Sirius XM (NASDAQ:SIRI) released quarterly results for Q2 2015 on July 28th nearly three weeks ago. In some ways I am puzzled that the company has received little in the way of positive press from that quarter, but in some ways I am not.
It seems that Sirius XM is criticized at nearly every turn, and micro-analyzed to exhaustion from those unwilling or unable to see the larger long term picture of the company and the period it is currently going through. The company just posted up what I feel are pretty exceptional numbers, and the resulting articles here at Seeking Alpha that followed were:
• Wi-Fi In Autos, A Sirius Problem. That age-old discussion about how streaming and the connected car will serve to destroy Sirius XM.
• Why I Sold Sirius XM After Earnings For Zero Gain. Again, commentary suggesting various connected vehicle services will doom Sirius XM to irrelevance or extinction.
• An Examination Of The Sirius XM Connected Vehicle Business. A scrutiny of Sirius XM's connected vehicle business and whether current revenue estimations fall in line with management's rough guidance.
That's it. I would have expected a bit more enthusiasm given what I read in the report, but I am starting to think I am one of the last investors standing on the bullish side of the fence. And that's fine by me.
I look at a lot of different numbers in the quarterly reports and check them vs. longer term trends to see if the company remains on track and performs in a fashion which is comfortable to me based upon my expectations. Since the contract shift with a 'major automaker' had time to bleed through the subscriber numbers by this time last year, year over year comparisons can now be made to various subscriber metrics. For the following comparisons, reference these quarterly statements: Q2 2014; Q2 2015; Q1 2015.
It is important to note that comparisons between Q1 2015 and Q2 2015 numbers are less important than comparisons year over year on a same quarter basis. The following comparisons and commentary start with year over year comparisons as follows:
Self-pay subscriber additions
• 2014: 380,000
• 2015: 519,000
Average Self-Pay Monthly Churn
• 2014: 1.8%
• 2015: 1.6%
A year-over-year increase in additions by 139,000 subscribers for Q2, or an increase in additions of 36.5% compared to the previous year, is quite positive and shows that there is still significant demand for new subscribers willing to pay for a Sirius XM subscription. Certainly this number is helped by the reduction in Sirius XM's self pay monthly churn rate from 1.8% to 1.6%. Higher customer retention and fewer deactivations dragging down the totals turn gross additions into higher numbers of net additions. Time will tell if Sirius XM can maintain this level of churn or if it was a one time anomaly. Investors will want to pay close attention to this metric and ensure it remains below 2%. It should be considered that had Sirius XM seen 1.8% churn, it would have found Q2 2015 with a similar number of net self pay additions as Q2 2014. This wouldn't be necessarily a bad thing, but certainly it would not be 'as good.'
Average Revenue Per User (ARPU)
• 2014: $12.36
• 2015: $12.42
Each subscriber brings in roughly the same (6 cents more per user) per month on an average basis year over year. It can be argued that increased pricing should have permeated the subscriber base and raised this number by a greater amount but due to retention discounting the number is not increasing by the amount of the price increase. This is likely correct, and to me is not any sort of concern. Sirius XM pays royalties on a percentage basis, and flat rate content contracts are already figured into the subscription rate. Thus that retained customer at a reduced rate is still profitable, even if it is not as profitable as a customer who pays full price. I am happy to see ARPU creep up, so long as the "U" or 'User' in that metric, continues to move up as well.
SAC Per Installation
• 2014: $33
• 2015: $32
The cost to acquire a subscriber is an important number, and it is good to see it continue to decline even if that amount is only around 3%, or $1 per subscriber.
As ARPU inches higher and SAC inches lower, the time it takes for a new subscriber to pay for itself becomes less. That's 'good.'
Customer Service and Billing Expense per Average Subscriber
• 2014: $1.05
• 2015: $0.99
Again, small changes to this metric are less important than the trend, and that trend has been "down." Lower costs per subscriber to service those subscribers is important, and a reduction of this amount by 6% year over year can result in significant savings long term. These little movements and continuous trends of increased revenue and reduced costs add up long term to good effect.
Share Repurchases
144,439,208 shares were repurchased for an average price of $3.88, with approximately $621 million left under the current plan's authorization.
Ending diluted outstanding shares at the end of the quarter were:
• 2014: 6,210,078,000
• 2015: 5,507,601,000
Showing a reduction of 702,477,000 shares or 11.3% of the total.
It is worth noting that to date, Sirius XM has reduced its diluted share count from 6,878,786,000 to 5,507,601, a total reduction of 1,371,185,000 shares or approximately 20% of outstanding shares in 30 months since the program's inception.
Furthermore it is worth noting that the company has room to continue borrowing at present low interest rates in order to continue to buy back shares and extend the current program beyond what is already authorized. An additional reduction of 600 to 700 million shares, or 11 to 13% of the current diluted share count, is not out of the question over the next 12 months if the program is continued at its present pace.
Again I want to be clear, a share buyback program is a long term issue and done properly will show returns towards or after the end of the program. Lower prices during the buyback provide a lower cost basis for the company and thus more shares repurchased for less money. If an investor does not have a long term horizon, a properly executed share buyback program, especially one done with the addition of debt, will have little to no effect in the short term.
The vast number of complaints from confused individuals wondering why the share buyback program has not inflated the share price, compared to the efficacy of the program itself indicated by the reduction in number of shares, shows efficacy to me. Those looking for large jumps in share price so that they could sell those shares at the expense of the company and thus their fellow "long term" investors may have become frustrated and sold out for less in the short term. Years from now those in it for the long term can look back and thank the impatient who sold out at $3, $3.50, $4 per share in the first 30 months of the buyback program.
So why hasn't the share price appreciated?
Those who agree with me that Sirius XM continues to perform well as a company and that the company just posted an excellent quarter may be asking why the share price has not appreciated beyond that magical $4 per share mark, and instead has been rejected at this point time and time again. Consider that this may not be a fundamental issue so much as a technical one. Consider all of those complaining over the past 18 months that they are "just waiting for $4 to sell" and consider that in general, Sirius XM has very little interest at the moment from the market. The company has little to no coverage, at least not compared to the daily banter about any other number of stocks that the media chooses to cover. Most do not understand the company, and while the stock is heavily 'traded', longer term 'investors' have begun to move on.
Much of the coverage is negative in nature, and with the share price languishing in the range it has, a prospective new investor may not find it to be an exciting investment.
That's fine by me. Trading around the $4 per share mark and adding to long call positions around the 50 day moving average remains the plan. I believe that long term investors will continue to be rewarded with a simple patient approach of adding on the dips. Sirius XM had a great quarter, and is undervalued at present share prices. The play of "sell or short at $4 per share" may be ending soon from a trader's perspective. Consider my article discussing technicals from a month ago, and if you have been patient you may be rewarded soon with a break north of $4 per share.
Disclosure: I am/we are long SIRI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long SIRI January 2016 and 2017 $2.50, $3 and $3.50 call options. I may trade against these positions from time to time.
