Merrill Lynch Upgrades Sirius To Neutral
Merrill Lynch analyst Glenn Campbell upgraded Sirius Satellite Radio to Neutral Today. The analyst has a price target of $3.11 for Sirius.
REPORT EXCERPTS
The clouds start to lift
We are raising our opinion to Neutral to reflect 1) an increase in our DCF value following better-than-expected 1Q08 subscriber growth; and 2) our view that the negative influences on the share price (declining expectations for growth, refinancing concerns and regulatory risks on the Sirius/XM merger) have passed their peak.
Subscriber results ahead of our estimates
XM and Sirius both reported better than expected subscriber growth with their 1Q08 results today: in aggregate, 627K vs our estimate of 578K, down from 841K in the year-ago quarter. EBITDA losses were slightly larger than our estimates and consensus. For Sirius, we believe these results were good enough to support the stock, in our view; for XM, they were stronger yet.
We have revised our forecasts to reflect higher subscriber additions in 2008. We have also adjusted our long-term model to assume higher churn (2.5%, revised from 2.4%) and higher ARPU ($9.50, revised from $9.00).
DCF valuation increased: to $3.11 for YE08E With our estimate/assumption changes, our YE08 DCF value increases from $2.89/share to $3.11/share. Our YE09E valuation increases from $3.07/share to $3.37/share.
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Position – Long Sirius, XM.
I wonder if this newby analyst realizes that you cannot add XM and SIRI subscriber figures and get anything meaningful, since they measure TWO DIFFERENT THINGS (XM’s numbers measure paying subscribers, SIRI’s #s measure paying subscribers plus net new vehicles manufactured with OEM installed receivers).
XM wasn’t bad, but SIRI at 332K including net unsold vehicles has to cause one to pause.
I can agree with that, Hippo I was disappointed with SIRI adds. Unless the 900,000 in parking lot subs has come down by 150,000.
Small Correction here….
Analysts look at the companies from a financial standpoint.
You say “XM’s #’s measure paying subscribers, Sirius #’s measure paying subscribers plus vehicles manufactured with OEM installed receivers”
1. The Sirius OEM istalled receivers are getting a payment.
2. XM is including promotional subs for which a payment is received as well.
3. The meaning comes in how the dollars shake out. There is no issue with combining the subscriber numbers as each subscriber on the rolls (be it Sirius or XM) has rev. dollars, or deferred rev. dollars, attached to it. From there it is simply a funtion of boiling down the metrics.
John….
Given the small change in deferred revenue, I would estimate that the “parking lot sub figure has gone down some. Not 150K IMO. I would put the metric at 860,000K.
>>>>1. The Sirius OEM istalled receivers are getting a payment.
But no revenue is recognized until such time as the eventual owner of the car purchases it — typically, 3-4 months after SIRI began counting it as a subscriber.
>>> >2. XM is including promotional subs for which a payment is received as well.
But in Xm’s case, the revenue is earned effective with the first month after sale, and thus the subs are “revenue generating” (SIRI’s are not “revenue generating” until months after they began counting them).
Basically, the problem with SIRI is the drying up of retail subscribers. We have always known that XM had the larger share of OEM subscribers, but SIRI has previously had retail to make up for it. With only 2500 net retail adds in Q1, clearly, SIRI’s is in very deep trouble.
Tyler, I understand what you are saying, But my position was, that SIRI was catching up in a big way, to XMSR even with the Parking lot subs being included or not. This around 27,000 extra is only about 12,000 more if you include extra churn. If this does not improve then it would take them forever to overtake XMSR if at all. If this did not improve then Hippo does have a point.
Hippo, yes while SIRI did only add 2,500, that is still much better then XMSR loss of (51,000) subs and nothing to be proud of. It at this point, is all about the end subcriber number. I dont find 27,000 to be much of a material difference between them. As a matter of fact if this was the kind of number (27,000) we were talking about 3 years ago to now (even with much less parking lot subs), I would be on your side.
As for when the money is collected is really not material. Instead of getting a payment of 12.95 each month or getting 155 after a year. whats the difference not much IMO. The one thing is I would much rather have it then not at all.
>>>>>>> Hippo, yes while SIRI did only add 2,500, that is still much better then XMSR loss of (51,000) subs and nothing to be proud of. It at this point, is all about the end subcriber number.
