If you follow Sirius XM, you are likely well aware that the company pre-announced some Q4 metrics back in January. They announced the addition of about 247,000 subscribers, a churn rate of 1.97%, an OEM take rate of 46.4%, and the fact that they anticipate that the end of 2009 will have seen the company over $100 million in free cash flow. These are all positive numbers, and this news is already baked into the stock.
What investors need to begin to focus on is some of the numbers that were not pre-announced so that any surprise factors are mitigated. Even if all of the surprise is taken out for you the reader, it is the attitude of the street that will carry the day. The company has been doing a good job at giving the street direction to focus, so in my opinion, the numbers will not carry any bombshells and the opinion of the quarter by the street will be neutral to positive. There will of course be detractors, but that is to be expected. Some things to watch for include:
Average Revenue Per User - ARPU
Average Revenue Per user, or ARPU will be an important metric to understand and watch. ARPU represents the average of how much money the company collects from the subscriber base. This number is expected to grow because the company is now collecting royalty fees, and has added services such as "Best Of" which command more dollars from subscribers. The wild card here is that the royalty fee increase is staggered because it does not come into effect for a subscriber until their current plan expires. Thus, the company has a bit of wiggle room to work with on marketing efforts, and will have this wiggle room until the Royalty rate issue is more fully absorbed as a cross section of the subscriber base. In layman's terms, the company can conduct retention efforts that include some free or discounted service, because the amount that APRU is expected to go up can not really be quantified by analysts. If absent such efforts ARPU would have been $12.00, but because of such efforts it come in at $11.75, no one would really be the wiser. The key here is that some growth is expected, and the company needs to show that the ARPU line is growing. Basically, there is a balancing act between keeping all of the metrics in a range that meets or exceeds expectations.
The company did not pre-announce ARPU. This would lead me to believe that there is nothing spectacular in the number that will be reported. This is not a bad thing, it simply is what it is. Churn was improved, and that likely is attributable, at least in part, to customer retention efforts which will be a drain on ARPU. If a customer calls to cancel, and is offered discounted service, that subscriber will now effectively lower the ARPU. Again, this is not bad, it is simply the cost of doing business. The key is that the company can show improvement. Given the status of the economy, the importance of showing lower churn is paramount, and a small sacrifice in ARPU would be appropriate.
Subscriber Acquisition Cost - SAC
This is the cost associated with obtaining a new subscriber. Costs include marketing efforts, advertising, etc. The company was aggressive in Q4 with advertising on television, on line, and in print. These costs will flow directly into the SAC line item. It should be expected that the Q4 SAC would be higher than other quarters. This is likely why it was not included in the pre-announced numbers released by the company. Is spending money and having a higher SAC bad? Not necessarily. Advertising and marketing efforts are an investment into the future. Look at the growth of a company like Geico, and you will see that spending money getting exposure has its rewards. The key here is control, and Mel has demonstrated that he is not a foolish spender. As an investor, simply be prepared to know that the company did plunk down a healthy sum on advertising.
In simple terms this represents the percentage of manufactured cars that have satellite radio installed. This is the bread and butter of satellite radio, and should not be ignored. The company had stated earlier in the year that they anticipated being close to 60% penetration by the end of 2009. Whether or not they achieved this has many variables, not all of which the company can control.
What we do know is that the company announced that 46.4% of those who bought a car with satellite radio elected to become self paying subscribers. Thus number rose above the prior year, and that is quite good. The natural question is what kind of ARPU per conversion the company is getting, but don't look for that answer any time soon. The key is showing a bit of growth in this area, even if at the expense of some ARPU. I think the company accomplished this. Knowing the penetration rate allows investors to model and anticipate the number of subscribers going forward if they apply the take rate. Of course this is Sirius XM, and given how each manufacturer has a different deal, building a model can be a real challenge.
The penetration rate can be looked at a a barometer for future growth. The take rate can be viewed as how positive consumers feel about satellite radio. I would expect that penetration will be announced at somewhere between 57% and 59%. This is good, and will be within the expectations of the company, and thus the street. What would be a surprise in the penetration rate? Anything below 55% or above 63%.
This is perhaps the one area that savvy investors will want to focus on. It is tricky at this point because Q1 has not historically been a strong quarter for satellite radio. The key here is for the company to offer good guidance that demonstrates growth, but not be so aggressive that average Q1 numbers will put questions into the heads of analysts and the street that the guidance is attainable. Guidance can always be adjusted when Q1 numbers are better known. The advantage Sirius XM has is that by the time they conduct the Q4 conference call, they will have about two thirds of Q1 under their belt. This may be enough information for Mel to be more aggressive in the guidance than he otherwise would.
Conference calls are always a time of anticipation. This one, in my opinion carries a lot less anticipation than normal because many metrics have already been announced by the company. I am not saying that the call is not important. It is. This is where we get the meat and potatoes of the company. I do feel that most of the metrics will be as expected, and thus the numbers will not be a driver of the stock one way or the other. What the driver will be is some sort of announcement outside the typical financials such as guidance.
Position - Long Sirius XM