The Sirius XM Subscriber Challenge
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.
They are no guantees but doubt that mel would have agreed to the conference if things were getting worse. I think he has the numbers and I think he will push the used car growth opportunity. Also he has reduced cost which will push free cash flow. He needs to show a path to 40 million subs over the next several years. He needs to show the price increase can and will stick. He needs to show the ESPN model works in Sat Radio. I think it does.
There is great opportunity going forward. That is a separation from whether or not they hit the numbers in a good way in 2011.
2010 brought growth from the implementation and now recognition as revenue from the music royalty fee
2011 brought modest growth and impressive numbers from reduced capex, satellites, etc.
2012 will have good numbers due to limited capex, the price increase, and the fact that there is no real debt issue to deal with this year.
In theory, the auto channel will have had enough recovery by 2013 that the subscriber picture will be able to improve and give them their growth.
The company has done well to swim upstream in a difficult economic environment, but at the end of 2012 we need to see:
1. The subscriber base being the growth engine from new and used – price increases again are not viable, and the music royalty fee is now baked in.
2. We need to see this company produce good numbers and good growth across the board even when they are building satellites and dealing with their debt. We want to see Sirius XM be able to perform in the best and worst case situations, and remove the roller coaster situation with capex, debt, etc.
3. This company has the ability to ride out the difficult times. We have seen that. 2012 will be great, but we simply need to remember that they are running this year in a vacuum as it relates to how this business would typically run
Spence:
You keep forgeting what Mel said, for every dollar earned, $.70 cents goes to the bottomline. You are truly lost if you believe the company discounting its pricing or offering deals doesn’t provide real subs. All companies do this, called a marketing writeoff in teh world of people that actually run companies. Heck, Pandora counts users no matter how many accounts each person may have. I have 3 in my household under my name. LOL.
Spence, mark this post! Mel on Jan 4th pre-releases subs over the guidance. Mel carefully reveals how they have mitigated debt even more without letting the cat out of the bag. This of course makes allows SIRI to blow the analyst expectations regarding earnings. Not good for you, not good for you.
Neverhthe
AMP….
Okay, so subscriptions can go down to $1.00 per month , but not to worry, Mel said that every dollar brings in 70 cents of profit. We will do fine….
NO… The company would go bankrupt. Do you understand what Mel is saying when he makes statements like that? Or do you think with $3,000,000,000 in revenue in 2011 that the company will bring $2.1 billion to the “bottom line”?
I hope you look at the numbers more closely than that!
Last quarter Sirius XM brought in $762,000,000. The bottom line was $104,000,000. That is more like 14 cents out of every dollar. I will let you figure out what Mel really meant.
You say Pandora counts users no matter how many accounts they have…..For the record, Sirius XM does the same.
You simply are not comprehending what I am writing, or what Mel is saying.
I did not say there was anything wrong with discounting, as long as everyone has a level of expectation built into it. Discounting robs the ARPU AND Revenue line item. If revenue goes down, profits go down.
It is pretty simple, but you can hang your hat on 70 cents out of every dollar even though you do not appear to understand what was being said.
Mel may very well announce subs over guidance. My point is that if he gives away the store to get there, the value of those subs is substantially less than you think
Spencer,
I love your previous response, “There is great opportunity going forward.”, and do not appreciate the one above. Why are you taking folks for granted? You think that you are smarter that they are. Big mistake, Spencer. When Mel says seventy cents on a dollar going to the bottom line, it is obvious that this starts at a certain threshhold. Every new customer today does bring seventy cents or so on a dollar. This is how the business model with relatively fixed costs works.
I told you many times get off your high white horse and respect the opinions of your readers, even if some of them are missing the point.
To me, it is obvious that the company will do very well, barred any abnormal situations, not only in 2012 but also in the next five years that we can foresee. Thye economy will evntually improve. OEM production will continue growing. Sat radio 2.0 will show up in 2012. That they failed to introduce it in 2011 is NOT good but not a disaster. Used car market will be gaining more and more strength. We do not know what other innovations they will introduce in the coming years. Let us not underestimate them too much. Mel is a smart and shrewd guy and, most importantly, he knows what he is doing much better than you and me and all of us put together.
VI….
I have been around long enough to know that I am smarter than many, but also that I am not as smart as many.
Every new customer does not bring 70 cents on a dollar, and the dynamics are far from fixed. Sirius XM can pay out tons in auto installations and have an unknown as to how many will even turn on the radio,
I am not on a high horse, but sometimes the only way someone finally gets it is when the point is hammered home. AMP made a very bad assumption based on his misinterpretation of what Karmazin said. Here is a guy running around thinking it is a good idea to sign up tons of people at $4.50 per month and that all will be right in the world of Sirius XM.
I like Mel, but sometimes he can make some bad moves. Giving up BBC Radio 1, one of the more popular streams over what would amount to drops in the bucket is foolish. Not getting customer service to a top notch status is foolish. Not getting apps updated is foolish. The product is not as good as it used to be, and they want to charge more. I know of MANY who share that sentiment.
I carry a healthy respect for readers, but I lose a lot of faith when I see some statements that are made.
spence, alittle off topic hear mel also said “u can expect the co. to bring in 2mil a day including weekends and holidays” free cash flow for 2012!!!
