Sirius XM Reports Mixed Q2 Results; Stock Undervalued

Sirius XM (SIRI) posted a mixed second quarter as revenue met and EBITDA missed FactSet consensus expectations. The SiriusXM service added 23,000 self-pay customers in the quarter, taking the 2022 total to a loss of 1,000 subscribers. However, management downgraded its full-year guidance to “positive” net additions from 500,000 net additions. The net loss was, as expected, due to constrained auto inventory in the United States in the second half of 2021 as churn dropped slightly to 1.5%. Despite the lower net addition guidance, the firm reiterated its financial targets for 2022, with cost-cutting expected to offset any impact from the potential loss of ad revenue. We are maintaining our narrow moat rating and $8.25 fair value estimate.

Consolidated revenue improved 4% year over year to $2.3 billion, with both of the firm’s segments contributing. Total company adjusted EBITDA margin fell to 30.1% from 32.4% as programming cost and royalty increases more than offset the revenue gain.

Pandora and off-platform revenue increased 3% to $534 million as ad revenue grew 5% to $403 million thanks to strong monetization growth for podcasts. Ad revenue per thousand hours at Pandora was flat at around $100. Gross margin for the segment collapsed to 31% from 37% as the podcast advertising improvement was more than offset by higher royalties and increased content spending. While the focus on podcasts has helped to increase ad revenue, we still believe the space is highly competitive, with cash-flush rivals like Spotify and Apple able to outspend Sirius XM.

Revenue for the SiriusXM segment expanded 5% to $1.7 billion, reflecting growth in average revenue per user. Monthly ARPU rose 7% year over year to $15.62. Gross margin for the segment was flat with a year ago at 62%, as 12% growth in content costs offset the revenue improvement. The continued ARPU growth and lower churn bode well for the second half as increased inflation potentially weighs on consumers.