In developing this Q2 preview for Sirius, I reviewed many analyst reports to arrive at consensus numbers, and looked at some metrics with what I feel is a closer eye. I also had the advantage of seeing the XM numbers as I developed this repot, and while many metrics between the two companies can be difficult to compare directly, there is information that helps confirm, or at least narrow down various assumptions:
Street consensus sits at about 470,000 NET and 930,000 GROSS. Most analysts fall within a tight range, with a few projecting what I consider overly low NET numbers, and a couple over 500,000 NET. I believe that most analysts are missing a few key points in reviewing the subscriber category.
While some may feel this overly optimistic, I believe that Sirius will come in with a higher GROSS number than XM. Most already expect a higher NET number due to the effect of churn on a larger subscriber base, and Sirius OEM deal structures. As we know, XM posted GROSS subscribers of 942,000. Earlier in the month, I felt that Sirius would have a GROSS number in the neighborhood of 950,000, but a review of vehicle production, as well as the recent announcement from Chrysler that they were quickly gearing to a 70% installation rate made me revisit my calculations.
As I posted in a previous article, Ford Motor Company’s production for the second quarter was 84,000 units more than Q1. In rough numbers, I see this as adding 23,000 additional installations that I previously did not account for. Additionally, I see Chrysler as quite possibly already installing at a rate greater than many anticipated. Being the more active partner, it may be reasonable to see an added 25,000 to 35,000 from DCX that was not previously figured. Certain models in the Chrysler group have seen increases in production, and DCX’s inventory is very reasonable for most models. This means that potentially Sirius could have a GROSS subscriber number in excess of 1,000,000. To my knowledge, no one is anticipating something like this to happen.
All of this being considered, I felt comfortable in adjusting my GROSS subscription estimate to 1,005,000. My original calculations garnered a NET estimate of 507,000, but this was prior to giving consideration to a stronger OEM quarter than anticipated, and what type of impact it would have on Churn. At the end of the day, I project 540,000 new NET subscribers. This implies Sirius getting a bit over 61.5% of the NET subscriber pool for the quarter. Last quarter Sirius had 66% of the NET subscriber pool.
If Sirius is able to garner more than 1,000,000 GROSS subscribers, it will be the first time this has happened in a non Q4 quarter.
This is another metric that was impacted by my digging further into vehicle production. Last quarter Sirius recorded a fully loaded churn rate of 2.3%, and street consensus seems to feel that this 2.3% number will remain stable. The 2.3% churn sits right in the middle of Sirius’ guidance for the full year. I project Sirius beating the street here for a few reasons that perhaps many are not considering. Because churn is based on the average subscriber base, Q2 can be a churn friendly quarter. The reason is that a disproportionate number of subs arrive at the end of the quarter due to Fathers Day. Therefore, the metric gets the benefit of a jump in subscribers, while most of the quarter, and the typical churn rate has already happened. This is a nuance that followers of the sector become aware of that many sometimes miss. In addition, a sudden bump in the OEM channel, which I now anticipate, could also effectively lower this metric. I look for fully loaded churn to come in at 2.2%..
AVERAGE REVENUE PER USER
ARPU is not GAAP metric. Because of this, the company defines what calculations fall into the ARPU category. Rebates that are tied to a subscription (Sirius’ typical method) impact ARPU and not SAC. Sirius did run a few promotions geared towards Fathers Day, and some of that impact could have been seen in Q2. The street is anticipating an ARPU of $10.94.
Like other metrics, this figure will also be impacted by my higher OEM production number. Cars that have been manufactured, with a subscription already paid for (deferred revenue), which have not yet been sold to a consumer impact ARPU. During the time that a car remains unsold, there is no transfer from deferred revenue to revenue. This effect carries a negative effect on the ARPU metric.
Because ARPU is calculated on the entire subscriber base, the impact is not huge in this metric, but it could be there none the less. I look for Sirius’ ARPU to be slightly lower than the street is expecting (however, investors should look at the deferred revenue line before worrying about this). I am anticipating an ARPU of $10.90.
SUBSCRIBER ACQUISITION COST
SAC I another non GAAP metric. As I have cautioned many times, there are many factors that go into SAC, and things such as the structure of deals can carry an impact on this line item. It is for this reason that a direct comparison to XM Satellite Radio in this metric is not an apples to apples comparison. Investors are likely better off comparing SAC to previous quarters to identify a trend.
The difficulty in making an estimate on this metric in this quarter comes in where Sirius is at with OEM chipsets. The Chrysler news once again made me reflect on this situation. Is it reasonable that Sirius has graduated to one of the newer chipsets this quarter, which would also bring a more financially friendly situation? If Chrysler is ramping as fast as they state, this is very likely in my opinion.
On the flip side of that, we have the video initiative launching. While Sirius BackSeat TV is not available yet, certainly chipsets and preparations were being made in this past quarter. These are expenses that we will have never seen before. Would these expenses offset other efficiencies? Only time will tell.
Street consensus on SAC is at about $105. With a higher OEM contribution, which has traditionally been more expensive than retail, it would seem that SAC between $104 and $107 may fit for this quarter.
COST PER GROSS ADDITION
CPGA is yet another non GAAP metric. Sirius does not utilize this metric, but competitor XM does. Arriving at CPGA is accomplished by adding marketing costs to the SAC number. The analysts that do proffer an estimate in this category seem to collectively arrive at about $150.
I would see no reason to bet against what these analysts have arrived at, and would not be surprised to see CPGA of $150 to $154.
The street is looking for revenue of roughly $228,000,000. The number actually seems quite reasonable to me, but may be a tad high. I would project revenue to come in at $226,750,00.
As I stated earlier in this report, investors should pay particular attention to the deferred revenue line and monitor the changes. Deferred revenue for Sirius comes mainly from prepaid subscriptions, and is booked as revenue each month that the contracted service (satellite radio) is delivered to the consumer.
The street is expecting a loss of 10 cents per share with a range between 8 cents and 13 cents. Reasonably speaking, the 10 cents per share seems to be in the right neighborhood, however, I can see a case for a penny either way. I will toss my hat in the ring at a loss of 9 cents per share.
Of particular note for this quarter, there are a few potential FIRSTS for Sirius.
1. Sirius’ quarterly loss may well be, and in fact is projected to be, less than rival XM’s.
2. Possible 1,000,000 GROSS subs in a non Q4 quarter.
3. Possible SDARS record for GROSS OEM additions.
Position - Long Sirius, Long XM