XM’s Q2 2007 conference call is scheduled for July 26th at 10:00 am. With the merger seeming to take the biggest amount of attention, it will be interesting to see how the street reacts to the call. In the past I have written a “what to expect” column prior to each call. For this quarter, I think it prudent simply to outline street consensus, and perhaps interject some of my own opinion.
Street consensus on subscribers seems to be sitting between 308,000 and 312,000 NET additions for the quarter. In my opinion, this quarter brings about the first time in nearly a year and a half that XM will beat the street on this metric, which should be viewed as good news. Expectations have been running too high for XM on this metric for quite some time with many analysts. Some of the more historically accurate analysts have been very good at projecting subscribers for XM, but their accuracy was often offset by others that simply seemed hesitant to bring their projections down to a more reasonable level. As was the case last quarter, the bulk of XM’s subscriber growth will come from the OEM channel. Retail additions on a NET basis may show a very similar figure to last quarter, with perhaps a slight improvement due to Fathers day, and some very attractive retail pricing during the quarter. On a NET basis, XM should benefit finally begin to see subscriber count benefit from their Hyundai, Toyota, and Nissan method of subscriber counting. In my opinion if there is a big surprise (over 350,000) in the XM subscriber number, it can be directly tied to this issue. I see XM coming in with a subscriber number between 320,000 and 330,000.
XM typivcally announces the churn figure of self paying subscribers. This method does not consider XM’s promotional subscriber “drop-offs”. Different analysts use differing methods when looking at XM’s churn. Some calculate the self paying churn, while others look at the fully loaded churn. Consensus on this metric is hard to gauge, but in the end, it would appear that most analysts are not expecting any big surprise here. In my opinion, I like to track the fully loaded churn because it paints a reflection between the GROSS subscriber number and the NET number. I would expect a fully loaded churn of between 2.6% and 2.7%.
Average Revenue Per User is a metric designed to see what type of revenue is generate on an average basis. The street consensus on ARPU seems to be in the area of between $11.40 and $11.50. ARPU can be impacted by things such as family plans which at $6.99 per month bring down the average a bit. Fathers Day is a big family plan contributor, but in any case, there is not likely to be a huge shift in the percentage of family plans, and certainly not enough to throw ARPU out of whack with expectations. I would expect an total ARPU of about $11.44.
SUBSCRIBER AQUISITON COST
Subscriber Acquisition Costs (SAC) are a metric that in theory outlines the costs associate with getting a subscriber. This is not a GAAP metric, and thus can be defined by the company. The structures of various deals can carry a huge impact on this metric, and because of that, comparisons with competitor Sirius become more difficult. Perhaps the best way to analyze SAC is to simply compare it to previous quarters in order to see a trend. At times, items such as rebates can impact SAC. When a rebate is on the hardware, it will show in the SAC line item. If the rebate is tied to the subscription, it will be reflected in ARPU. SAC costs can fluctuate for many reasons. XM had previously announced that they were anticipating a rise in SAC because they had hardware that they wanted to move. A slight rise in SAC should not be taken as a surprise. The street consensus on SAC is about $68. In my opinion, SAC should come in close to this mark, but a variable that some forget to consider is the structure of the Hyundai, Toyota and Nissan deals. If one of these is ramping up faster than expected, then the costs associated with the install need additional consideration. SAC between $66 and $69 is reasonable in my opinion.
COST PER GROSS ADDITION
CPGA is considered the “fully loaded” metric for costs associated with garnering subscribers. Similar to SAC, CPGA is not a GAAP metric, and thus, the definition of CPGA is determined by the company, and not accounting principals. CPGA includes all costs in SAC as well as marketing efforts. It excludes employee expenses. The street consensus for CPGA is about $111 to $114. The big variable here ties to advertising and marketing. In my opinion we will see XM announce a CPGA of roughly $115.
Street consensus has revenue in the neighborhood of about $275,000,000 in a very tight range. In my opinion, revenue may be another metric that beats the street albeit by a narrow margin. I am expecting revenues of $276,000,000 to $279,000,000.
Street consensus rests with a loss of about 45 cents per share. XM should come in close to this range. In my opinion, a loss of 46 cents per share is what XM will deliver. The adjusted EBITA loss in my opinion will be ($56,000,000).
Overall, I see the merger taking center stage for the conference call, and for XM to outline what they feel is a strong business plan with or without the merger. One key thing for investors to consider is how this company is performing on a stand alone basis. Look for the tone of the call to be upbeat, and for an active question and answer session with a wide range of topical questions.
Position - Long Sirius, Long XM