Barrington issued a report today on Sirius' Q4 and Full year 2007.
Sirius Satellite Radio Inc. (SIRI-NASDAQ )
Estimates Tweaked Higher After Solid Quarter
Results for Q4/07 and FY/07 were generally positive, with slightly lower-than-expected revenues, but net earnings above expectations. For the quarter, total revenues were $249.8 million, up 29% over Q4/06. A shift to instant rebates versus mail-in negatively affected ARPU in Q4, particularly since the retail component is higher in the Christmas selling season. Sirius noted that January marks 29 consecutive months of leadership in retail market share versus XM.
Diluted EPS improved to $(0.11) from $(0.17) a year ago, as revenue growth outpaced operating expenses. Our estimates called for diluted EPS of $(0.13) on revenues of $289.4 million, which was in line with the consensus mean estimate for diluted EPS, but higher than the $241.8 estimate for revenues. Full year revenues increased 45% to $922.0 million, while diluted EPS improved to $(0.39) versus $(0.79) in FY/06. Our estimates were for diluted EPS of $(0.40) on revenues of $961.6 million.
Sirius ended 2007 with 8.3 million subscribers, a net gain of 2.3 million or 37% over the 6.0 million subscriber count at the close of 2006. XM posted a smaller 1.4 million net subscriber gain in 2007, still a decent 18% increase, raising XM’s overall subscriber count to 9.0 million. XM’s subscriber count advantage diminished from 27% at year end 2006 to 8% now.
Expense control was very good in the quarter. One negative variance was for revenue share and royalties, notably reflecting the agreement to pay higher royalties. This quarter’s expense line not only included the higher rates, but also a catch-up provision for the prior quarters of the year. The 2008 provision will be at a higher run rate on an overall basis, but the final period will be lower.
We maintain our OUTPERFORM rating on SIRI, continuing to prefer it over XMSR. Both should fare better in a merged situation. However, Sirius’ greater momentum should prove a plus in case the merger is denied. We outline herein some positive changes to our earnings estimates over the next several years
Sirius Satellite Radio Inc. announced financial results for Q4/07 and FY/07 that were generally positive, with slightly lower-than-expected revenues, but higher-than-expected net earnings, when compared to our estimates. For the quarter, total revenues came in at $249.8 million, representing a 29% increase over Q4/06. We were expecting revenues of $289.4 million, while the consensus mean estimate called for revenues of $241.8 million. The negative variance in revenues was partly attributable to a shift from instant rebates versus mail-in rebates at retail, since the latter have a tendency to often go unclaimed, whereas the former are obviously not subject to this possibility. Moreover, this change in the rebate policy negatively affected ARPU in the fourth quarter,particularly since the retail component is higher during the Christmas selling season. The instant rebates lowered ARPU by $0.59 in the quarter, whereas the mail-in rebates had a negative impact of only $0.14 during the fourth quarter of last year. ARPU was also negatively affected by lower monthly net advertising revenue per user, which fell to $0.41 from $0.53 a year ago. The net result was a decline in ARPU of 8% to $10.05 versus$10.92 a year ago.
Despite the lower ARPU, diluted EPS improved to $(0.11) from $(0.17) a year ago. Our estimates called for diluted EPS of $(0.13), which was in line with the consensus mean estimate. Significant revenue growth and decreased operating expenses combined to improve the bottom line. Operating expenses, including costs of service, decreased by$67.1 million or 22.6% versus Q4/06, with the largest declines coming from reduced stock-based compensation expenses, reduced SAC ($90 per gross subscriber addition versus $103 in Q4/06) and lower marketing expenses. However, these improvements were partially offset by increases in G&A and customer service expenses, as well as a significant increase in revenue share and royalties. This increase in revenue share and royalties notably reflects the agreement to pay higher royalties. Moreover, this quarter's expense line not only included the higher rates, but also included a catch-up provision for the prior quarters of the year. The 2008 provision will be at a higher run rate on an overall basis than for 2007, but the final period will not include a similar adjustment. In our opinion, we feel that expense control was very good in the quarter. Continued improvement in managing the variable costs associated with the business is an important priority, as the initially high average fixed costs are spread over a growing base of subscribers and associated revenues.
