With the release of the Q1 2009 10Q today, investors get to take a deeper look into how the performance of the company is tracking. Bearing that in mind, it is prudent for investors to understand what various metrics mean, measure, and how they can play off of each other. While many metrics in financial statements are standard, many companies have very distinct ways of measuring things which is worth understanding. Rather than focus on the standardized typical metrics, we will delve into the more company specific metrics and in addition help give clarity to non-official metrics.
SUBSCRIBER – A radio that the company receives a payment for.
PROMOTIONAL SUBSCRIBER – A radio that has a payment and contracted service attached. Promotional subscribers typically apply to cars that are in a “trial” period for which the company receives money. Not all trial periods are counted as subscribers. By example, Toyota’s three month trial has no payment for the subscription attached. Thus, these radios, which are active, will not impact the subscriber number or churn, but do have subsidy costs. A substantial number of this type of installation could cause a rise in Subscriber Acquisition Costs (SAC) because SAC measures against the subscriber base of which Toyota, Nissan and Hyundai drivers do not contribute to until after the trial period is over.
PARKING LOT SUBSCRIBER A term coined regarding the type of deal Chrysler and Ford have. While not an official metric, it is important to understand because of the impact this subset of promotional subscribers has on other metrics such as ARPU and Churn. Chrysler and Ford pay a subscription at the time of manufacture of the car. In the period after manufacture, but before the sale of the car, these subscriptions are literally sitting on a parking lot without an active listener. Sirius XM takes in this payment and books it to DEFFERRED REVENUE (a liability). It is deferred revenue because money has been received, but the contracted service is not yet delivered. In other words, the company must deliver the service to move the money from deferred revenue to revenue. This can begin to happen as soon as a consumer buys the car.
A large number of this type of subscriber enlarges the deferred revenue line item. Another impact is on the total deactivation’s. If a Chrysler comes with a one year subscription, and the car as a “parking lot subscriber” for three months prior to sale, it is impossible for that radio to become a deactivated radio for 15 months. “Parking Lot Subscribers” is not an official metric, but carries specific impacts that should be understood by investors.
RENTAL CAR SUBSCRIBER This refers to rental cars that have satellite radio, and pay Sirius XM money for that subscription (typically a revenue share). Rental cars with satellite radio that give no payment to Sirius XM are not counted in the subscriber pool.
SELF PAYING SUBSCRIBER Subscribers, whether from the OEM channel or the retail channel that are being paid for by the end user.
AVERAGE REVENUE PER USER (ARPU) – ARPU is derived from total earned subscriber revenue and net advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period.
ARPU includes as part of its formula, the number of subscribers. This is why I stress the importance of understanding the number of “parking lot subscribers”. During the time at which these types of subscribers on on a parking lot, they are not contributing any dollars to revenue, yet are counted as a subscriber. A subscriber contributing no revenue brings down the average.
CONVERSION RATE This is sometimes referred to as “TAKE RATE” The percentage of subscribers that receive service as a promotion which then convert to self-paying after the initial promotion period. This is referred to as the “conversion rate”, and is given as a percentage. At the time of sale, vehicle owners generally receive between three and twelve month prepaid trial subscriptions and Sirius XM receives a subscription fee from the OEM. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. Sirius XM measures conversion rate three months after the period in which the trial service ends. It may take up to 90 days after the trial service ends for subscribers to respond to marketing communications and become self-paying subscribers.
Based on this definition, it may mean that OEM;s such as Toyota, Nissan and Hyundai will not be included in this metric, because there is no payment received from those OEM. Clarity on this aspect may happen in a future quarter.
SUBSCRIBER AQUISITION COST (SAC), Is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense divided by the number of gross subscriber additions for the period. SAC, as adjusted, per gross subscriber addition is calculated as follows. This is the reported cost to garner a subscriber.
Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a SIRIUS or XM radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS and XM radios; product warranty obligations; provisions for inventory allowance; and compensation costs associated with stock-based awards granted in connection with certain distribution agreements. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS and XM radios, and revenue share payments to automakers and retailers of SIRIUS and XM radios.
AVERAGE SELF PAY MONTHLY CHURN Average self-pay monthly churn represents the monthly average of self-pay deactivation’s by the quarter divided by the average self-pay subscriber balance for the quarter.
The important distinction here is that this number is based on self pay deactivation’s and excludes deactivation’s of promotional subscribers.
FULLY LOADED CHURN This is an unofficial metric which takes into consideration all deactivation inclusive of promotional subscriber. Understanding the fully loaded churn is important because Sirius XM rely heavily on the OEM channel for subscriptions.
REVENUE SHARE Revenue share refers most often to the percentage of subscriber revenue that Sirius XM pays to an OEM partner. each OEM has their own deal, so this amount varies depending on the deal. As OEM’s without the benefit of a revenue share become a larger part of the picture, certain metrics will benefit.