Examining The Sirius XM Connected Vehicle Services Business (NASDAQ:SIRI)

It’s no secret that the Connected Vehicle Services business (or CVS) of Sirius XM Holdings (SIRI) has been growing much more slowly than originally anticipated when the company purchased that business from Agero in late 2013. At the time, revenue was expected to be $100 million in 2014, double by 2016, and continue to grow at strong double-digit rates for many years to come. Instead, it took until 2018 before subscription revenue for the business reached $100 million.

Prior to the 2019 10-K report being released, the CVS subscription revenue was not separately shown in the company’s filings. However, due to the way Average Revenue Per User, or ARPU, was defined, it was possible to derive these figures. That definition was as follows:

“ARPU – is derived from total earned subscriber revenue (excluding revenue associated with our connected vehicle services), advertising revenue and other subscription-related revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee.”

Therefor, one could always derive CVS subscription revenue by subtracting the separately identified ARPU subscription revenue from the consolidated subscription revenue line item in the P&L. During the latter part of 2019, the company finally began to separately identify CVS subscription revenue in the footnotes. And, when the company released its 2019 10-K, the company separately identified the annual figures for the past three years in a footnote:

“(1) ARPU for Sirius XM excludes subscriber revenue from our connected vehicle services of $159, $111, and $84 for the years ended December 31, 2019, 2018 and 2017, respectively.”

The table shown below traces the historical data that I had previously constructed. Note that the $111 million for all of 2018 and the $84 million for all of 2017 referenced in the above footnote match the figures in the table, verifying that the approach previously taken had been correct.

More importantly, note that when the 2019 subscription revenue was eventually released, it still hadn’t reached the annual rate of $200 million expected by 2016, nor had the revenue demonstrated much consistency in its rate of growth. (See below)

Quarterly CVS Subscriber Revenue (in 000s)

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Current Quarter

$18,632

$22,314

$22,421

$24,884

YTD 2014

$40,947

$63,368

$88,252

Q1 2015

Q2 2015

Q3 2015

Q4 2015

$23,089

$24,766

$25,170

$25,428

YTD 2015

$47,855

$73,025

$98,453

Q1 2016

Q2 2016

Q3 2016

Q4 2016

$24,698

$21,862

$21,713

$20,031

YTD 2016

$46,560

$68,273

$88,304

Q1 2017

Q2 2017

Q3 2017

Q4 2017

$20,203

$20,655

$20,644

$22,344

YTD 2017

$40,858

$61,502

$83,846

Q1 2018

Q2 2018

Q3 2018

Q4 2018

$24,835

$26,310

$30,095

$30,181

YTD 2018

$51,145

$81,240

$111,421

Q1 2019

Q2 2019

Q3 2019

Q4 2019

$36,000

$38,000

$41,000 $43,000

YTD 2019

$75,000

$116,000 $159,000

Source: Chart by Crunching Numbers from company’s quarterly filings and 10-K

The above table indicates both good news and disappointing news for the CVS business. Growth for the past two years has been very good – almost 33% in 2018 and almost 43% in 2019. However, that quarterly growth has remained extremely erratic, not something one might ordinarily expect from a subscription business.

For instance, it has only been since Q4 of 2017 that the company has maintained consecutive quarterly growth in the subscription revenue. And, even then, that growth has been quite variable in either percentage or dollar volume. While Q4 of 2017 was 8% (or $1.7 million) higher than Q3 of 2017, Q4 of 2018 was just $0.1 million higher than Q3 of 2018. The following quarter – Q1 of 2019 – was ~$6 million higher than the Q4 of 2018 amount of $30.2 million.

Also note that the company began reporting its financial details in millions of dollars rather than thousands of dollars in 2019. This change in granularity makes it somewhat more difficult to obtain a precise handle on quarterly growth. Regardless, there was clearly stellar growth in Q1 of 2019, followed by more moderate quarterly growth of $2 million, $3 million and $2 million over the next three quarters.

I would have expected to see less erratic growth in a subscription based business, although some of the quarterly variability could be due to the change in reporting to millions of dollars. The rest could be tied to improved penetration into the market as the company has continued to add OEMs, or it could also be tied to the specific deals with the various OEMs that are taking the product.

Regardless, the 33% growth that occurred in 2018 followed by the 43% growth in 2019 should be welcome news to some Sirius investors. Still, the $159 million total revenue for 2019 is far below the $200 million originally expected to be achieved three years earlier. And, if the growth had continued at the expected strong double-digit rates off that expected $200 million target for the three years since 2016, that $159 million is even more disappointing.

Is it any wonder that the analysts don’t waste any of their questions on this half billion dollar investment? Or, that management doesn’t bother to bring it up? Even at the Annual Goldman Sachs Communacopia Conference held last September, there was only one mention of the CVS business in an extensive 40 minute interview with Sirius XM CEO Jim Meyer. And that mention was in response to a question about M&A and business diversification:

“So, we are not a conglomerate. We don’t – we don’t understand – we are not built to run a conglomerate, okay. We are not built like a private equity company or to some extent some of the Liberty companies that own, you know Liberty Media owns a lot of different things, right. We are in the audio entertainment space. We have found opportunities that are tangential to that like the connected vehicle space where we get one plus one being more than two and that business – one of the reasons I have been in that business, our OEM customers asked us to be in that business. They asked us for help in those other, so they don’t run subscription business. They don’t run churn models, except for GM, rest of them don’t do it, okay.

