Churn Is Key To Sirius XM’s Short Term Success
Sirius XM recently reported their Q3 numbers, an for the most part the street responded well to them. The company demonstrated that they are capable of producing good number even in what has traditionally been their weakest quarter each year. For the street this is a decent sign of how real Sirius XM can be in the year to come.
There are many metrics to look at with a company. What is their debt situation? Where is their EBITDA growth? How is cash flow? Are they managing costs? All of these are indeed important, but in the end the story rests with a simple metric called churn. Churn represents how many customers are they losing compared to how many they bring in. In order to increase revenues, grow, and make money the company has to main paths to take. The first is to get more money out of existing subscribers and the second is to bring in more subscribers.
In Q2 of 2010 SIRI brought in just over 2 million subscribers. They had a churn rate of 1.8% and thus lost a bit over 1.4 million. The result was a positive subscriber number of nearly 600,000. All of this happened with auto sales at 3 million for the quarter. In Q3 we see a slightly different situation. Auto sales remained stable at about 3 million, and gross subscriber additions came in just below 2 million. For the purposes of debate, the quarters were identical in terms of auto sales and gross subscriber additions. The big difference was that churn went from 1.8% to 1.9%. This resulted in a net subscriber count of just under 400,000 (a 33% drop from the previous quarter).
For Sirius XM to keep demonstrating growth, the need to keep churn in check. The company needs to keep this metric below 2.0%. The third quarter was a close call. The company was aggressive in their retention efforts, but as it turned out had little wiggle room. Their Average Revenue Per User (ARPU) in Q2 was $11.81. In Q 3 the company maintained that number. Holding the line was great news, but it does bring the natural question as to whether or not the street sees ARPU of $11.81 as good enough when combined with subscriber growth of about 400,000. Such numbers will deliver an ever increasing revenue, which might be more tame than some hope.
Until Satellite Radio 2.0 comes along a year from now, to reignite new possible revenue streams this company needs to, at a minimum, match Q3 numbers. Some will state that the company can increase prices about 5 months from now. As I have stated in the past, this is not a done deal. The FCC needs to approve such an increase. The Commission has already opened a 6 month comment period on the issue, and at the end of 6 months the debate will begin. This means that base prices will likely remain in place until summer of 2011. Churn needs to stay at 1.9% or better until Satellite Radio 2.0 arrives. If churn slips, the consequences could be troublesome in the short term.
Sirius XM’s Mel Karmazin has established some guidance for 2010. The guidance shows a lower EBITDA as well as modest subscriber growth. In my opinion, ARPU will remain flat as well. I must reiterate that there is not anything really wrong with this. The money the company brings in is great, and as they continue to deal with debt, the balance sheet improves. The trick here is holding the line over the next 3 or 4 quarters. One silver lining is that if auto sales pick up, the gross subscriber additions can help ensure more and more subs each quarter.
Many people feel that SIRI is being conservative with their guidance. I would tend to agree. However, while I think the company will beat these numbers, I do not think it will happen in a grand way. As the street gains a better understanding of SIRI’s performance the equity can garner the respect and appreciation of investors. The third quarter was good, but the guidance shows Q4 not quite holding the line. This is perhaps the reason we will see a pause in the stock price. I projected last week that the $1.30’s are key and that the company would test these levels. I still believe that to be the case. A growth story can still happen, but they need to keep churn in check (without giving away the store) for that to happen. Time will tell, and marketing programs like the free Best Of trials should help.
Position – Long Sirius XM Radio
Good article Spencer, I see you mention guidance at the end. IMO, if Sirius would have given more guidance the Market would have reacted differently. The guidance wasn’t just conservative, there was practically none given. It was wait and see what happens, if the company cannot provide at least favorable estimates going forward it will make people nervous. As such recent mixed analysts grading.
The recent news with Sirius President selling 5 million shares is not very good news. The market in whole has insider sell/buy ratio at 6-1 as reported by CNBC I believe Wednesday. Which makes the Market outlook dismal for the coming weeks. Sirius XM could drop to the 1.20 range where there is underlying support. I predicted 1.30 range right before the CC, but since revise that to 1.20 with this recent news. Even HS and NFL renewing their contract will not boost the SP very much.
Hopefully, auto sales will be good and the XM Snap sells are high. BTW, you can get the Snap at Radio Shack for 29.99 on Black Friday, a reasonable price gift for all our friends and relatives who don’t have Sirius in their cars.(Every little bit counts.)GLTA
Nice read Spencer. Churn of course is extremely important but auto sales are the real key and the trend is up…so, look for subs to continue to increase proportionally with little change in churn. As far as guidance for 2011, it would “not” be credible to provide until the NFL contract is completed and the Howard issue settled. I expect guidance by the company to be issued once these two premium content issues are resolved. Tthe overall market selling by insiders hopefully is due to more favorable tax considerations for 2010 vs 2011 pending on imminent changes to the tax code.
