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Why Is Sirius XM (SIRI) Down 4.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Sirius XM (SIRI - Free Report) . Shares have lost about 4.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sirius XM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Sirius XM Holdings Inc. reported second-quarter 2018 earnings of 6 cents per share that came in line with the Zacks Consensus Estimate. The figure surged 49% on a year-over-year basis.

Total revenues increased 6.3% from the year-ago quarter to $1.432 billion and beat the Zacks Consensus Estimate of $1.419 billion.

Average revenue per user (ARPU) increased 1% to $13.30. ARPU was negatively impacted by 24 cents related to the new revenue recognition standard.

Segment Details

Subscriber revenues (79.5% of total revenues) increased 2.5% year over year to $1.138 billion. In the second quarter, Sirius XM added 429K net new subscribers. As a result, total subscribers, as of Jun 30, 2018, were 33.5 million, better than 33.1 million as of Mar 31, 2018.

Sirius XM added 483K net new self-pay subscribers in the second quarter to end with approximately 28.2 million self-pay subscribers.

Sirius XM stated that that the monthly churn rate of 1.6% marked the lowest ever reported by the company over a quarter. Solid new car conversion rates of 39% and used car rates in the high-20s contributed to self-pay subscriber growth.

Advertising revenues (3.3% of total revenues) increased 17.6% year over year to $47.2 million. Equipment revenues (2.6% of total revenues) were up 23.3% year over year to $36.8 million.

Music royalty fees and other revenues (14.6% of total revenues) rose 25.5% year over year to $209.3 million.

Automotive Drives Growth

Sirius XM stated that new car penetration of 75% was on par with the company’s expectations. Installations were down 1.5% during the quarter. Moreover, estimated used car penetration was close to 38%.

Management stated that new vehicle trial starts increased 2% to 3.4 million, while used car trial starts grew over 10% to a record 2.4 million, resulting in total trial start improvement of 5% to over 5.8 million.

At the end of the quarter, total trial funnel was over 9.3 million. However, paid trials declined 54K in the quarter.

Sirius XM stated that it will continue to focus on building its presence with independent dealers in 2018.

Recent Updates

In May, Sirius XM launched iOS and Android apps, which received a positive feedback from users. Following the launch of the redesigned application, on-demand listening has increased by 60%.

Management is optimistic about the agreement with Netflix “to create, curate and launch a full-time comedy channel with the streaming service.”

Operating Details

Contribution margin was 69.5%, down 100 basis points (bps) on a year-over-year basis, with lower customer service and billing expenses and the accounting change partially negating higher revenue share and royalty expenses.

Revenue share and royalties cost increased 38% from the year-ago quarter to $404.3 million. Moreover, satellite and transmission cost was up 19.8% year over year to $23.5 million. Customer service & billing cost increased 0.3% year over year to $95.6 million.

Engineering, design and development expenses declined 1.1% from the year-ago quarter to $27.5 million. Sales and marketing expense increased 12.2% from the year-ago quarter to $119.8 million.

However, subscriber acquisition costs (SAC) dipped 4.3% from the year-ago quarter to $119.8 million. SAC per installation declined 11.7% year over year to $27.54, primarily due to reductions in OEM hardware subsidy rates, lower chipset costs and decrease in the volume of installations.

Adjusted EBITDA increased 4% from the year-ago quarter to $543 million. Adjusted EBITDA margin contracted 80 bps to 37.9%.

Operating income declined 13.1% from the year-ago quarter to $361.6 million. Operating margin contracted 560 bps to 25.2%.

Balance Sheet & Cash Flow

Cash and cash equivalents were $63.5 million as of Jun 30, 2018 compared with $78.5 million at the end of Mar 31, 2018. The company had $1.75 billion available under its revolving facility.

Sirius XM repurchased over 3.6 million shares for approximately $22 million, and paid nearly $50 million in dividends to stockholders in the reported quarter.

Guidance

Sirius XM positively revised part of its full-year 2018 guidance. Revenues are expected to be over $5.7 billion, while adjusted EBITDA is expected to be roughly $2.175 billion (up from $2.15 billion). The company anticipates adding almost 1.15 million self-pay net subscribers (up from 1 million).

Free cash flow is expected to be around $1.5 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Sirius XM has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Interestingly, Sirius XM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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