Sirius and XM both reported earnings today, and while the results were not stellar, there are many metrics which are scaling in a manner that helps demonstrate the viability of the SDARS business model. Costs are under better control and both companies are seeing the benefits of their respective OEM deals bring in subscribers.
For XM, the contribution of Nissan and Hyundai are beginning to pan out as the installations in these brands are beginning to contribute to the subscriber rolls. For Sirius, the promise of a Ford ramp up will be substantial in Q3 and beyond.
Sirius outpaced XM in the subscriber tally, coming in with a bit over 19,000 more subscribers than XM. Sirius is seeing an increase in churn, but sector watchers have been anticipating this with the churn-out of DCX and to a lesser extent, Ford promotional periods beginning to expire.
The retail channel remains a tough channel. XM had a negative 51,000 subscribers in the retail channel. Sirius, which does not break out these numbers remains positive in this area by our estimation. One can arrive at this conclusion by estimating that XM had a stronger OEM quarter on a gross additions basis, as well as some previous trends. Assuming that NPD captured 55% of Sirius’ retail, then I would estimate Sirius had 302,000 gross retail additions vs 233,000 for XM. This would leave Sirius at 701,000 in the OEM channel compared to XM’s 802,000.
Specific to Sirius and the OEM channel, I keep an eye on deferred revenue. This metric is important because the subscribers that are on yet to be sold cars have the subscription payments booked in deferred revenue (any prepay plans such as annual plans also have payments booked here). In Q3 of 2007 deferred revenue was $475 million. In Q4 of 2007 that number jumped to $548 million, a $73 million jump. In Q1 deferred revenue was $561 million, only a $13 million jump. A slow down in production by big OEM partners such as DCX is reflected here. At the end of Q4 2007 Sirius had 11% of their subscriber base as “parking lot subs”. This metric was not given on the call, but given inventory days, and slowed production, it would appear that this metric is lower now than it was in Q4.
On revenue Sirius and XM reported $270 million and $308 million respectively. Both companies were slightly below street estimates, but not by margins that would be considered material. Ad revenue was a positive piece of news for both Sirius and XM. Sirius boosted ad sales by 25% while XM brought in an addition 21%. The ad revenue growth should continue as SDARS attracts more subscribers. The companies had nearly identical losses from operations with XM at $93.6 million and Sirius at $88.6 million.
The companies were hindered from better metrics by the make-up payment for the RIAA, as well as litigation. Sirius had some substantial capex expenses for their satellite build.
Overall, the quarters were not great, but not bad either. Investors can now at least picture a day where positive cash flow is maintained. With a merger, this can happen even sooner. The street treated both stocks well today. In my opinion, the quarterly reports of these companies represented a small part of that move. The reaction may be grounded in the fact that the quarter for both companies was realistic with expectations, and people are simply betting on a positive outcome to the merger. Observers can see where the metrics are scaling, and can see where the companies are spending money. The only thing that gets these equities to the next level is a merger announcement. If the wait on that is long, watch for the drift effect.
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Position – Long Sirius, Long XM