Deferred Revenue Subscribers

seems this subject comes up quite a bit.

Sirius counts as subscribers radios for which they have been paid. In the case of DCX and Ford, this happens as the car is being delivered to the dealer.

Because this payment is tied to a service being delivered, it is booked as deferred revenue until such time that the car sells. at that point, funds are removed from deferred revenue and booked as revenue.

The impacts:

1. Subscriber numbers benefit from this.

2. Sirius recoups their subsidy investment into a radio quickly. They can then easily re-invest dollars into another radio. The structures of these deals are cash flow friendly. Cash flow is VERY IMPORTANT in this phase of Sirius' growth.

3. Longer deals are churn friendly.

4. Longer deals give the consumer more time to experience the product.

5. These deals do carry an impact to ARPU. Although a payment has been received, it can not be booked as revenue until the consumer buys the car, and the service is being delivered. Thus, when the car is at the dealer (right now about 2.7 months worth) there is no revenue. These $0 revenue subs bring down ARPU.

In many ways, the positives of these deal structures outweigh the negatives. The name of the game is recouping dollars as quickly as possible and growing the business. These OEM deals allow this to happen

Because Sirius has a substantial amount of deferred revenue, it is an important metric to monitor when looking at the financials.

Deferred revenue is considered a liability because the "contract" has not been fulfilled. However, one must consider what needs to happen to turn the deferred revenue into revenue. For the most part it only involves something Sirius is doing every day any way. Broadcast the service.

Items included in deferred revenue:

1. Activation fee - Sirius books this fee over 3.5 years, XM over 3.1 years.

2. Prepaid subscriptions - Both companies book this as service is delivered.

3. Ford and DCX subs or "bundled" subs where the OEM pays for a subscription up front. The money is booked into revenue as the services are delivered.

Many trying to compare the ARPU of these companies need to take the additional step of considering the deferred revenue that Sirius has because of item #3 above. This is how to consider the comparison (not exact because of weighted averages, but close enough):
---------------------------------------------------------------------

Subscriber revenue $209,635 $137,641 $400,431 $252,822
Net advertising
revenue 9,177 8,125 15,898 15,463
Total subscriber and
net advertising
revenue $218,812 $145,766 $416,329 $268,285
Daily weighted
average number
of subscribers 6,811,750 4,354,447 6,554,943 4,070,075
ARPU $10.71 $11.16 $10.59 $10.98
----------------------------------------------------------------------
Now, if you believe there are 500,000 deferred revenue subs, you will have to adjust ARPU to $11.56 ($218,812,000/6,311,750/3)

At 600,000 the ARPU adjustment would go to $11.75
($218,812,000/6,211,750/3)

At 700,000 the ARPU would have to be adjusted to $11.94
($218,812,000/6,111,750/3)

At 800,000 the ARPU would have to be adjusted to $12.14
($218,812,000/6,011,750/3)

Sirius states that deferred revenue subs equate to 9% to 10% of the sub base. Whether this is the total subscribers or the daily weighted average of subscribers needs to be clarified.

There are other little things that differ as well. Sirius uses a daily weighted average while XM uses a monthly weighted average. XM books more activation revenue each month (not very material) because they have a lower divisor (3.1 vs. 3.5).

At the end of the day, the important thing is smart growth, cash flow, continued cost effective penetration in the OEM channel, and maintaining a strong retail presence. There are a lot of cars on the road without SDARS radios in the dash.