It has been an interesting year to be a Sirius XM investor. The company has had their ups and downs, as have investors. There is uncertainty in the air relating to Liberty media, and an ever evolving audio entertainment landscape that has several "mediums" competing for the ears, if not the attention, of consumers.
Earlier this year there was a disaster in japan that carried a direct impact on the mix of subscribers Sirius XM obtains. It carried a positive spin in the second quarter followed by a negative spin in the third. Very early on I was able to identify this dynamic because of the tracking that I do in the auto sector. It is that same tracking that led me to the conclusion that in Q4 SIRI would have a challenge in meeting guidance.
When I addressed that challenge some people incorrectly assumed that I was calling for a miss in subscriber guidance. I was not. I was simply stating that meeting the 442,000 subscribers that the company needs in Q4 to hit 2011 subscriber guidance was not a walk in the park. As I addressed my concerns I even pointed out ways in which the company can indeed hit their guidance, but therein lays my concern. Depending on what the company does to meet that guidance, it could carry a negative impact somewhere else.
My opinion on this matter has been mis-characterized to the point that there are some out there with an incorrect assumption that I was calling for the company to miss 1.6 million subscribers when in fact the only thing I have expressed was that it would be a challenge. I have even stated various ways that the company could "meet" subscriber guidance, some of which will carry a negative impact on other metrics, and some of which that are positives. What I cannot control is people who mis-characterize what I say. What I can do is paint a crystal clear picture of my thoughts. Because what I have stated has been misrepresented or misinterpreted I get comments like these:
"Spencer… Do you think Jan 04th CITI date that Mel is speaking at is significant? Could he announce that SIRI met 2011 guidance with 442k subs? What’s your take on things? read an earlier post where you said SIRI will bring in between 430k-470k in Dec. That means you now think they will meet guidance?"
"Spencer… so now that you have a ballpark figure for December auto sales from the new car market, do you still feel strongly that SIRI will have a hard time meeting 2011 sub guidance with the required 442k in additional subs they would need this month?"
Mel Karmazin and management of this company speak at conferences such as these all of the time. They regularly have meetings with investment banks. For Mel to speak at a Citi conference is nothing out of the ordinary, and the biggest topic of discussion will likely be the 2012 outlook for Sirius XM. In such conferences Mel is, and has to, be a salesman. This is not an insult in any way. It is his job to outline the high points of the satellite radio business model. He will focus on areas of growth, and merely touch on areas that may be perceived as being negative. He will not go on and on with charts that 20% of the self paying base is churning out each year on an annualized basis. Instead he will focus on what is coming in. He will not say 55% of those exposed to satellite radio don't want the service, he will instead speak to the 45% that do want it.
Mel could certainly announce that they finished the year with 1.65 million net subscriber additions, but the devil is in the details. If getting to that number required giving the service at 6 months for $25 (a promotion the company is running) to twice the number of people as normal (carrying a negative impact on ARPU) is that good? Is that really hitting your guidance? Or is that manufacturing a way to hit guidance? The key is delivering the numbers in a manner that meets expectations across the board.
Last quarter ARPU (Average Revenue Per user) was at $11.66. What if the ARPU could have jumped up to $11.74 showing growth, but instead stayed flat at $11.66 because the retention efforts were boosted and the company is "giving away" cheap subscriptions in order to hit the 1.6 million number. Is that hitting it out of the park, or is it hitting into a double play but bringing in one run? There is nothing wrong with getting a run, even by giving up two outs, but if you need 3 runs, you are still behind the curve. Mel will speak at Citi, and deliver a good report that could include an early look at how the company finished up 2011. What we need to remember is that there is a subscriber picture and then there is an overall picture.
Let's start with some basic assumptions:
- When Sirius XM outlined their guidance, the basic thought process is that the numbers will be meet without the company having to take a hit in another metric. In other words, the company is making good progress in all area and not sacrificing some in order to make a certain part look good.
