XM’s Quarter Better Than What Headlines Read
The Headline Does Not always tell the story.
“XM Losses Expand. Estimates Miss As SAC Increases”
The headline is technically accurate. XM’s loss did expand, and SAC was higher. The question though is whether or not the performance in Q1 of 2008 is good for the company going forward.
What we see when we look deeper into XM’s quarter is a company that is investing into their future. Revenue did jump. This was expected. After all, they have more subscribers this year than they did last year. SAC did increase. This is because the company is making a substantial investment into some OEM partners that are absorbed in a slight different manner than other OEM deals. Manufacturers such as Toyota, Nissan, and Hyundai get a subsidy, but do not participate in the subscriber numbers until these radios have self paying subscribers.
This means that XM invests into a radio with these manufacturers with the payoff happening a bit down the road. With a conversion ratio at 53%, that investment will pay off at some point, and the revenue gained from the self paying subscriber can then be used to invest into more vehicle stereo installations.
What XM has done is keep costs and their loss under control, while also investing in their growth. This investment in the OEM channel by XM will bear fruits at some point. Looking at this quarter, the losses are all in areas that will deliver future value, and that is the direction that these companies need to be focused on.
I would term the quarter a good quarter, especially considering where XM spent their money. This quarter shows stability with a predictable outcome vs. spending on content which has a less predictable benefit.
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Position – Long XM
you said “Manufacturers such as Toyota, Nissan, and Hyundai get a subsidy”
I thought these new partners did not require a payment to install radios–that was supposed to be the big positive as they come on—have they stated otherwise regarding toyota and hyun? If so where?
“Manufacturers such as Toyota, Nissan, and Hyundai get a subsidy, but do not participate in the subscriber numbers until these radios have self paying subscribers.”
Hasn’t XM indicated that unlike GM they do not pay cash to get installs at Toyota and Hyundai? I think they may have said that about Nissan too? What are the specifics of install payments at these new partners and when did XM release them?
People that think there are no costs associated with these installs are simply mistaken. You can call XM to verify this. I have heard of several people who are under this misconception.
nooneimportant, a chip set is needed for every radio, XMSR pays for that. It is the reason open access is not that great, unless the companies are willing to buy the chips themselfs.
A chipset is ten bucks tops maybe less for the new parteners as they are using the latest gen chipset. XM has maintained in the past that like Honda there would be no other cash payments for Hyundai and Toyota–they said this consistently in 2005 and 2006 when they were pumping the Toyota 2006 YE oem ramp that never happened. They pay GM 100 bucks in cash per install (they get back about 20 per install by way of the 3 month free trial sub). In fact the reason that they said they would not count a Hyundai or Toyo sub until it actually signed up was because they were not getting paid by them for the free trial since XM was not paying then for the install they were giving the trial free. So this idea that they have publicaly said that they will be paying anything significant for these subs is bogus. Now they may in fact be paying as they have been less than truthful on lots of issues in the past. Tyler since you claim you have talked to them on this simply tell us what payments other than chipset and free telematics are they now saying they will be making. Trust me if you look at their past claims in 2005 & 2006 they made it clear there were no cash payments for installs.
In fact if you look at their dramatic claims of diminishing SAC that they made for the out years in their presentations in 2005 and 2006 it was clearly due to the very low SAC with the new partners (Hyun, Toyo).
noone….
I would suggest that you call I.R. at XM.
I think if you review the transcripts from XM’s calls you will not find where they said no cash payments for subsidies. This story that there was no cost to these subscribers made the rounds a couple of years back, and for some reason there are people who still believe this to be the case.
There are many subsidies. Chipset, installation, marketing, etc. People who thought these subs were free should think again.
If these subs were free, how does SAC go up?
The stories went around as you say because Parsons, Panero, et. al consistently maintained this to institutional investors in meetings. You really are less up on this stock then you claim. They have plainly stated that they pay 100 install per raido to GM and you find that in analysts reports though I doubt XM has ever said that in a transcript. Why do you think they got no revenue on trial subs from the new partners (you went into great detail in 2006 in a seekign alpha piece you wrote)? I suggest you talk to anaysts about what they were saying on this back then.
The point remains that if you have been told what they are paying say it –if not and have just gotten blue smoke and mirrors say that instead. You are simply a cheerleader for these guys with little real finance backround from what I can see–also I suggesst you do a chart of the GM subs gains which will show that the GM push being abover plan –way above is all that is making their subs growth and is what is killing their CF.
noone….
The issue that many people misunderstood what was initially said, and made an assumption that these subs would be “free”. This has never been the case. The analysts understood, but a lot of others did not.
What I have been told is that there are costs to these subs. Neither XM nor Sirius give specifics (front end loaded, back end loaded, radio subsidy, installed subsidy, etc.). You can however see that there are costs by looking at the metrics over time.
If you want to identify me as a cheerleader, that is fine. Some people accuse me of being too critical.
GM’s installations are slightly above plan from what information is given. They went did their 6,000,000th install a little while back, so I do not think they are installing at a pace that is way ahead of projections. You can look up the date of the 5,000,000 install and the 6,000,000 install and see the progression.
GM is an expensive deal. I have written about this many times. The rev share component is now maxed out. at above 50% (based on a $10 subscription price). This means that XM pays GM a bit over $5 per month on all radios installed since the 6,000,000th installation.
These deals leave room for making one metric look better depending on structure. A low front end cost helps SAC, but the higher back end hits other metrics (royalty and rev share).
I suggested that you call XM because you will get the word from the company themselves.
The fact is that they did say in 2006 that these would have no rev share and no cash payments and thus would dramitically lower avg SAC. Eidently you did not attend the many appearances they made (or meetings they held in Boca) with various institutional investors. Why would they not tell you what the numbers are? How on earth can you make any assumptions about the metrics going forward with out that? You answersmake no sense and I can not see how you can say they had a good quarter. In 2005 they told investors that the rev share was maxed out at 3.00 per sub with GM. As for analysts I suggest you check again –in fact at one point in telling people that not only was Toyota to be free other than the chip set cost but that they would ultimately get paind by them for the telematics–they then stopped saying that and switched to Toyota was going to be free to them because they were giving them the free telematics.
If you think you are an analyst on this stock (I mean you are telling all that the q was better then every one but you realizes) I suggest you do the math in a post on the NPV of the life of a GM sub. If you can not do that then you certainly can not analyze anthing about this. XM and Sirius both know exactly what each is paying in all their OEM deals (as I heard Parsons once say we have been bidding against them in every deal and so we know their bids and they know ours). So the issue then is why will they not give you the numbers but only tell you we are paying something? Its a joke on shareholders.
I really doubt you have much access to many real analysts or to the meetings other than CC’s if you think they were telling folks in 2005 that they were going to be paying Toyota money.