Sirius XM will be announcing their quarterly report this coming Tuesday at 8:00 AM. Investors and the street are expecting decent numbers, and the company has already pre-announced some metrics such as subscribers, churn, and take rate. Perhaps more so than other quarters, investors are eager to get the numbers. The reason is that Sirius XM seems to be on the positive end of the news cycle as of late, and the equity has responded well. Good numbers would take people off off the sidelines, and get them active in making an investment decision about Sirius XM. Investors will be tuning into the call to garner all of the numbers. Savvy investors will join SiriusBuzz and Satellite Radio Playground as the sites team up for live coverage of the quarterly report beginning at 7:00 AM eastern, and running throughout the conference call. Participants can access identical coverage from both SiriusBuzz and Satellite Radio Playground. Join Spencer Osborne, Demian Russian, Charles LaRocca, Newman, and Dennis "COS" Costa as we dissect and analyze the pre-release of numbers as well as the live call.
So will the company report good numbers? Early indications are that they indeed will. Positive subscriber growth, a growing self paying subscriber base, and paying down debt are all indicators that things are moving in the right direction. The key is how much growth can the company show, and whether they will offer up guidance that is just as positive.
In quarters and years past Sirius XM was measured on potential rather than things like EBITDA. This was because satellite radio was in a growth phase, and investors were betting on a brighter future rather than positive cash flow. The shift from potential to EBITDA has been long, and still is not quite complete, but it is far closer now than it ever has been.
Subscriber numbers are important, as are costs and revenue, but in the end look for Mel to focus on EBITDA growth. That being said, let's take a look at some of the metrics the company should be reporting:
This number is already known. The company announced the subscriber news back on April 14th. Sirius XM added over 171,000 new subscribers for the quarter and their total now sits at 18,944,199. As you can see, this is just shy of 19,000,000. Look for the company to give a little nugget of new information during the call by announcing that they are already over 19,000,000 subscribers. This news will certainly make the number crunchers eager to try to figure out the current subscriber base for Q2, but the important news in such an announcement is that GROWTH is happening. The subscriber metric is once again gaining importance with Sirius XM Radio. The company needs to garner subscribers to continue to show EBITDA growth. The only other channel for growth is advertising, and while stable, there is little indication that ads on satellite will be enough to drive 20% growth.
Self Pay Subscribers
This is perhaps the most important metric in the subscriber picture. These are people who are actually paying for their subscription themselves. A growing self pay category indicates that consumer acceptance of satellite radio is growing. The self pay subscriber growth was 154,000 in 2009 and the company finished the year at 15,703,932. Knowing that the company added subscriptions in Q1 was good news to investors. the key question is whether or not they were able to continue the self pay subscriber category during the quarter. Given what transpired during the quarter, I would say that additions to the self pay line would have been minimal, and that most growth happened in the promotional subscriber line. Given the 2% churn the company announced. there were over 300,000 subscribers dropping off each month from the self pay category. The key is how many self pay subscribers they were able to offset that number with The churn announced by the company would indicate to me that Sirius XM was aggressive in custom retention efforts, thus mitigating the loss of too many self pay subscribers. I am looking for a modest loss to a modest improvement in self pay. In other words, the number will be pretty stable (+/- 50,000 either way).
This is where I suspect most of the subscriber growth came from. Ford and GM are big contributors in this category, and both of these American brands benefited from Toyota's mis-steps in Q1. Better sales for brands such as Ford and GM boost the subscriber base because the company receives subscription payments. Toyota's resurgence in March, and Hyundai's more positive sales will benefit the subscriber base in the moths ahead. Look for nearly all of the subscriber additions in the quarter to be promotional. This is okay, given that the company is increasing their take rate, meaning more self pay subscribers in Q2 and beyond.