Sirius has maintained the stronger subscriber momentum of the two satellite radio companies in recent quarters. Net subscriber additions for Sirius in Q4/07 totaled 654,309. Q4/07 was the ninth consecutive quarter of net subscriber addition leadership for Sirius. While retail net additions have begun to slow down, we remain very positive about growth in the automotive OEM market, where Sirius reported a year-over-year increase of 87%, largely due to further improvement in its relationships with Ford and Chrysler. Even with the slowdown in retail net additions, Sirius noted that with the January NPD data release, the company has now led XM in retail market share additions for 29 consecutive months.
For the full year, revenues increased 45% to $922.0 million, while diluted EPS improved to $(0.39) versus $(0.79) in FY/06. Our estimates called for diluted EPS of $(0.40) on revenues of $961.6 million, whereas the consensus mean was for diluted EPS of $(0.41)on revenues of $939.5. Sirius saw a 49% reduction in net loss for the year to $(565.3)million, up from a loss of $(1.1) billion in 2006.
Several positive developments emerged in 2007. Sirius continued to make headway with automotive OEMs, as evidenced by extended relationships with both Ford and Chrysler. Ford extended its relationship until 2016 and will include Sirius radios in 70% of its production starting with the 2009 model year vehicles. These vehicles will also offer Sirius’s new Travel Link suite of services that access to information like real-time weather and traffic updates, sports scores and movie times. The Chrysler relationship was extended to 2017, also in 70% of its production, starting with the 2008 model year vehicles. Sirius also improved its programming, offering more sports (including full NASCAR coverage) and more specialty talk and music stations.
The trends in place in key metrics suggest earnings progress will be slightly better than our most recent estimates have suggested. While the fourth quarter ARPU was not among these favorable indicators, we would observe that the negative variance reflecting the switch in rebate policy in favor of instant rebates would have a relatively smaller impact on the first several quarters of the year, particularly as the push toward OEM intensifies.
Favorable expense comparisons are likely to continue. SAC still has room to fall. Sirius has been playing catch up with XM on this score, and the chipsets in cars are rolled in over a several year period. As Sirius moves to later generation chipsets the SAC costs should have a downward bias. With regard to the revenue share and royalties line, the annual expense level will likely rise, but the quarterly pattern should be one of gradual increase throughout the year as the OEM component of mix edges higher. However, the 2008 experience should include quarterly amounts that are higher than in the first three quarters of 2007 but lower than the fourth period figure that included the catch-up adjustment for earlier quarters.
We provide our detailed quarterly model for 2008 following the text of this report. Our new full year EPS estimate is $(0.28), a slight increase over our former $(0.30) figure. The quarterly pattern includes quarterly per share losses of $0.08 in each of the first two periods followed by somewhat smaller quarterly loss of $0.06 per share in each of the final two periods. Our annual estimates for the following several years have also been tweaked higher. Our new full year EPS estimates are now $(0.18) for 2009 (up two cents), $(0.09) for 2010 (up a penny), and $0.02 for 2011 (up two cents). Sirius achieved positive free cash flow for the second half of 2007, but EBITDA remain negative. Our new estimates indicate EBITDA will turn nominally positive in 2009 and EPS will turn nominally positive in 2011.
We are reaffirming our OUTPERFORM rating on SIRI. We continue to prefer it to XMSR. Both should fare better in a merged situation. However, Sirius’ greater momentum should prove a plus in case the merger is denied. Our target price for SIRI separate from a merger is $3.50, providing upside of 19% in the absence of a merger, though it is likely both stocks would take a hit if the merger were to be ultimately denied. We are inclined to feel the merger is justified given a broader definition of the market for audio services, but the passage of a year since announcement of the deal without approval by the DOJ is not a favorable sign.
Business Description: Sirius Satellite Radio Inc. is a satellite radio provider in the United States. The Company offers over 130 channels to its subscribers, 69 channels of100% commercial-free music and 65 channels of sports, news, talk, entertainment, traffic,weather and data content. Its primary source of revenue is subscription fees, with most of its customers subscribing to SIRIUS on either an annual or a monthly basis. As of December 31, 2007, the Company had 8,321,785 subscribers. In addition, it derives revenue from activation fees, the sale of advertising on its non-music channels, and the direct sale of SIRIUS radios and accessories. On February 19, 2007, the Company and XM Radio entered into an Agreement and Plan of Merger, pursuant to which the Company and XM Radio will combine its businesses through a merger of XM Satellite Radio and a newly formed, wholly owned subsidiary of the Company.
Position - Long Sirius, XM