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Sirius XM’s Earnings Likely To Drop In 2019 In Spite Of The Pandora Acquisition

The Sirius XM Holdings Inc. application is displayed for a photograph on an Apple Inc. iPhone in Washington, D.C.(Photographer: Andrew Harrer/Bloomberg)

© 2018 Bloomberg Finance LP

Sirius XM Holdings Inc (NASDAQ: SIRI) is set to release its Q2 2019 earnings report on July 30, 2019, followed by a conference call with analysts.

Key Expectations

  • Sirius XM Revenues have largely increased over recent quarters, with revenues rising by a sharp 26.8% (y-o-y) in Q1 2019, benefiting from the acquisition of Pandora in early 2019.
  • The market expects the company to report a 35% y-o-y jump in revenue in Q2 2019, driven by a sharp increase in subscriber base and advertising revenue due to the acquisition.
  • Earnings are expected to come in at $0.05 per share in Q2 2019, marginally lower than $0.06/share in the previous-year period.
  • Lower earnings are likely to be driven by an increase in cost of services and higher sales and marketing cost.

You can view our interactive dashboard – Sirius XM Earnings: Performance and 2019 Forecast – and alter the key assumptions to arrive at your own estimates for the company’s revenues, earnings and stock price. Here is more Trefis Media data.

A Quick Look At SIRI’s Key Revenue Sources

SIRI reported total revenue of $5.77 billion in FY 2018. Key revenue sources are as follows:

Subscriber Revenue: $4.59 billion revenue in 2018 (contributed 80% of total revenue). This includes self-pay and paid promotional subscriptions, U.S. Music Royalty Fees, and other ancillary fees.

Advertising Revenue: $0.19 billion revenue in 2018 (contributed 3% of total revenue). This includes the sale of advertising on Sirius XM’s non-music channels.

Equipment Revenue: $0.16 billion revenue in 2018 (contributed 3% of total revenue). This includes revenue and royalties from the sale of satellite radios, components, and accessories.

Other Revenue: $0.83 billion revenue in 2018 (contributed 14% of total revenue). This includes service and advisory revenue from our Canadian affiliate, connected vehicle services, and ancillary revenues,

A] Revenue Trends

Subscriber Revenue

  • Subscriber revenue increased sharply in Q1 2019 due to a higher music royalty rate, increase in weighted average number of subscribers, and increase in the average price per paid subscriber due to the growth of Pandora Plus and Pandora Premium subscribers.
  • Going forward, we expect segment revenue to growth to be driven by the growth in subscriber base, increases in the average price charged, and the sale of additional services to subscribers.

Advertising Revenue

  • Advertising revenue also saw a sharp rise in Q1 2019, primarily due to the increase in rates charged per spot as well as a greater number of advertising spots sold and transmitted.
  • Segment revenue is expected to continue to grow at a healthy rate through 2019, led by more advertisers being attracted to its national platform and growing subscriber base, as the company is set to launch additional non-music channels.

Equipment Revenue

  • Revenue increased on y-o-y basis driven by an increase in royalty revenue due to transition to a new generation of chipsets.
  • Future growth in segment revenue is likely to be driven by an increase in royalty revenue associated with certain new chipsets, and increase in device sales from its connected vehicle services.

Other Revenue

  • Other revenue decreased in Q1 2019 driven by a decrease in data usage revenue generated from connected vehicle services.
  • However, this trend is expected to reverse through 2019 due to additional revenues generated from the company’s Canadian affiliate and a pick up in connected vehicle services.

B] Expense and Profitability Trend

Total expenses are expected to increase going forward due to higher cost of services provided and higher selling and marketing cost, partially offset by lower subscriber acquisition cost.

  • Cost of Services: Cost of services increased in Q1 2019 due to higher streaming royalties, higher content licensing costs, and wireless transmission costs. The metric is expected to increase further, as the company offers additional programming, and renews or replaces expiring agreements, higher service and billing cost due to higher customer base, and increase in transmission cost due to increased investment in internet streaming.
  • Sales and Marketing Cost: Cost increased sharply in Q1 2019 primarily due to additional subscriber communications, retention programs and acquisition campaigns, as well as higher personnel-related costs. Sales and Marketing cost is expected to increase as the company expands programs to retain its existing subscribers, win back former subscribers, and attract new subscribers and listeners.
  • Subscriber Acquisition Cost: Cost decreased in Q1 2019 driven by reductions to OEM hardware subsidy rates, lower subsidized costs related to the transition of chipsets, and a decrease in the volume of satellite radio installations. The metric is expected to remain low as the subsidized chipsets cost is expected to decline as the company transitions to a new generation of chipsets, and subsidies offered.

In spite of a sharp increase in revenues, net income margin is expected to see a slight decline in Q2 2019 driven by an increase in total expenses.

Full Year Outlook

  • For the full year, total revenue is expected to increase sharply by over 33% to $7.7 billion in 2019 and further by 6.5% to $8.2 billion by 2020.
  • Higher revenue is likely to be driven by additional revenue from the acquisition of Pandora in early 2019, higher subscribers, increase in average revenue per subscriber, and higher royalty rates.
  • Net income margin is expected to drop from 20.4% in 2018 to 12.5% in 2019, driven by higher cost of services provided and an increase in marketing cost, along with acquisition and transaction related expenses during the year.
  • Margins are expected to improve to 14% in 2020 due to synergies from the Pandora acquisition.

According to Sirius XM Valuation by Trefis, we have a price estimate of $6 per share for SIRI’s stock.

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