Sirius XM Holdings Inc.

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1 March 14, 2015 Sirius XM Holdings Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 04/17/2013 Current Price (03/13/15) $3.91 Target Price $ Week High $ Week Low $2.98 One-Year Return (%) Beta 1.69 Average Daily Volume (sh) 24,709,020 Shares Outstanding (mil) 5,575 Market Capitalization ($mil) $21,907 Short Interest Ratio (days) 4.31 Institutional Ownership (%) 23 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 10.8 Earnings Per Share (%) 16.9 Dividend (%) N/A using TTM EPS 48.9 using 2015 Estimate 32.6 using 2016 Estimate 26.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (SIRI-NASDAQ) Sirius XM reported mixed financial results in the fourth quarter of 2014, with its bottom line meeting the Zacks Consensus Estimate and the top line surpassing the same. The company is largely dependent on the future of the U.S. auto industry, which at present is poised for strong growth. Therefore, even a minor fluctuation in auto sales may significantly affect the company s financials. To counter such overdependence, management seeks diversification and has decided to foray into the telematics business. We believe that the acquisition of the connected vehicle services division of Agero is a major positive for the company. However, increased leverage coupled with stiff competition from rival players are likely to act as headwinds for the company while moving ahead. Thus, we reaffirm our Neutral recommendation on Sirius XM. Low, Type of Stock Large-Growth Industry Brdcst-Radio/Tv Zacks Industry Rank * 179 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 940 A 962 A 1,000 A 3,799 A A 1,035 A 1,057 A 1,091 A 4,181 A ,074 E 1,116 E 1,102 E 1,157 E 4,471 E ,761 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.02 A $0.02 A $0.02 A $0.02 A $0.08 A 2014 $0.02 A $0.02 A $0.02 A $0.03 A $0.08 A 2015 $0.03 E $0.03 E $0.03 E $0.03 E $0.12 E 2016 $0.15 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in New York, Sirius XM Holdings Inc. (SIRI) was founded in At the time of incorporation, the company was known as SIRIUS Satellite Radio Inc. On Jul 28, 2008, its wholly owned subsidiary, Vernon Merger Corporation, merged with XM Satellite Radio Holdings Inc. As a result, XM Satellite Radio Holdings Inc. became a wholly owned subsidiary of Sirius Satellite Radio Inc. In Aug 2008, the merged entity changed its name to Sirius XM Radio Inc. The company provides satellite radio services in the U.S. and Canada. The Sirius system consists of 4 in-orbit satellites, over 125 terrestrial repeaters, satellite uplink facilities and studios. The XM system consists of 4 in-orbit satellites, over 650 terrestrial repeaters, satellite uplink facilities and studios. Subscribers can also listen to music and other channels over the Internet. Sirius XM s satellite radios are primarily distributed through automakers, retailers and its websites. The company reports in four revenue generating segments: Subscriber Revenues: This segment consists of subscription fees, activation fees and the effects of rebates. Advertising Revenues: This segment includes the sale of advertisements on the company s non-music channels, net of agency fees. Equipment Revenues: This segment includes revenues and royalties from the sale of SIRIUS and XM radios, components and accessories. Other Revenues: This segment offers ancillary services, such as Backseat TV, data and weather services. REASONS TO BUY Sirius XM broadcasts music, sports, news, talk, entertainment, traffic and weather news in the U.S. and Canada for a subscription fee through its proprietary satellite radio systems the SIRIUS system and the XM system. The financial barriers to entry in the satellite radio market are significant due to the high start-up costs. The merger between Sirius Satellite Radio and XM Satellite Radio in 2008, the two erstwhile competitors, generated significant business synergies for the merged entity. SIRIUS XM has a very strong business relationship with the original equipment manufacturers. The company owns an extensive satellite network, covering the whole of the U.S. that provides audio content through more than 170 channels. Management continues to boost shareholders wealth through frequent share repurchase programs. To date, Sirius XM has nearly $1.7 billion remaining under its existing $6 billion share buyback authorization plan. Sirius XM posted an impressive performance in the fourth quarter of As of Dec 31, 2014, the company s total subscriber base stood at 27,311,087, up 6.9% year over year. Payment category wise, Self-Pay subscribers totaled 22,522,638 (up 6.8% year over year) while Paid Promotional subscribers were 4,788,449 (up 6.9% year over year). In the reported quarter, ARPU came in at $12.49 compared with $12.31 in the year-ago quarter. Average self-pay monthly churn rate stood at 1.8% against 1.9% in the prior-year quarter. Subscriber acquisition cost stood at $33 compared with $34 in the year-ago quarter. In the reported quarter, the company attained record EBITDA and free Equity Research SIRI Page 2

