Lucas Binder of UBS issued a report today on Sirius' subscriber numbers. It seems that Binder did miss one item on Sirius however. Binder notes that this is the first time Sirius has released Self Paying Churn. This is not at all the case, as Sirius has given both churn numbers (self paying as well as fully loaded churn) in their conference calls for quite some time now.
Lower Than Expected Subscriber Growth
Sirius reports lower than expected net adds; in-line churn
SIRI reported lower than expected net adds of 654,309 (vs. UBSe 902,700), which were down 28% y/y. Total subs at year-end 2007 were 8,321,785 (vs. UBSe8,570,176), an increase of 42% y/y. SIRI reported in-line FY 2007 churn of 2.2%(vs. UBSe 2.2%) and for the first time released self-pay churn rate of 1.6%, which is lower than the non-promo churn typically reported by XMSR (1.8%).
Positive free cash flow in 4Q for second year in a row
SIRI is expecting to have significantly greater positive free cash flow in 4Q07 vs.4Q06. Our current estimates for FCF are $37.8M and for 4Q07. Due to the much lower than expected net additions and in-line churn, it is likely gross adds were lower than expected, which leads to better EBITDA and FCF in the quarter, as the company highlights. As a result, we believe the lower subscriber growth is likely a key contributor to higher FCF. We expect a 4Q07 EBITDA loss of ($168.2M).
Weak retail could be reason for weak sub adds
While SIRI did not provide details about the breakdown of subscriber growth between retail and OEM growth, given the holiday season, we would expect retail to be a major contributor toward better 4Q07 results. However, given a q/q inc of 25% (well below the norm), we believe retail weakness could have contributed to lower than expected adds. SIRI should release ‘07 results and ‘08 guidance in late Feb.
Valuation: Maintain Neutral Rating with a $3.90 price target We base our price target on a detailed DCF analysis, using 3.0% growth in perpetuity and 13.0% WACC.
Tyler Savery Position - Long Sirius, Long XM