Sirius XM recently reported their Q3 numbers, an for the most part the street responded well to them. The company demonstrated that they are capable of producing good number even in what has traditionally been their weakest quarter each year. For the street this is a decent sign of how real Sirius XM can be in the year to come.
There are many metrics to look at with a company. What is their debt situation? Where is their EBITDA growth? How is cash flow? Are they managing costs? All of these are indeed important, but in the end the story rests with a simple metric called churn. Churn represents how many customers are they losing compared to how many they bring in. In order to increase revenues, grow, and make money the company has to main paths to take. The first is to get more money out of existing subscribers and the second is to bring in more subscribers.
In Q2 of 2010 SIRI brought in just over 2 million subscribers. They had a churn rate of 1.8% and thus lost a bit over 1.4 million. The result was a positive subscriber number of nearly 600,000. All of this happened with auto sales at 3 million for the quarter. In Q3 we see a slightly different situation. Auto sales remained stable at about 3 million, and gross subscriber additions came in just below 2 million. For the purposes of debate, the quarters were identical in terms of auto sales and gross subscriber additions. The big difference was that churn went from 1.8% to 1.9%. This resulted in a net subscriber count of just under 400,000 (a 33% drop from the previous quarter).
For Sirius XM to keep demonstrating growth, the need to keep churn in check. The company needs to keep this metric below 2.0%. The third quarter was a close call. The company was aggressive in their retention efforts, but as it turned out had little wiggle room. Their Average Revenue Per User (ARPU) in Q2 was $11.81. In Q 3 the company maintained that number. Holding the line was great news, but it does bring the natural question as to whether or not the street sees ARPU of $11.81 as good enough when combined with subscriber growth of about 400,000. Such numbers will deliver an ever increasing revenue, which might be more tame than some hope.
Until Satellite Radio 2.0 comes along a year from now, to reignite new possible revenue streams this company needs to, at a minimum, match Q3 numbers. Some will state that the company can increase prices about 5 months from now. As I have stated in the past, this is not a done deal. The FCC needs to approve such an increase. The Commission has already opened a 6 month comment period on the issue, and at the end of 6 months the debate will begin. This means that base prices will likely remain in place until summer of 2011. Churn needs to stay at 1.9% or better until Satellite Radio 2.0 arrives. If churn slips, the consequences could be troublesome in the short term.
Sirius XM's Mel Karmazin has established some guidance for 2010. The guidance shows a lower EBITDA as well as modest subscriber growth. In my opinion, ARPU will remain flat as well. I must reiterate that there is not anything really wrong with this. The money the company brings in is great, and as they continue to deal with debt, the balance sheet improves. The trick here is holding the line over the next 3 or 4 quarters. One silver lining is that if auto sales pick up, the gross subscriber additions can help ensure more and more subs each quarter.
Many people feel that SIRI is being conservative with their guidance. I would tend to agree. However, while I think the company will beat these numbers, I do not think it will happen in a grand way. As the street gains a better understanding of SIRI's performance the equity can garner the respect and appreciation of investors. The third quarter was good, but the guidance shows Q4 not quite holding the line. This is perhaps the reason we will see a pause in the stock price. I projected last week that the $1.30's are key and that the company would test these levels. I still believe that to be the case. A growth story can still happen, but they need to keep churn in check (without giving away the store) for that to happen. Time will tell, and marketing programs like the free Best Of trials should help.
Position - Long Sirius XM Radio