Sirius XM Radio (NASDAQ:SIRI) is the most dominant satellite radio company in the world. A "merger of equals" between Sirius and XM in 2007 created a near monopoly in the space. This does not mean the company is free from competition. Terrestrial radio, digital sales, and a proliferation of streaming services from the likes of Pandora and Spotify have made this a crowded space.
After a rocky couple of years, Sirius XM appears to have righted itself and is headed for a bright future.
New car installations give it a leg up
Consumers who pay a monthly fee for a service without even thinking about it are the golden geese of subscription businesses. Companies will spend great sums of money toward customer acquisition with the expectation of many years of revenue in the future. Spending $100 to acquire a customer makes sense if they will spend $9.99 a month for the next 5, 10, or 25 years. Sirius XM is able to achieve the benefit of this recurring revenue without much of the cost.
According to its 2014 annual report, Sirius XM is installed in 70% of new cars sold. Additionally, "Every major automaker now offers a SiriusXM trial to customers buying or leasing a new car that includes a satellite radio."Customers want Sirius XM in their vehicles, and these free trials very often convert to self-paying customers.
The company currently has 23.4 million self-paying customers, and these customers tend to stay: "Self-pay churn rate of 1.6% in the second quarter was the best on record since Sirius and XM were combined in 2008, a decrease from 1.8% in the prior year period." Once people try Sirius XM, they usually like it, and most new car sales create the possibility for another paying customer.
The company has recently made efforts to extend this success to used car sales with "a national network of more than 15,000 dealers enrolled in our program offering trial subscriptions to their customers."
Buyback program and consistent revenue growth
No matter how well a company performs on the top and bottom lines, a ballooning share count will severely damper individual investor returns. From 2008 to 2012, shares outstanding jumped from just under 2.2 billion to nearly 6.9 billion. Management has since been determined to reduce share count in a meaningful way, with authorized repurchases aimed at decreasing the 5.37 billion shares currently outstanding.
Revenue growth has been consistently strong, with a 5-year average of 11.08%, operating margin has improved to nearly 26% of revenue, and the share count has slowly worked its way down. This combination has led the company to produce positive free cash flow and earnings per share.
Scalability in this type of industry is key, and Sirius XM appears to be on the cusp of serious profitability. Once costs such as infrastructure build-out and content acquisition are accounted for, it requires barely any additional outlay to add a new customer. The revenue from that customer should drop almost entirely to the bottom line.
Many new customers should be joining the fold over the years to come. From the 2014 annual report, "Today, that fleet [of vehicles on the road with factory installed radios] is about 70 million; it will roughly double its size to 140 million by 2022."
John Malone wanted it all
John Malone is perhaps the most accomplished businessman in the cable and media industry of the 20th century. For a wonderful look at his accomplishments, and those of seven other CEOs who delivered enormous shareholder value over many years, I highly recommend "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success" by William Thorndike. While fundamental business dynamics are generally more important than executive leadership, there are a handful of CEOs that have earned so much credibility through their successes that I find it nearly impossible to bet against them. Jeff Bezos, Warren Buffett, and Elon Musk are certainly a few, and when it comes to media and cable, John Malone is one as well.
As recently as January of last year, Liberty Media, which is Chaired by Mr. Malone, attempted to acquire the remaining portion of Sirius XM that it didn't already control. The underlying economics that made it so desirable to Mr. Malone then should make it desirable to new investors now.
Sirius XM has had some dark days in the recent past where its very continued existence was in doubt. Those appear to be in the past and the future for investors looks bright. The company provides a better-sounding, nationwide version of terrestrial radio with unique content to boot. It is in a niche, but it is a large and growing niche. I look forward to seeing what the years to come bring for Sirius XM.