius XM Holdings' Performance Is a Sign of Better Things to Come

Sirius XM (NASDAQ: SIRI  ) got off to a solid start in fiscal 2014 with strong first-quarter results. The satellite radio provider is gaining subscriber growth momentum. However, Sirius will have to focus on content to continue adding subscribers as it faces a tangible threat from Apple (NASDAQ: AAPL  ) . Let's take a look at Sirius' performance in the quarter and see how it might perform going forward.

A robust performance
Sirius XM's revenue for the quarter increased 11% from the year-ago period to $998 million in the first quarter. This was better than analysts' expectations of $995 million. The company also improved its profitability, as its adjusted EBITDA margin rose to 33.5% from the year-ago number of 29.1%. 

The company's total subscriber base surged to an all-time high of 25.8 million. It added around 267,000 subscribers in the first quarter. More important, self-pay subscribers grew 173,000. Management is confident that it will be able to achieve its full-year target of adding 1.25 million subscribers. Since there are only 20%-26% cars with Sirius XM radio in the U.S., the company sees huge untapped potential for its product going forward.

Factors that might drive growth
The second-owner market in automobiles has been growing consistently. Sirius has agreements with various dealers in this segment. So, it can offer trials to customers who are getting their vehicles serviced at these locations. Currently, the conversion rate of these trials is around 30%. However, management believes that in the next few years, the turnover of enabled vehicles in the secondary market will actually exceed the new vehicle universe.

Sirius is also targeting connected vehicles. It had purchased Agero's connected vehicle business last year, strengthening its position in telematics and connected vehicle services. Presently, Sirius is working to integrate Agero's resources and technology and is on track to recognize $100 million in revenue from its connected vehicle business this year. Over the next three years, Sirius expects to double the revenue from this segment. 

As far as the core business is concerned, Sirius has secured long-term renewals with content providers such as Fox News, Major League Baseball, and the NBA. Management expects many more long-term renewals going forward in order to ensure that its content assets remain exclusive and strengthen Sirius' position in car audio entertainment. Later this year, Sirius plans to introduce several new commercial-free music channels. 

Sirius is preparing to launch a radio channel with NBC News, known as Today Show Radio. It has also added business radio in association with the Wharton School. This is a new full-time channel that will let listeners share business insights and receive advice from eminent personalities of the business and finance world.

Beware of Apple
It is clear that Sirius XM is making good moves to keep its growth momentum intact. It is necessary for the company to do the same since this space is quite competitive. For example, Apple's iTunes Radio has a large catalog of music with 26 million songs. 

Also, Apple's policies with iTunes Radio are proving to be a hit with artists, as it has decided to pay more than other Internet providers such as Pandora, along with a share of advertising revenue.

This sounds like a threat for Sirius, as Apple's CarPlay, which was announced earlier this year, will allow drivers to use their iPhone apps for in-car infotainment. If iTunes Radio becomes a separate app, some iPhone users may choose to forgo their Sirius XM radio service. And as Tim Cook alluded to in Apple's acquisition of Beats, the two will be able to work together on projects beyond what anyone has planned currently. Perhaps integrating Beats's streaming music service into CarPlay could be one such strategy.

Final words
The only way Sirius XM can defend itself against Apple is by providing better content. The company is certainly doing that by adding more channels. Moreover, Sirius' relationship with dealers around the country might also prove to be an asset.

Lastly, Sirius' valuation looks decent at 27 times forward earnings, impressive for a company whose earnings are expected to grow at a compound annual growth rate of 20% for the next five years. Since Sirius is present in just a fourth of the cars on U.S. roads, it has a lot of room for growth. A strong dealership network, good content, and growth in the auto industry will help Sirius tap the rest of the addressable market, making it a high-growth stock that investors would want to have in their portfolio.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2014, at 11:27 PM, Protocola wrote:

    Fantastic write-up...finally a click I'm NOT disappointed with substantive factors that will drive SIRI stock performance.

    Thank you!

  • Report this Comment On June 04, 2014, at 11:04 AM, BillFromNY wrote:

    "This sounds like a threat for Sirius, as Apple's CarPlay, which was announced earlier this year, will allow drivers to use their iPhone apps for in-car infotainment. If iTunes Radio becomes a separate app, some iPhone users may choose to forgo their Sirius XM radio service."

    This is true as far as it goes. Out of all the new car buyers whose auto includes Sirius and a free three month trial, only about 42 percent subscribe to Sirius after the free trial. I think that already most iPhone users fall into the 58 percent that don't take Sirius.

    But nothing will change as to content. iPhone users that buy the CarPlay option and don't take up their Sirius won't get the Sirius content. They will settle for the Pandora-like iTunes interface and all the free Internet stations that they can search up.

  • Report this Comment On June 05, 2014, at 10:06 AM, dannysboy wrote:

    I can't comment on IPhone. I know nothing about it.

    However, I will relay this experience. Two years ago, I got caught and stopped by an accident in a heavy snow storm high in the Sierras of I-80.

    Being stuck, I decided to make some phone calls. I couldn't even get a dial tone in the storm. However, my Sirius radio performed just as well as if it were a sunny day in May.

    I have had other bad weather experiences and the sat. radio signal has never failed, unlike my sat tv signal.

    When I'm traveling long distances, I need reliability in my information sources. Sat. radio has always delivered.

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