2023-05-03 11:45:05 ET
Summary
- 1Q23 earnings were below consensus on revenue and adj. EBITDA.
- While SIRI raised its FY23 EBITDA and FCF guidance, the weak self-paid net additions and limited growth prospects in the weak auto market make it challenging for growth.
- The success of its forthcoming product launch and marketing technology rollout later this year may offer significant advantages and improve the fundamentals of the business in the long term.
Overview
Sirius XM Holdings (SIRI) is a broadcasting company that provides satellite radio and online audio services in United States for a monthly subscription fee. I recommend a hold rating following weaker than expected 1Q23 results. My outlook for SIRI is bleak in that I continue to see limited opportunity for SIRI to grow revenue in this weak auto market driven by high rates, weak conversion rates, and an uncertain advertising backdrop (companies are pulling back marketing budget to stay afloat). To make things worse, the weak topline performance is going to further squeeze margins by higher music royalty expenses and investments being made in product & technology.
1Q23 earnings
1Q23 results were below consensus on Revenue and adj. EBITDA. The miss to revenue was driven primarily by weaker than expected SXM subscriber net adds and ARPU. The miss to adj. EBITDA was driven by a combination of lower revenues and higher than expected engineering expenses related to investments being made in product & technology.
Guidance raised
SIRI raised FY23 EBITDA guidance to $2.75 billion, an increase of $500 million, and also raised FCF guidance to $1.1 billion, an increase of $500 million. Frankly, I believe the market is not surprised by this increase in guidance given the huge RIF exercise conducted in March. As such, I believe the increased guidance is merely a function of cost savings, which means we are unlikely to see a big step up again as there are only so many fats to cut. That said, I believe there is a path to margins improvement if new car sales continue to improve. All-in, I'd say that FY23 EBITDA guidance should be more or less in the bag especially after management comments regarding the ramping of EBITDA in the following quarters. Consequently, a higher EBITDA flows through to the FCF line as CAPEX expectations remains unchanged. The problem, however, is post FY23.
Self-paid performance was weak
While the raised guidance was good for FY23, I believe the worse-than-expected self-paid net additions in 1Q23 has offset any positive impact it might have on the share price as investors get worried about the fundamental of the business. The decline was driven by lower 4Q22 vehicle and streaming trial starts and a seasonally higher churn rate in 1Q23. I believe this is somewhat expected given the pull back in marketing spend (to cut cost), typical seasonal slowdown, and weaker conversion. On the point of conversion, I believe it has declined as the business starts to face a wall in converting more price-sensitive consumers and greater competition in premium audio services. While management is optimistic about the potential conversion benefits that could come from initiatives like 360L, I remain concerned that the competitive intensity within premium audio and the greater access to applications in the dash board will continue to pressure subscriber trends.
As such, I do not see any credible path to recovery based on the current economy outlook. Management has reiterated its guidance for modestly negative self-paid net adds for 2023, noting that this expectation owes to continued economic uncertainty and auto sales that remain soft. In somewhat, investors hoping for a recovery here is betting on a macro recovery - which is extremely hard to say for certain today. I recommend to take a conservative stance by assuming the operating environment to be difficult. What could be helpful here is to see an increased contribution from the "streaming only" channel. However, I don't expect it contribute significantly until SIRI ramps up marketing spend into the relaunch of its streaming platform later this year.
New product launch
What could help the current SIRI situation is the success of its forthcoming product launch and marketing technology rollout later this year, which I believe do offer significant advantages. For instance, SIRI has revamped its in-app onboarding experience by allowing users to choose genres right away, which I believe increased retention rates as consumers can enjoy listening to their preferences and have easier access to the content that matters most to them. In other words, SIRI reduces the user friction, allowing consumer to discover what they want easily. Of course, all these are qualitative datapoints that cannot be easily translated into the P&L, as such it is always discounted by the market. However, if management can continue to leverage on these product enhancements to improve the fundamentals of the business, I believe it will eventually show up on the P&L.
Conclusion
SIRI has raised its FY23 EBITDA and FCF guidance, which I believe this is mainly a function of cost savings rather than growth opportunities. Furthermore, the weak self-paid net additions and limited growth prospects in the weak auto market make it challenging for the company to improve its revenue prospect in the near-term. Overall, I recommend taking a conservative stance and closely monitoring the company's performance in the challenging operating environment before having any thoughts of investing.
For further details see:
Sirius XM Holdings' Raised Guidance Did Not Surprise The Market