- Mel Karmazin tends to "under-promise" and "over-deliver". He did raise guidance after Q2, which is indeed demonstrating that he is anticipating being able to "over-deliver" from initial guidance. That is fine as long as the audience understands that the new guidance of 1.6 million subscribers is a more exacting number. The problem is that there are many who are still looking for Mel and company to "hit it out of the park"
- Meeting guidance in my opinion is delivering 1.6 million net subscriber in 2012 without sacrificing growth in other metrics that would not have been anticipated.
- The company has some wiggle room. They can even show modest growth in a metric such as ARPU and investors will never know what the true potential of that number was.
- For every action there is a reaction.
I have had some interesting emails that actually make me scratch my head in disbelief. One person said, "There is no way SIRI misses on subs. You are a fool. They will simply not turn off radios and keep those people on plus the Lynx is a game changer and people will buy them up. I already ordered mine from Crutchfield. Not only are you wrong about subs, but about Malone. He wont get control, Mel will not allow it. It will cost him $5 per share minimum to get this company."
The problem here is exactly what I discussed above. Is simply leaving radios on FOR FREE so you can hit a subscriber number a decent business model? The FTC is very specific about what a subscriber is and what a subscriber isn't. The company defines a subscriber as a radio for which they have received payment. If someone is not paying, they are not counted. It is pretty simple stuff. Certainly the company can leave a radio on for as long as they desire, but counting it as a sub when there is no revenue is dangerous on a couple of fronts. 1) It falls outside the definition of a subscriber in their own SEC filings and 2) This practice would become an anchor to ARPU. Sirius XM leaving a radio active for the purpose of trying to retain someone does not make that person a subscriber. Certainly there are occasions where an active subscriber has a credit card expire, and they are still counted for perhaps 30 days while the company makes efforts to get the consumers information, and that is reasonable. The issue is that happens quarter after quarter at a fairly consistent rate. If you suddenly add a bigger percentage of the pool to that number then metrics like accounts receivable and ARPU absorb the pain.
The bottom line here is that you, as an investor, need to ask yourself a few questions. At the halfway point of the year when Sirius XM updated their 2011 guidance, were your expectations that the company would hit that number by discounting service more than normal, and counting subscribers that have not paid? If those were not your expectations, then why would that type of situation (if that is what it takes) be seen as acceptable now?
The reality is:
- We will likely see at least 1,850,000 deactivated subscribers
- We would need roughly 2.3 million gross additions to bring in the required 442,000
- The highest gross additions in 2011 were at 2,179,000 in Q2 of this year.
- The production by "leading" partners is less this quarter than in Q2 by 14,000 units (for two biggest partners Ford and Chrysler)
- The Sales in the trailing category is weaker by 23,000 units
- The projected sales in the point-of-sale category is estimated to be 177,000 units weaker than in Q2
- The Lynx never materialized and for all intents and purposes is still "missing"
- Marketing of the Edge was almost non-existent.
- Satellite Radio 2.0 does not appear to be a smashing hit and carries little buzz.
- Retail is always better in Q4, but has dropped substantially
- The used car deals will help....the question is by how much
- The company is actively trying retention and has even turned the "5 months for $25" program into a "6 months for $25"
- They can improve churn via aggressive retention, but the improvement has to be viewed as reasonable.
- They can improve take rate, even via discounts, but again, the improvement has to be viewed as reasonable.
Essentially we need a record quarter of gross additions without the benefit of record auto sales. The mix of auto sales is not conducive to match Q2. Retention helps cure the deactivated line but does nothing for the gross additions line. However, the deactivations MUST increase from Q3's 1,804,000 because if they didn't, everyone would raise an eyebrow. The company has wiggle room, but it is not unlimited.
Yes, Sirius XM can hit guidance, and may well announce something early to that effect. The details will come out in February and then investors can gauge what measures the company had to employ to get there. The hope is that we get to a "Natural" 1.6 million, and not one propped up by sacrificing something else. Hopefully at this point my stance is now crystal clear. For regular readers, and listeners to me on the radio show this has likely been a review of what you already know. but for others, it could be a good view into someone who is busy crunching numbers.