The company announced a churn number of a respectable 2%. This showed stability in the churn category. Typically Q1 has the highest churn because this is the quarter where the most renewals are due from the previous year. 1 year ago churn was at 2.2%. I suspect that the company achieved year over year improvement, and quarter over quarter stability in churn by offering incentives to consumers that were up for renewal, as well as healthy incentives for new self pay subscribers. This is not a bad thing at all. It is business. Given the condition of the economy, it is better to get some money rather than none. Activities such as this will impact ARPU, but it is my theory that even with incentives the company will still be able to show ARPU growth. It is a balance in keeping churn to stable levels, while also showing ARPU that is rising. The very fact that the company can do this is a positive sign.
OEM Take Rate
The percentage of people on trial subscriptions that elect to become self paying subscribers. The company seems to be having success here. They are announcing small improvements in this category each quarter. For Q1, the company stated that the take rate was 45.2%. This was down slightly from the 46.4% we saw in December 2009, but the number is stable. With the economy seeing some sparks of life, investors can look forward to continued improvement in this metric.
This metric represents the average revenue brought in by subscribers. ARPU was $10.92 for Q4 of 2009. Each time the company discounts the service, it will have a negative effect on ARPU. Sirius XM had is getting additional revenue from family plan, internet, and Best Of packages. I believe that some of this added revenue is being used to offset churn. There is some latitude here for Sirius XM, and the key is seeing growth in this metric. I look for the company to show growth and report an ARPU of right around $11.00.
Subscriber Acquisition Costs (SAC) measure how much it costs to add a new subscriber. Without getting too technical, it is a guide to measure how quickly a subscriber could get a return on the money they invest to get that subscriber. Last quarter SAC was at $64, meaning that Sirius XM paid $64 to get each subscriber. SAC can be impacted by many things that are beyond the control of Sirius XM. Wild swings in OEM production can produce wild swings in SAC. A rising SAC should not be a cause for alarm if it is accompanied by a boost in subscribers. In Q1, OEM production ramped up with many auto makers, and thus, Sirius XM would be paying out or investing more money into equipping those cars with radios. The key is seeing that SAC is reasonable when compared to the overall environment. Look for a small increase in SAC attributable to increased production. SAC could come in near $70 in my opinion.
The street is expecting about $675 million in revenue. I would anticipate that the company will beat this number. The analysts have been pretty good about getting the various price increases into their models, but the company is showing a penchant for beating those numbers. Look for revenue to be between around $704 and $712 million.
There are many aspects of the business the company will likely discuss. These will include discussion about the OEM channel and where the company feels that will go. Another is their focus on EBITDA growth and strengthening their balance sheet.
The company recently announced that they are paying of the remainder of the 10% Senior PIK Secured Notes due 2011. This essentially will clean up all of the PIK notes for 2011. These notes, issued in February of last year were about to go to a higher interest rate. Late last year the company bought back about $60 million worth of the notes. This $114 million was the balance that was left. Moves such as this will be a positive, and analysts may inquire about future debt payments because the interest is substantial. Even though there is no debt due in 2012, interest is still payable. Watch for Karmazin to state that the company will seek out opportunities to by back additional debt. During Q1 Sirius XM refinanced $800 million which is now due in 2015.
Recent EBITDA growth has happened as a result of the merger and as a result of additional revenue from price increases. Karmazin has stated that most merger synergies are in place. The price increase will be fully absorbed soon, so the natural question is how the company can continue to show EBITDA growth. The answer is that they need to garner new subscribers, get more dollars from advertising, and monetize whatever they can. I expect that the company will add in the neighborhood of $120 to $135 million in adjusted income from operations, and about $160 to $175 million in free cash flow.
Current guidance for 2010 is full-year revenue of over $2.7 billion, positive free cash flow, the addition of over 500,000 net subscribers this year, and adjusted income from operations to be up approximately 20% to $550 million. I anticipate that subscriber guidance will be raised by 250,000, full year revenue will be adjusted to "approaching 2.8 billion", and adjusted income from operations to remain the same.
The street is expecting a small loss of $0.01 per share. Sirius XM should be able to beat this, and could even report a profit of $0.01 per share.
Overall the call will carry a positive tone, and should be well received, in particular if they are able to report a positive EPS. The focus will be on guidance, growth, and better economic conditions.
Position - Long Sirius XM Radio