And so, we are able to help and make profit and make us more important to the OEM. So, that’s kind of the way I think about it. The way I think about the use of our money, whether it is cash, capital or open to buy whatever it might be, open the bar up is, first and foremost are we making the right investments internally in our business, and we are investing heavily both in content, marketing and development of product.”

It’s difficult to see how the company has made a profit on this business. When the transaction was initially announced, it was supposed to generate $100 million and operate at breakeven. Assuming some inflation over the years, the company most likely lost a substantial sum of money over the first five years. Perhaps Meyer was referring to calendar 2019.

Additional Disclosures

I am adding this information in addition to the standard disclosure information required by Seeking Alpha. First, I only write articles that cover companies that I already own, or that I am seriously considering purchasing. Second, while these articles express my opinions, I do try and objectively assess these companies, although my ownership may introduce an unintended bias. Third, I am currently re-investing the dividends on every Sirius position that I hold.

I had owned a significant position in Sirius for several years before I wrote my first article on the company back in 2011. I had purchased those positions (including one 30,000 share core holding) too soon, and had it not been for the bailout by Liberty Media more than a decade ago, I would most likely have had a six figure loss. That paper loss eventually turned into a sizable profit by writing covered calls against the core position and also trading large blocks of shares around that core holding. I eventually sold almost all of my positions, although I still hold several small, very long term, positions, totaling less than 1,000 shares in various accounts, including two that date back to early 2008.

I continue to trade large blocks (typically 5,000-7,500 shares) of Sirius, and recently purchased two trading positions. I have sold $6 covered calls against one of those recently acquired positions that will expire on April 17th. I may buy additional shares and/or sell any position at any time, write more calls against any position, execute buy-write transactions or execute calendar rollouts on the calls if they look attractive.

Current Market

Sirius has not been immune to the recent COVID-19 infection and the resulting market meltdown. After reaching a 52-week high of $7.40 on February 20th, it plunged to an intraday low of $4.11 on March 23rd, a price last seen in November of 2016. The shares have since rallied to a closing price of $5.25 on April 9th heading into a 3-day weekend. Does this present a buying opportunity? Another interesting question might be, “Has Sirius been repurchasing shares at these prices?”

Unfortunately, we really don’t have quite enough information, although I suspect that it has been a buyer. The current 10-K states that the company had [Remember that the share figures in the following excerpt from the 10-K are in millions]:

“Common stock, par value $0.001 per share; 9,000 shares authorized; 4,412 and 4,346 shares issued; 4,412 and 4,346 outstanding at December 31, 2019 and December 31, 2018, respectively.”

And, the front page of that document tells us that Sirius had:

“…common stock outstanding as of January 31, 2020 was 4,413,944,475…”

This indicates that Sirius issued at least 1.5 million shares to executives, board members or employees during the month of January. We also know that no additional shares were repurchased in January because that information would have been disclosed under “Subsequent Events” in the 10-K. Finally, also from the 10-K, we know that the company had authorized a total of $14 billion in share repurchases, and that:

“[$1.166 billion] remained available for additional repurchases under our existing stock repurchase program authorization.”

It is not apparent whether the company purchased shares of common stock under its Rule 10b5-1 plan since the end of January and whether or not any or all of the $1.166 billion of the current share repurchase authorization is still available. However, since Rule 10b5-1 plans have preset guidelines about purchases, it would seem likely that those guidelines would have triggered purchases as the shares declined in price.

While the company had debt of nearly $8 billion at year end 2019, it has none of that debt coming due prior to August of 2022. So, if the company did purchase a significant quantity of shares in Q1, it probably would have had to draw down funds under its Senior Secured Revolving Credit Facility because cash at the start of the year was quite low. We will know much more when the company reports results on Tuesday, April 28, 2020.

Perhaps the most significant question facing a potential investor is how will Sirius fare in an environment of rapidly rising unemployment, more working from home and less driving? I’m guessing that it will be better than most. The main product is currently deeply discounted and could be termed an affordable luxury, although many consider it a necessity. More importantly, in 2017, Meyer made this comment about the typical Sirius subscriber:

“Today, our average subscriber is in their upper 40s and makes $115,000 a year. Obviously that doesn’t describe America, right. America’s obviously younger than that and not as wealthy as that. And so as more and more used car buyers come to us, we’re going to have to very, very smartly and very, very carefully manage that value equation for them as we transition and that content equation, okay. …

…there’s a variety of pricing tradeoffs in there that will need to make as we try to go after a lower demographic and we need to be very careful. That’s why when I say it’s going to be done very, very carefully and very, very systematically that we don’t disrupt this big base that we have that’s paying us almost $16 a month today right.”

The ARPU hasn’t changed much since 2017, although today the All Access package has a significantly higher list price than $16/month. In fact, the past three years the slowly rising monthly ARPU was $13.25, $13.34 and $13.82 per month. And, that ARPU figure includes some advertising revenue and is not incurred by the subscriber.

Regardless, as a long-term trade, the recent price of $5.25 would appear to be an attractive entry point.

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 the stock with a significant portion having short term covered calls written against the position. I may buy or sell shares at any time, or write additional calls, roll the current calls forward or let the calls be exercised or expire. I have no position in any other company mentioned in the article and no plans to buy or sell shares in those companies over the next three trading days.

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