Sirius XM: Pandora Ad Revenue Growth Is Helping the Top and Bottom Lines

Key Morningstar Metrics for Sirius XM Holdings

• Fair Value Estimate: $7.50
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Sirius XM Holdings’ Earnings

There is still room for digital transition in advertising, especially in audio, as shown by Sirius XM Holdings’ SIRI third-quarter results. Advertising revenue growth in Pandora and off-platform (the firm’s streaming segment) mostly offset the continuing weakness in overall broadcast audio advertising, which contributed to a slight decline in Sirius XM segment revenue.

While platform subscribers declined slightly, the increase in trial funnel listeners from last year (albeit with no change from the previous quarter) indicates a slowdown in subscriber losses. We expect this to continue, and combined with increasing streaming advertising revenue, it bodes well for Sirius. Management maintained its full-year revenue, adjusted EBITDA, and free cash flow guidance. Our fair value estimate remains at $7.50.

Weak advertising revenue for Sirius XM drove monthly average revenue per user down to $15.69 from $15.72. While a decline in self-pay subscribers continued (down 94,000), monthly churn increased only slightly to 1.6% from 1.5%. An agreement may be in sight for the dispute between autoworkers and automakers, but if it is not realized, vehicle turnover could decline, resulting in slightly lower churn. However, Sirius XM’s dependency on used vehicles, which have lower conversion rates, could also increase, impacting subscriber additions. This segment’s gross margin dipped 1% to 61%, mainly due to higher royalties.

Pandora’s advertising revenue per thousand listener hours increased by 1%, but it was more than offset by a 4% decline in total ad-supported listener hours. But this was more than offset by growth in other advertising revenue, primarily from podcast and programmatic ads. As expected, advertising demand from industries like media and entertainment weakened due to the writer and actor strikes, but higher spending by other industries, such as consumer packaged goods, indicates continuing ad revenue growth for the firm and this segment. Gross margin improved by approximately 1 percentage point to 33% as higher music royalties were more than offset by margin improvement in podcasts, driven by ad revenue growth.

Total revenue of $2.27 billion was a slight decline from last year’s $2.28 billion. Within Sirius XM, lower advertising revenue (down 16%) was the largest contributor to its 1% year-over-year decline. Pandora and off-platform revenue increased 2% from last year, mainly due to 3% higher podcast and programmatic advertising revenue. Adjusted EBITDA margin improved by around 130 basis points from last year to 33%, as the firm’s cost control more than offset an increase in revenue share and royalties.