Sirius XM Radio will report the first quarter numbers May 7, 2009 at 8:00 AM Eastern. The numbers are widely anticipated by investors, as people want a sense of direction for the company, and to better understand if the business model is viable. With a slumping economy, and weak auto sales, the numbers at first blush will be a mixed bag. This could well add more confusion and uncertainty for investors in a time when uncertainty is most unpopular.
Traditionally, people have tended to look at the subscriber numbers as the barometer of the company. Big sub numbers meant big things in the future. Bad numbers meant that rough times were ahead. With the merger, and the company maturing to more of a media company there are other, perhaps more important metrics, that investors need to consider.
The adjusted EBITDA gives the potential better than any other metric at this point. If the company can get to a point of making money, subscribers, SAC, and ARPU take on far less meaning. In 2007 the Adjusted EBITDA was ($567,000,000). In 2008 the same metric improved to a loss of ($136,000,000). The latest guidance from the company was a positive adjusted EBITDA of $300,000,000 for 2009. If Sirius XM can demonstrate with Q1 numbers that the positive $300,000,000 can be obtained in 2009, despite slumping sub numbers, weak auto sales, and a poor economy, some will argue that the business model has been validated.
Bad subscriber numbers will grab the headlines of the uninformed, but those that want a deeper understanding will seek out not how many subscribers there are, but whether the bottom line is improving despite the loss of subscribers. With synergies happening, new revenue streams from programming packages and a price increase on the family plan, there exists a lower and new "tipping point" of the number of subscribers required to reach profits. Getting an understanding of what that number is should be the main focus.
The company will lose subscribers. Period. Get used to that concept now, because it is what will happen. In Q3 of 2008, the company had gross additions of 1,846,996. In Q4, traditionally the best quarter of the year, gross additions slipped 7% to 1,710,052. This happened despite the biggest gift giving holiday of the year. The economy has slipped further since, and Q1 has never been a huge quarter anyway. If we project slippage of 20% from Q4 to Q1, gross additions will come in at 1,368,000.
From a raw numbers standpoint we now need to address deactivations. Deactivation differ from churn because churn is based on self paying subscribers. OEM promotions can deactivate without impacting the churn metric. In the past, total dactivations measured against the total subscriber base has been termed as "fully loaded churn". While the company no longer gives the fully loaded churn as a metric, we do see total deactivations. In Q3 of 2008, total deactivations were 1,502,915. In Q4 of the same year, deactivations rose to 1,627,647. Fully loaded churn in Q4 was roughly 2.86%. Again, the condition of the economy plays a role in what transpires. Indications about car sales, and economic trends would make it reasonable to assume that deactivation would go up in Q1. Given that situation,if we were to assume fully loaded churn of 3.2%, then the subscriber picture would give us a net loss of (484,000) subs. That seems harsh, but that is the realistic potential here.
Simply stated, the possibility of Sirius XM reporting a positive subscriber number is about as realistic as finding a wild penguin living in Arizona. Investors should expect a negative subscriber number.
Churn is reported on self paying subscribers. The level of self pay churn has recently been in the neighborhood of 1.8% to 1.9%. At their best, Sirius XM was reporting self pay churn of 1.5%. What this demonstrates is the impacts that the poor economy is having on SDARS. Given that Q1 was more troublesome for the economy than Q4, it would be reasonable to assume that there would be a slight increase in the self paying churn metric. What investors should anticipate is a self paying churn between 1.9% and 2.2%. What the street needs to hope for is that the Q1 churn number represents a bottom in the metric. Given that April car sales seemed to stabilize, and some economic indicators are flattening out or improving, it very well could be that the churn metric will be at its worst in the Q1 numbers. Only time will tell. At least we will have established a range that these and other metrics should fall within going forward.
The average revenue per user is a metric that simply measures what each subscriber brings into the company each month. The higher the number, the better. For 2008 the ARPU was $10.51. I would expect that there will be a slight climb in this metric, but a major factor is OEM partner Chrysler. Because of the Chrysler deal, there is a negative impact on ARPU. Depending on current inventory levels, and sales that have transpired, the AREPU could carry a small impact either way. The $2.00 price increase on the family plan subscribers (about 20% to 25% of the subscriber base) did not happen until late in the quarter. I do not anticipate that this will carry a major impact on this report. It will show through far more clearly in Q2.
Where we may see a stark difference is in the "Best Of" programming. At last look, 500,000 subs were participating in this programming. This pool represents about $2,000,000 more per month in additional revenue. If the "Best Of" pool grew during the quarter, it will bump the ARPU upwards slightly.
In the end, I would anticipate ARPU coming in slightly higher than the 2008 figure of $10.51.
Subscriber Acquisition costs are the costs assigned to garnering a subscriber. These include subsidies, some marketing costs, etc. Given the current trends, and the lack of car sales, there has certainly been some adjustment into how much the company is spending. Mel is a cost cutter, and bottom line watcher. He will want to deliver a good SAC number because people are sensitive to costs now more than ever. Look for SAC to be in the low $70's, and to represent an improvement.
As I stated earlier, the real measure of the results for Sirius XM will be in whether they will be on pace to deliver positive adjusted EBITDA of $300,000,000 in 2009. It is my belief that this metric will show strength, and will be a focal point of the call.
The Audio for the conference call can be heard by tuning in to channel 126 on Sirius or 90 on XM
A webcast is also available
Position - Long Sirius XM Radio