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3 Things to Look for in Sirius XM's Earnings Call

By John-Erik Koslosky - Jul 25, 2016 at 12:57PM

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The top and bottom lines are important, but there are story lines that shed far more light on the company's long-term strategy and success.

GAME OF THRONES CAST MEMBERS and writer/producers talked with Entertainment Weekly Radio, which is on Sirius XM, AT COMIC-CON. IMAGE SOURCE: SIRIUS XM.

Sirius XM (SIRI 1.30%) reported a strong first quarter in late April. Revenue was up 11%. Earnings were up 62%. To put it simply: Everything went about as well as expected.

But the company also left us with a few story lines to watch when it reports and discusses its second-quarter results on Tuesday, July 26, that should be more helpful in deciphering the satellite-radio service's long-term progress than the second-quarter top and bottom lines.

Let's look at three of those areas.

Is this level of subscriber growth here to stay?

In 2015, Sirius XM posted the biggest growth in subscribers since the merger of the two companies in 2007, adding 2.28 million new subscribers. Even better, that growth came in a year when new-car sales in the U.S. were slightly lower than the year before, something you'd expect to dampen subscription growth.

Sirius followed that up with another strong quarter of subscriber growth in Q1, up 8% over the prior year, which led executives to revise their growth forecast for the full year from 1.4 million to 1.6 million new paying customers.

This kind of growth in subscribers flies in the face of conventional wisdom that subscriptions have been poised to turn south because of streaming competition. The question is whether these kinds of numbers -- or something relatively close -- are sustainable, or if they're more of an anomaly because of some factor that's not readily apparent. With second-quarter earnings, we'll see if that growth is holding up and what execs have to say about why it is or isn't.

Progress on the used-car front

New-car sales have been a key driver of Sirius subscription growth for years. The company has been working with automakers to get its technology in more cars for years. But it's just about reached its saturation point on that front.

Sirius technology is now in three of every four cars and trucks that roll off the assembly line and much of that final 25% is made up of cars priced at the low end of automakers' respective lineups. Car owners looking for base-model subcompacts are a lot less likely to spring for monthly audio subscriptions, so it makes less sense for Sirius to invest its money to make sure those vehicles are satellite-ready.

Instead, it's devoting its attention to the used-car market. A lot more used cars with Sirius technology already installed are changing hands, and Sirius now sees this area as its primary driver of growth moving forward.

It thinks it can double, and perhaps even triple, the number of used-car owners signing up for subscriptions over the next several years, but to do so, it needs to figure out how to effectively reach those buyers and sign them up for trial subscriptions. The company is now working with used-car chains, insurance companies, auto-maintenance shops, and websites that help connect car buyers and car owners. It's casting a wide net, and some of the efforts won't work out. But to keep the subscriber rolls growing, some will have to succeed. Look for updates in the quarterly report.

Is a dividend on the way?

Sirius has been putting its cash to use buying back its own shares for years. This had made sense. After the merger, there was an abundance of outstanding shares. In 2012, they numbered 6.8 billion. An ongoing buyback program that set aside about $2 billion per year has reduced that to around 5 billion today.

At the same time, Sirius has continued looking for potential acquisitions. It spent $530 million on the connected-vehicle unit from Agero and will soon be supplying services such as automatic crash notification, remote door unlocking, vehicle location tracking, and turn-by-turn directions.

But CFO David Frear hinted last month that there may soon be a change in direction in how the company is deploying its cash. Frear told analysts at the Bank of America-Merrill Lynch Global Telecom Conference that the "company's economics set up well as a dividend story."

He went on to say that he expects the company's board to discuss "the role of buybacks and dividends." There's no indication if that discussion has begun, but the cat's out of the proverbial bag, so we can expect analysts to be prying for more information during the conference call Tuesday.

Other things to keep an eye on

Those won't be the only areas of interest in the quarter's report. In fact, we can probably also expect some discussion about a potential Pandora acquisition or merger, now that it's been reported that Sirius XM's largest stakeholder, Liberty Media, may be interested in buying Pandora. But these are three important long-term story lines worth watching.

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