It has been about a month since the last earnings report for Sirius XM (SIRI - Free Report) . Shares have lost about 5.9% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Higher Subscribers, ARPU, Pandora Acquisition Aided Sirius XM Q1 Revenues
Sirius XM Holdings Inc. reported first-quarter 2019 earnings of 3 cents per share that missed the Zacks Consensus Estimate of 5 cents. The figure also came below the year-ago earnings of 6 cents.
Total revenues, including Pandora’s results in first-quarter 2019, increased 26.8% year over year to $1.74 billion but missed the Zacks Consensus Estimate of $1.85 billion. The year-over-year increase was driven by the acquisition of Pandora in the reported quarter.
Sirius XM revenues grew 8% year over year to $1.5 billion in the reported quarter. The increase was driven by growth in subscriber base and higher average revenue per user (ARPU). Moreover, pro forma consolidated revenues increased 10% to $1.86 billion.
In the reported quarter, Sirius XM’s ARPU increased 4.4% year over year to $13.52, recording the highest growth rate in nine years. Notably, ARPU excludes the impact of revenues from Sirius XM’s connected vehicle services. Pandora’s ARPU increased 6% year over year to $6.7.
Subscriber revenues (83.6% of total revenues) increased 15.9% year over year to $1.46 billion. In the first quarter, Sirius XM added 132K net new subscribers. As a result, total number of subscribers was 34.2 million, better than 33.1 million as of Mar 31, 2018.
Sirius XM added 131K net new self-pay subscribers in the first quarter to end with 29.05 million self-pay subscribers, better than 27.7 million as of Mar 31, 2018. Additionally, the company added 1K paid promotional subscribers in the reported quarter. However, paid promotional subscribers declined 4% year over year to 5.13 million as of March 2019.
Sirius XM traffic users increased 14% year over year to 8.85 million and Canada subscribers increased 1% to 2.66 million.
Additionally, average self-pay monthly churn rate of 1.8% in first-quarter 2019 remained flat year over year.
Advertising revenues (12% of total revenues) were $209 million in the reported quarter compared with $42 million in the year-ago period. Additionally, equipment revenues (2.4% of total revenues) were up 17.1% year over year to $41 million. However, other revenues (2.1% of total revenues) declined 10% year over year to $36 million.
Pandora added 227K net new subscribers in the first quarter. As a result, total number of subscribers was 6.89 million, better than 5.63 million as of Mar 31, 2018.
The company added 246K net new self-pay subscribers in the first quarter to end with 6.2 million self-pay subscribers, better than 5.63 million as of Mar 31, 2018. Pandora’s paid promotional subscribers in the reported quarter were 736K.
Moreover, monthly active users declined 9% year over year to 66.04 million. Ad supported listener hours declined 11% year over year to 3.42 billion.
Pandora’s total revenues increased 14% year over year to $365 million owing to subscriber revenue growth. Additionally, the company’s advertising revenues increased 7% year over year to $231 million, a record for the first quarter. The increase was due to growth in advertising revenue per thousand listener hours, which increased 13% year over year to $62.6.
Ad revenues are expected to grow in the coming quarters as well owing to initiatives taken by Sirius XM. The company is helping advertisers reach users through voice assistants by selling “commercial time and screens to smart speakers like Amazon Echo and Alphabet’s Google Home.”
Automotive Drives Growth
Sirius XM’s used trial distribution expanded to 37,500 dealerships.
In the quarter under review, about 119 million vehicles on road were equipped with Sirius XM-enabled radios, up 11% year over year and representing approximately 45% of all the cars in the country currently. Moreover, in the same period, auto sales were strong.
Used car penetration was 44%, an increase of 400 basis points (bps) from the year-ago quarter. Further, management stated that total trial funnel was 9.3 million, taking into account used car trial starts growth of 18% year over year.
Sirius XM recently unveiled a streaming-only package, Essential, for $8/month. The service includes music and talk shows and is suitable for use on “mobile, tablet, desktop and home devices.”
Additionally, the company is witnessing increasing adoption of 360L platform. Notably, General Motors’ new model, 20 Cadillac XT6, will feature Sirius XM’s 360L. Additionally, most of General Motors’ 2020 models will have 360L.
To bolster its content offerings, Sirius XM continues to add content from all spheres including music, politics, news and sports to its platform. For instance, in the recently reported quarter, the company launched more than 100 ad free music channels on its platform.
Contribution margin for the reported quarter was 70%, flat year over year.
Revenue share and royalties cost increased 58.7% from the year-ago quarter to $492 million and customer service & billing cost increased 20.2% from the year-ago quarter to $113 million. Transmission cost was also up 40.9% year over year to $31 million.
Engineering, design and development expenses increased 74.2% from the year-ago quarter to $54 million. Sales and marketing expense increased 71% from the year-ago quarter to $183 million.
However, subscriber acquisition costs (SAC) declined 12.2% from the year-ago quarter to $108 million.
Adjusted EBITDA increased 26.8% from the year-ago quarter to $567 million. Adjusted EBITDA margin expanded 410 bps to 30.5% due to reduced subscriber acquisition costs and increased revenues supported by Pandora acquisition.
However, net income declined 44% from the year-ago quarter to $162 million owing to costs associated with Pandora acquisition and higher tax rate.
Balance Sheet & Cash Flow
Cash and cash equivalents in the first quarter were $62 million compared with $54.4 million in the prior quarter. Long-term debt in the reported quarter was $7.2 billion compared with $6.9 billion in the prior quarter.
Cash flow from operating activities in first-quarter 2019 was $396 million compared with $415 million in fourth-quarter 2018. Free cash flow was $300 million in the first quarter compared with $327 million in the prior quarter.
Sirius XM repurchased over 101 million shares worth $604 million and paid nearly $57 million in dividends.
Pro forma revenues are expected to be approximately $7.7 billion while adjusted EBITDA is expected to be roughly $2.3 billion. The company anticipates adding about 1 million Sirius XM self-pay net subscribers.
Free cash flow is expected to be around $1.6 billion. The company expects cost synergies of more than 75 million/ year.
The abovementioned guidance includes Pandora’s results.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 10.71% due to these changes.
Currently, Sirius XM has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Sirius XM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.