3 cash flow growth mainly on the back of 6% growth in new car sales. Sirius XM is highly optimistic about its future growth prospects as 20% of its radios are available in 26% of the cars in the U.S. This figure might improve at a rapid rate with the deployment of the company s wireless-based telematics services. Recently, Sirius XM extended the broadcasting agreement with PGA Tour for three years. The company also struck a deal with Volvo automobile company to provide Volvo customers timely information on weather and traffic through the signing of a four-year subscription package with Sirius XM. In Dec 2014, Sirius XM and WSI Corporation launched the all-new SiriusXM SXAR1 Portable Aviation Receiver and advanced WSI aviation apps to offer pilots with the most relevant pre-flight briefing and in-flight weather details. Moreover, the company has strong telematics partnerships with almost all major car manufacturers including the likes of Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan and Toyota. Sirius XM is also planning to offer upgraded apps to its clients in the future and is highly optimistic about generating strong revenues from its connected vehicle business while moving ahead. Meanwhile, the company believes that it has significant scope for growth through proper utilization of its 25 MHz spectrum. REASONS TO SELL In the fourth quarter of 2014, New Vehicle Customer Conversion rate stood at 40% versus 42% in the year-earlier quarter. Meanwhile, the company slashed the guidance for both subscriber addition and EBITDA growth for fiscal Sirius XM expects to add.2 million subscribers in The company exited the fourth quarter with only $147 million of cash and cash equivalents and $4,494 million of outstanding debt compared with $135 million and $3,094 million, respectively, at the end of The debt-to-capitalization ratio stood at 0.77 against 0.53 at the end of We believe that the company s decision to revert to its share buyback plan may put additional pressure on the company s cash balance. Sirius XM is facing significant competition from several fronts. Pioneer System, a leading car information system manufacturer, unveiled a new car stereo called AVIC-X920BT that supports Internet radio. This product can detect Pandora Internet radio settings from iphones or ipods, and can be translated into convenient access to create customized music stations for individual users while driving. Pandora has over 80 million registered users in the U.S. and provides a unique algorithm that increases the intrinsic quality of the music. In addition to iphone, Pandora has also developed streaming services for BlackBerry and Android-based smartphones. Furthermore, the itunes online radio service of Apple has become a major threat for SIRIUS XM. Earlier, Sirius XM was accused of misleading its subscribers by renewing services without issuing any prior notice. Following this, the court ordered the company to refund $3.8 million to its subscribers and also improve its billing process. With respect to several valuation metrics, Sirius XM is currently trading at significantly high multiples compared with the industry average and the S&P 500. Sirius XM s business depends upon automakers to a large extent. The sale of lease of vehicles with satellite radios is the most important source of subscribers for the company. Given the precipitous global economic fluctuations and the company s extensive dependence on the auto industry, we believe that the company s financial results will fluctuate in the near-term. Equity Research SIRI Page 3

4 RECENT NEWS Sirius XM Earnings in Line, Revenues Beat Estimates Feb 5, 2015 In the fourth quarter of 2014, Sirius XM s GAAP net income came in at $143.1 million or $0.03 a share compared with $65.2 million or $0.01 in the prior-year quarter. Moreover, earnings of $0.03 were in line with the Zacks Consensus Estimate. Meanwhile, total revenue of $1,091 million exhibited annualized growth of 9.1% and also surpassed the Zacks Consensus Estimate of $1,079 million. Quarterly total operating expenses stood at $797.3 million, up 5.6% year over year. Operating income, in the reported quarter, was around $293.7 million, highlighting a 19.7% rise from the last-year quarter. Sirius XM posted record fourth-quarter adjusted EBITDA growth of 17%, reaching $381 million. At the end of 2014, SIRIUS XM had $1,253.3 million of cash from operations compared with $1,102.8 million at 2013-end. Quarterly free cash flow at the end of the same period stood at $1,131.6 million against $929.2 million in the year-ago quarter. At the end of the reported quarter, SIRIUS XM had nearly $147.7 million of cash and cash equivalents and $4,493.9 million of outstanding debt compared with $134.8 million and $3,093.8 million, respectively, at the end of The debt-to-capitalization ratio stood at 0.77 against 0.53 at the end of Segment Wise Results Quarterly Subscriber revenues were $922.2 million, up 8.2% year over year. Advertising revenues stood at $28 million, up 10.2% year over year. Equipment revenues were $29.9 million, up 15% year over year. Other revenues were $110.9 million, up 15.4% year over year. Subscriber Statistics In the fourth quarter of 2014, SIRIUS XM added 576,689 subscribers which reached the company s total subscriber base to 27,311,087 as of Dec 31, 2014, up 6.9% year over year. Payment category wise, Self- Pay subscribers totaled 22,522,638 (up 6.8% year over year) while Paid Promotional subscribers were 4,788,449 (up 6.9% year over year). Important Operating Metrics Despite intensifying competition from Google Inc. (GOOG), Apple (AAPL) and Pandora Inc. (P), SIRIUS XM s average revenue per user stood at $12.49 in the quarter compared with $12.31 in the year-ago quarter. Average self-pay monthly churn rate stood at 1.8% against 1.9% in the prior-year quarter. New Vehicle Customer Conversion rate came in at 40% versus 42% in the year-earlier quarter. Subscriber acquisition cost stood at $33 compared with $34 in the year-ago quarter. Financial Outlook Management expects full-year 2015 revenues at around $4.4 billion while adjusted EBITDA is projected at roughly $1.6 billion. Meanwhile, free cash flow will likely stand at $1.25 billion. Also, the company estimates an addition of 1.2 million net new subscribers in Equity Research SIRI Page 4

5 VALUATION Sirius XM is currently trading at 32.6x to our fiscal 2015 earnings estimate. This is at a massive premium to both the S&P 500 and the industry average. With respect to our fiscal 2016 earnings estimate, the stock is currently trading at 26.1x, again a huge premium to both the S&P 500 and the industry average. We believe that SIRIUS XM s financials will remain healthy aided by an effective marketing strategy. The company s diversification in the telematics segment is also encouraging. We, thus, maintain our Neutral recommendation with a price target of $4, based on 33.3 x our fiscal 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low SIRIUS XM HLDGS (SIRI) Industry Average S&P GRUPO TELEVISA (TV) DISCOVERY COM-A (DISCA) TRIBUNE MEDIA (TRCO) SCRIPPS NETWRKS (SNI) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA SIRIUS XM HLDGS (SIRI) Industry Average S&P Equity Research SIRI Page 5

6 Earnings Surprise and Estimate Revision History Equity Research SIRI Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SIRI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform %, Neutral %, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research SIRI Page 7