There is a growing number of ways to entertain your ears on the open road, but satellite radio continues to be an increasingly popular choice. Sirius XM Holdings (SIRI) closed out the second quarter with a record 26.3 million subscribers.
The lone provider of satellite radio in America wrapped up the three months ending in June with 475,472 more subscribers than it had when the period began. Sirius XM has tacked on more than 1.2 million net additions over the past year.
The healthy subscriber growth combined with the average account paying slightly more for the premium audio service and strong gains in ad revenue to deliver better than expected top-line growth. Sirius XM's revenue rose 10 percent to $1.035 billion, making this the first quarter in its history with revenue topping $1 billion. Analysts were only holding out for 8 percent growth.
Free cash flow and adjusted earnings grew at an even headier pace. The gains came despite marketing, customer service, and royalty payments all growing faster than Sirius XM's subscriber growth.
The model works. This is a very scalable business with high fixed costs and low variable expenses. As long as Sirius XM keeps growing its user base, it won't be a surprise to see the company's bottom line growing even faster. The challenge is its ability to keep listeners coming.
Turning the Dial
Sirius XM has defied the naysayers. It's been consistently profitable for three years, and that's a big deal since it was on the brink of bankruptcy just five years ago. The 2008 merger between Sirius and XM worked. The cost savings and inertia of the medium have propelled Sirius XM into a media giant that will generate $1.1 billion in free cash flow this year. That's not too shabby for a company that was so hard up for cash in 2009 that it gave up 40 percent of the company to Liberty Media (LMCA) just for the right to lend it some money.
Still a challenge is wider smartphone adoption. And new cars are rolling out with advanced features that allow drivers to stream music apps through their dashboards and vehicle speakers. However, many folks trading in old cars for newer models are buying into vehicles with factory-installed satellite radio receivers for the first time. This is why we're seeing subscriber growth at Sirius XM even though it has instituted two price hikes over the past three years.
Buyers of new cars with Sirius XM receivers convert into paying customers 42 percent of the time. That figure has been drifting lower over the years, but Sirius XM is making it up in volume.
Leveling the Paying Field
The threat of streaming challengers is real. Tech giants are snapping up digital music platforms, realizing that the connected car is the next battleground. However, Sirius XM could be helped out by the greediness of wireless carriers.
The two largest mobile service providers -- AT&T (T) and Verizon (VZ) -- have been weaning longtime customers off unlimited data plans. This means that the free ad-supported music apps aren't free in terms of data usage. The convenience and pricing predictability of satellite radio may not seem like such a bad deal as AT&T and Verizon get hungrier.
Sirius XM is making the most of its recent good fortune to be nearly halfway through its $6 billion in repurchase authorizations. It may want to set some of that money aside in case it needs to follow the tech giants into buying streaming music providers so it doesn't have all of its eggs in one basket, but for now it's a pretty sturdy basket.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Liberty Media and Sirius XM Radio. Try any Motley Fool newsletter service free for 30 days.
The 7 Worst Things You Can Do With a Pay Raise
For Sirius XM, Satellite Radio Makes a Louder Ka-ching!
You've been eyeing that fancy new car (or boat), or you've had your eye on upgrading your home, but you haven't been able to swing the down payment. Well, now you've got the money -- right?
Wrong. Just because you can now pony up a down payment, that doesn't mean you can afford the monthly payments you'll have for many years. By using your raise as a down payment on a purchase you still can't technically afford, you're locking yourself into years of unnecessary stress.
What if you're a renter? Sure, you could move into an apartment that costs $150 more a month. But that will be one more "permanent" expense on your budget. You can't easily get out of a lease if you change your mind, lose your job or decide you want to make a career shift.
Ask yourself if you really need a "better" apartment, or if you have all the space you need now -- in which case, you can use that extra cash each month on other things you really do need.
Now that you're in the money, you may be tempted to live the high life (or, at least, a higher life). Lots of people fall into this trap, and it's known as lifestyle inflation -- upgrading your standard of living with every pay raise so that you never use the money for more sensible things, like saving for retirement or paying down your credit card debt.
It's easy to feel the siren call of dinners at fancy restaurants, huge flat-screen TVs, and golf club memberships -- which seem like must-haves now that you're earning more. But making your lifestyle cushier every time your income rises is a vicious cycle, and it's a lot harder to downgrade to your former lifestyle than you may think. Don't feel compelled to up your spending just because you can.
OK, so you realize you shouldn't buy a fancy living room set or spring for a massive flatscreen -- but what about renting to own? You may not be able to afford to buy these things, but renting to own seems like it would be a decent alternative. Right?
Wrong. While the monthly payments at rent-to-own stores may seem reasonable, what you pay in the long run for a new Xbox or stainless steel refrigerator is much more than it would be if you purchased the item outright. For example, Consumer Reports in 2011 calculated that a Toshiba (TOSBF) laptop that cost $612 to buy outright would cost $1,872 at a rent-to-own store. Just like you shouldn't charge items you can't afford to buy, financing them through a rent-to-own agreement is a road to nowhere.
Speaking of financing purchases you can't afford –- avoid using your windfall as an excuse to buy stock on margin.
What's a margin purchase? If you want to buy a lot of stock, but you don't have enough money to do so, you can open a margin account. You'll only be required to put down the initial margin (similar to a down payment), and the brokerage firm lends you the rest of the money.
The trouble with margin buying -- as with any scenario in which you're trying to get more than you can really afford -- is that the longer you hold onto to this stock, more money you'll fork over in interest. And if you can't make your payments? The securities in your margin account serve as collateral.
The returns (and what if the stock goes down?) aren't worth the risk. If you can't afford to buy the shares on your own, don't buy them.
Remember that deli you've always dreamed of owning (even though you have no idea how to run a deli)? Or your brother-in-law's big wacky idea that he promises just can't fail?
Don't use your new income boost to create the down payment on a business loan for these ideas.
Its one thing to invest in an existing business that's rapidly growing. But don't use your bonus or some accumulated pay raise as a down payment on a business loan for an untested business.
Make sure that if you do choose to invest in a business or business idea, it's one that demonstrates a solid future with solid returns. And remember: You won't lose your shirt if you stick with cash investing, rather than leveraged deals.
You're certainly welcome to loan money to a friend or relative if you want, but if you do, you'd better be ready to kiss that relationship goodbye. The instant someone owes you money, relationships become strained, resentments boil up, and things get weird fast.
If you want to help out someone who's going through a rough patch, you're both better off if you find another way of doing so, like helping them revise their résumé to find a new job or offering to bring some groceries to their house.