Boomer….
Auto sales above 1 million per month is the magic number. We need to remember that each 1 million cars made delivers 600,000 to 650,000 subscribers. The auto sector will work its way back, but it will be a process that will take time.
Churn is based on self paying subscribers. The real key is keeping the promotional subs and getting them converted to self paying. The company added over 300,000 to the self pay line in Q3. This was good.
I like the way you named the post “Churn Is Key To Sirius XM’s Short Term Success”. Exactly short-term. But what about lon-term? There are much bigger issues than short-term retention in this economy. There is a bunch of questions that are extremely interesting and important for a sensible discussion in terms of the company’s future. Will satellite radio be more than a discretionary service and turn into something similar to cable/sat TV? If yes, how long will it take? How fast can siri grow? What is their realistic saturation point/potential in terms of subscribers? These are fundamental questions that interest long-term investors looking at least into 2014-2015 timeframe and beyond. If siri does turn into a virtual necessity like paid TV (I have always believed that it will) we stand to benefit tremendously. I tend to think that siri’s primary spot is still the auto. There is too much competition in your household from people to books to gadgets. Auto is where you are “confined” to an enclosed environemt and would like to make your experience entertaining and safe at the same time. This is why I keep saying that pandoras and the likes in your auto are either not safe (are you going to read their banners while driving?!) or the same as terrestrial radio. This is why I believe that siri’s business model is not only very smart but also practically impossible to compete with unless you launch a similar service. If we assume that siri will turn into a necessity, we can expect for the next ten years an average of 3-5 million subscribers added per yearv in improved economy counting used car reactivations . Sirius XM 2.0 may also be revolutionary for the service. While acheiving the same functionality as pandoras, you will not be distracted by advertisement as with pandoras but can program your unit in adavnce and get phenomenal content that is much more than music. If there are no major flaws in this analysis, we can expect lower churn, much higher ARPU, adjusted pricing (it will still happen because siri has not raised its price for a decade and FCC will have zero arguments to deny a reasonable raise)and a count of 50M to 60M subs by 2020 accounting for exponential growth. At a reasonable price of $20/month, or $240 a year, we will see a revenue of about $13B/year and profits at least a half of that. How much would this company be worth than? If we take a low multiple of 20, we have about a $130B company. Even if the diluted share count is 6.5B (I personally believe siri will buy back by then at least 50%), we have $20/share. You may say that I a dreamer or simply insane (some folks have already branded me with this epithet). What I about those who believed in apple when the company was nowhere at $3 a share with no competitive product but a genius back onboard in 1997. Are they now also insane at aappl $308 a share in November 2010? May be they saw something others did not! Or may be they are simply much smarter than others!!!
I have to agree with a previous post tha auto sales are the key. Just look at what happened when auto sales were down. While mentioned in the earnings report, a goldmine awaits in the form of the used cars out there with inactive satrad receivers installed. Used car dealers are offereing free 90 day ttial periods with those cars, but as for those who have had the car since new I wonder exactly wha kind of maiing, paper or email, is being sent out by Sirius to entice those people to try satrad again. There’s a realistic 50% or more subscriber increase awaiting Sirius if it can reach into that pool of potential customers. I don’t see the aftermarket products making a real difference until Satrad 2.0 comes out and then we don’t know for sure what that will entail. Time will tell.
If a Sirius subscriber purchases a new car and activates the radio in the new car while deactivating the Sirius subscription in the old vehicle, would that transaction contribute to the churn rate?
Sirius needs to do a better job of being pro active and marketing to and gaining subscribers in workplace and retail locations. This would reduce the dependence auto industry. How many potential at-work and retail customers are there? Tens of millions at least.
To reduce churn:
“the first is to get more money out of existing subscribers & the second is to bring in more subscribers”
As a Sat Rad subscriber since Feb 2002 and a SiriusFM(oops there I go again.. I meant SiriusXM – my apologies Mel) stockholder. I very well may NOT give Mel my money when my sub runs out in Feb 2011. Additionally, with the direction the programming on the music and comedy channels has taken,I do not encourage anyone to subscribe without saying “its OK but it ain’t what it used to be prior acquisition & be prepared to encounter sub-par customer service if you do have a problem”.
Way too much emphasis is on car sales and not retention of customers. Plus, quality of the service is not a factor to most posters on this site. We all know Mel is a master of smoke & mirrors and a lot of posters on this site lap up everything that Mel & his cohorts put out.
Don’t count on me to carry the water for Mel & Company