Spencer…
I see you used my posts to make an example of the fact that you think people misunderstand you. I have been the one who HAS understood you better than most. I’ve posted many times stating that your calculations regarding Japan and car sales for Q2 and Q3 I believed were spot on and could have helped many investors. But now I am a little bewildered. I never posted anything that made it appear as though I thought you had SIRI missing guidance. But you did imply it was very possible in many of your recent articles. And so my posts to you were quite simple: I wanted to know if you still felt missing 2011 guidance was still possible with Dec car sales numbers coming in pretty healthy over 1 million — and, most notably, your post to another person stating you now are predicting 430k-470k in subs for Dec — which implies you don’t believe that SIRI will miss guidance despite prior articles saying the opposite was possible.
Spencer, I get the impression you’re trying to play both sides of the fence.
How can you post a response saying you think SIRI will have between 430k to 470k in new subs and write a story saying SIRI might miss guidance?! The last time I did my division tables, in between 430k-470k puts subs at 450k which is ABOVE 442K that’s needed. So I guess if you wrote that, you think 2011 guidance will come in just fine?
Well, we now have another signal to pay attention to: 300 million short positions as of December 15th and who knows how many more from the 15th till now.
Short squeeze back over $2 again or another massive takedown as some have predicted?
Any insights about this huge short position and what you think might be in store? Frankly, at $1.815 I just don’t feel like this price is a bargain. It will be interesting to see how all this plays out as there are only small handfulls of people [myself included] who feel the stock is headed lower before any kind of a runup [maybe there’ll be a runup right before earnings and a huge pop if earnings beat] and the majority who feel $2+ is now just around the corner.
Funny how 20 upgrades [literally] plus Howard Stern getting his own TV GIG and a NY Post rumor mill story STILL weren’t enough to get the share price over $2. Yet 90% of the people posting say things like “SIRI is a coiled spring ready to pop.” Let me present a dose of reality to those that care [and I know most like to pretend they don’t]: it IS a coiled spring ready to pop. And God help the pumpers of this stock should there be one bit of bad news, cause this coiled spring will pop, alright. But they may not like the direction. The last time I looked, the springs under my bed faced south. Just sayin’….
Jessee….
I was not taking a dig at you. Actually I have several comments and bater that are so off base that they would simply be more confusing to readers than anything.
What this begs the question of is HOW the company does it. There are certainly ways in which the company can hit the number (they have some wiggle room). My point is hitting the number at the expense of something else is not really hitting guidance. It is a fools way to hit guidance.
On the short position:
1) There is a “natural” short side to any equity. In particular, an equity that has converts out there.
2) The short position in Sirius XM has bee over 200 million shares for quite some time and even been above 300 million a few times this year. The days to cover only sits at 7 though, which takes the legs out of a squeeze
What this begs the question of is HOW the company does it. There are certainly ways in which the company can hit the number (they have some wiggle room). My point is hitting the number at the expense of something else is not really hitting guidance. It is a fools way to hit guidance.
This was the best part of your article. I agree 100%. But will the market care if SIRI gets their 442k [and then some] even if it means they gave 50% off to half the new subs? This stock has never traded on fundamentals. When traders see they hit or beat 442k, that’s all that will matter. I hope I’m wrong. But don’t think I am. Further comments?
Jesse….
At some point, if the wiggle too much, the street will notice. For example:
Last quarter they had 1,804,000 subscribers deactivate. They added subs to the self-pay line. By simple deduction we can assume that the deactivation category needs to come in at least at 1,850,000 and more likely 1,875,000. certainly the company could keep 40,000 or so “on the books”, but if they that deactivation category does not grow the way it should, we will see a problem in the making.
This is why the delta to get to gross additions is so important. It is better to add more. Perhaps the reason Sirius XM sweetened the $25 for 5 months to $25 for 6 months was because they have exhausted their wiggle room in the deactivated side of the equation.
Cheaper subs is okay if people and the streets are aware. One potential issue is that they also need to prove that their price increase will be viable. Frear seems to have already set the table for more deactivated subscribers in his latest public address
fraz….
Free cash flow for 2011 will be about $750 million. With 365 days a year at $2 million per day, that would $75o million in free cash flow.
Spencer,
I do not see how free cash flow for 2011 can be at $750M. Are you talking about the cash in bank at the end of 2012. This number may be as high as between $770M and $800M. Free cash flow at $750M to $800M is feasible starting 2012.
On the fixed cost premise, I still believe that I am right. The infrastructure is in place for another five years. The costs here are 99% controlled and easily modeled. The only limited and easily modeled variables are new radios, their installation, roylaties and marketing. Even if we take a very conservative approach of fifty cents on a new dollar from a new sub, it is still HUGE. Let us not downplay this factor.
spence 400 mil in 2011 not 750 like u said
fraz….
Profits are expected to be $400 million.
Free cash flow is anticipated to “approach $750 million”
I was referring to, and stated FCF (free cash flow)
I’m constantly getting offers to come back for 6 months for $25, but it’s only good for an older specfic receiver that i don’t own anymore. I still have 2 active receivers.
A co-worker got the same offer for a car he doesn’t own anymore, but would like to use this offer for his new leased-car. SIRIXM said no and now he’s turned off with satellite radio.
Question: Why on earth does SIRIXM care what receiver it is? Why not just activate the bleeping thing and get a new subscriber?
Spencer… there were over 23000 $2 Calls open for Jan March Jan 2013 and 2014 with barely any Put activity. So many pumpers are saying a breakout $2.10-$2.20 is coming beginning next week. Plus the Bollinger bands are as tight as I’ve ever seen them. What do you think? You see that breakout, too? My nose is twitching but I’m nervous buying here? One crisis event out of Europe and it could crush the share price out of this stock. And Iran seems to be amping up into a full blown “Wag the Dog” distraction from the EU. Would you buy at these prices? Your input is desperately needed by me cause I lost a lot of money in the stock in august and have had a very hard time trading it since.