The time has come to take a look at what we anticipate for the Q3 conference call to be held by Sirius XM (NASDAQ:SIRI) on Tuesday, November 1, 2011. Typically I release my projections earlier, but my work tends to find its way to other locations, and in the interest of self preservation I am releasing this a simple 24 hours prior to the call.
For Sirius investors Q3 will be a mixed bag. The company will be challenged to produce subscriber numbers that match the just over 450,000 they announced in Q2, and due to the company’s first dip into the retail pool in quite a while with the Edge and the Lynx, costs will be a bit up and the Subscriber Acquisition Cost (SAC) will face challenges as well. The costs associated with getting these radios onto retail shelves are typically born in the quarter prior to their release. Thus, the company is “investing” into chipset’s now in order to add subscribers later.
While I see Q3 as a mixed bag, it is in the comparisons that the tenor of the street will be determined. Sirius XM will have some numbers that are not good as last quarter, but still better than last year. Thus in the year-over-year the numbers may look good, but in the quarter over quarter they will not look as good. A lot will depend on the salesmanship of Sirius XM CEO Mel Karmazin.
What I look for is the company to establish first and foremost is that their 2011 guidance is safe. This will be somewhat obvious, but reiterating the safety of the guidance is an important aspect of the call. Secondly I look for the company to focus on the additional revenue streams coming into play as a result of a price increase in 2012 and the roll out of Satellite Radio 2.0 already. I have highlighted how the company can exact more revenue now with Satellite Radio 2.0 in articles titled, “Sirius XM’s Satellite Radio 2.0 Platform Will Begin To Deliver Revenue“ and “Sirius XM’s Secret To Reducing Churn While Increasing Revenue“. The roll-out of Satellite Radio 2.0 can play a bigger role than many realize. It is not the new hardware that makes the difference, but rather the pricing points and the added value that can be had for a relatively small up-charge to consumers. While some diehard longs will love the new hardware, it is not what represents the game changer for Sirius XM. Investors need to read between the lines of what will exact revenue and what will not. One message board poster attempted to take me to task for my stance that the new hardware is not the driver. This was a classic case of a message board poster that is blinded by their love of the company and mistakenly taking my stance on the hardware as a stance that satellite radio 2.0 was not a big deal. The message board poster was shown the light.
One thing most investors will have already noted was the lack of a run-up prior to the call. In quarters past the company would typically see some decent action going into as well as after the call. The key with this call is which path Mel Karmazin leads the street down. If he focus on the present then the street will not be terribly impressed. If he focuses on the future, there will be a lot to look forward to. What to expect:
The street is looking for revenue to come in at about $764 million. I think that the street may be a bit aggressive here. Simply stated there was one time revenue last quarter that will not exist this quarter. I see the street expectations of $764 million to be at the high end of the range. Look for revenue to be between $750 million and $762 million with a safe bet at $756 million.
AVERAGE REVENUE PER USER (ARPU)
Last quarter the company delivered ARPU of $11.53. Look for a small improvement here as the company seems to have been able to tweak this number up over the last few quarters. No real surprises here. ARPU should be between $11.53 and $11.58.
I have outlined for quite some time that Sirius XM would have a difficult time repeating the 452,000 subscribers they reported last quarter. The main reason for this is that the disaster in Japan in March of this year carried a positive impact in Q2, and the opposite reaction will happen in Q3. This occurs because of the way the company counts subscribers. The disaster in Japan brought with it supply disruptions in automakers that dominate the “trailing” category. The trailing category are promotional subscriptions that only get counted if they become self paying subscribers after a three month promotional period. Because supply with these automakers was challenged, and because they are only counted after a trial period, the impact will happen this quarter.
Look for the company to report subscriber numbers between 400,000 and 420,000. The wild card here is the used car deal with GM that has 1,000 dealers providing promotional subscriptions to any brand car as long as it is satellite radio equipped. While these cars will also fall into the trailing category, the program launched in Q2, and could have some conversions that will help the Q3 number slightly.
The company is now less transparent than they used to be in the subscriber metric. They no longer separate OEM and retail. I suspect that they simply do not want the street to see the break-out numbers due to their new retail units. My suspicion is that the retail numbers will not be as good as perhaps the street wants, thus, they are now hidden.
From what I can tell the company has been much more aggressive in this recent quarter to keep subscribers. This will likely pay dividends and helped to ensure that the company could report a number north of 400,000. Look for churn to be steady at 1.9%.
Look for 45.6%
Look for SAC to be between $58 and $60 on the build-out of retail radios and additional marketing expenses.
The street is look for $0.01. Look for the company to match those expectations.
Look for $189,000,000
There are a few things at play that investors will want to watch. Not only is Sirius XM reporting their numbers, but the auto sector will be announcing theirs as well. Sirius XM is very reliant on the OEM channel for subscriber growth. Headlines for the auto channel should be decent with a SAAR anticipated to be 13.4 million. However, the raw data will show sales of just over 1 million units, a number that typically allows Sirius XM to report decent numbers, it is not enough to show growth rates people want. In the end it all boiled down to the bottom line, and fortunately the company can speak to a price increase that will begin delivering real dollars to the bottom line beginning now.
Position – Long Sirius XM Ra