SiriusXM (NASDAQ:SIRI) has been on fire lately and for good reason. The company is performing markedly well and with billions in Net Operating Losses to offset profits from a tax standpoint there is essentially nothing not to like with this company. In essence, they are hitting on all cylinders. We all see the positives of the company on a regular basis. It goes without saying that the company can and does paint a pretty picture. One thing I oft do is to outline the potential risks, even if they seem small. Part of investing is understanding risk, expectations, as well as perception.
When a company finally makes the waves we have been anticipating it is quite easy to get caught up in the excitement, the wave, and the emotions. I often have SiriusXM bulls make statements like, “the company will have an amazing year”, and “this is a blowout quarter”. Whether or not the company is performing to the level of “amazing” or putting up a “blow-out” quarter is a matter of expectations and interpretation. If the street was expecting the results delivered then perhaps it calling it a blow-out is overblown. Further, it is the expectation of the street as a whole that sets the bar. As educated as you or I can make ourselves about this equity, the vast majority of investors simply do not have a clue and follow the herd.
SiriusXM has a metric called ARPU. It stands for average revenue per user. Simply stated, it takes the revenue the company brings in and divides it by the number of subscribers. This metric gives investors an idea of how much money the company is able to bring in per subscriber. On the flip side of this we could just as easily have a metric called ACPU or average cost per user.
In the latest quarter SiriusXM produced ARPU of $11.97. This was a very positive move upward from the $11.77. Had the company reported the cost side (including interest expense), the ACPU would have been $10.34. This would also be a positive trend from the previous quarter, which came in higher at $10.52. Essentialy, last quarter SiriusXM was on the positive side of these metrics by $1.25 and this quarter that improved to $1.63. This is substantial! While the ARPU metric improved quarter over quarter by $0.2o, the delta between the revenue side and cost side improved by $0.38 cents. The improvement here is something that many on the street will fail to notice.
Now we need to get into expectations. The price increase was about $1.50. The initial question is how much of that can get to an improvement in ARPU and then how much can reach the bottom line. Potential drags on ARPU improvement include retention programs that offer the service at a discount, the number of paid promotional subscribers that are already at a discount, and the number of family as a percentage of the overall subscriber base plans. Potential items that raise ARPU are the number of people that adopt the all access plan at nearly $16 per month. If investors are expecting ARPU to to $12.50, they may be setting themselves up for disappointment. If the expectations are more grounded, then they should be happy.
The magic here is not whether SiriusXM can get ARPU higher. The magic happens when they get it higher in concert with trimming the cost side of the equation that most do not look at. This is how the company can post perhaps more modest increases in ARPU while actually performing better than that. This last quarter was a prime example of what I am talking about! With the company paying off debt, and refinancing at lower rates, the costs for SiriuysXM each month drop substantially. When this happens, they are keeping a greater percentage of the money collected!
Simplistically speaking, SiriusXM kept 10.6% of revenue in Q1 and a more impressive 13.6% in Q2. That represents growth that is outpacing the metrics the street typically tracks:
- ARPU quarter over quarter improved 1.7%
- Revenue quarter over quarter improved 3.9%
- Costs quarter over quarter were down 0.8%
- Subscribers quarter over quarter improved 2.7%
- The ARPU vs. ACPU improved a huge 23.3%
The SiriusXM story oft does not include little nuggets like this one. You only get these by digging deeper.