But this is just reflective of the reality of the situation — retail isn’t going to be a significant contributor going forward. It never was.
This is why I’ve claimed all along that XM’s OEM dominance is key. And that SIRI’s payment of 3/4 billion dollars for a five year deal with Stern was a horrible mistake. Over time, retail will substantially go away for both companies.
300K net adds isn’t great for either service. But the last 3 Q1 look like:
……SIRI……XMSR…
’08 322,534…303,000
’07 556,490…285,176
’06 761,187…569,054
I think everyone can agree this isn’t the kind of trend one would like to see as net adds, but right now, I feel more comfortable that XM may have bottomed than I do about SIRI.
SIRI’s weak retail performance is especially concerning since they spent this massive amount on Stern, which was solely to help brand recognition and retail sales, and scarcely benefits OEM.
Hippo, You forget the OEMs at the time were not there for ether in any real substance in 05. I also highly dought that people that came in for Stern (2.3 million at least) would care if they bought a XMSR OEM, they would switch it out using a retail product. Those subscribers will be at SIRI as long as Stern is.
hippo….
Your assertion was that blending the subs is meaningless because of the way subs are counted. This is not the case. Any adjustment that someone wants to make can be made.
>>>>But no revenue is recognized until such time as the eventual owner of the car purchases it — typically, 3-4 months after SIRI began counting it as a subscriber.
Revenue is only part of the equation. Payment and cash flow are the other. The structure of this deal allows continued installations without whaling on cash flows. Inventory for Chrysler at the end of April was 74 days (422,000 units). Your 3 to 4 month estimate is a bit off right now. 2 to 3 months would be more accurate.
Retail will have a strong Q2 as normal.
link…
http://www.autospectator.com/c.....-year-drop
>>Your assertion was that blending the subs is meaningless because of the way subs are counted. This is not the case. Any adjustment that someone wants to make can be made.
That’s correct, on both points. You cannot add apples and oranges. XM determines subscribers by one method, Sirius by another. You cannot sensibly add them, any more than you would add US and Candian dollars to get a total. You must convert from one unit to the other first — for example, if one increased XM’s figure by 1.5 Million then added them, you’d be looking at a sensible result.
And it is certainly true one can make any adjustments they want to; however, when presenting data that is to be meaningful as “information”, it is incumbent on the presenter to make such adjustments or, at the very least, disclose that such adjustments are needed.
>>> Revenue is only part of the equation. Payment and cash flow are the other.
Well, revenue is the part that matters.
Deferred revenue is nothing more than a customer advancing money to a vendor of products or services pending the completion of the earnings process. In short, a loan to the service provider.
Payment and cash flow are not important unless this bit of cash flow makes the difference between collapse and survival. Companies surviving on the cash flow from prepayments is a borderline practice, and certainly not an excellent way of financing startup operations (the problem being what happens if the startup operation fails — instead of the holders of securities getting slammed, the customers do).
>> Retail will have a strong Q2 as normal.
I seem to recall you saying something like that about Q1 a couple months ago — it was off a bit but looking better, something like that.
While Q2 used to get a little bump from Fathers Day, there is every reason to anticipate marginal growth or even retail losses for both companies in Q2.
>>>>>>for example, if one increased XM’s figure by 1.5 Million then added them, you’d be looking at a sensible result.
This is not correct. You are still at “apples and oranges” To be more correct you would add 1,500,000 PLUS a payment from the OEM to get closer to “apples to apples”
OR You could simply deduct 860,000 from Sirius and take away the payment from deferred revenue.
Even without that you can still arrive at an ARPU for the blended base, which can give meaningful data for consideration. You can also arrive at a blended SAC which is meaningful.
The cash flow model of the DCX deal is not for survival. It is for building a base. It is about leveraging cash. To allow the deal to happen, the OEM gets some benefit in the form of a revenue share.
Example.
(assume a subsidy of $100 – a sub payment of $100 – a monthly fee of $10 – and a rev share of $2.50.)
company has $1,000 to put radios into cars. They come to an agreement that the OEM will buy a subscription, and a rate of installations.
They buy 10 radios and are out of money.
However, those radio’s get installed and $1,000 comes back.
That $1,000 can then buy 10 more radios.
This same $1,000 can be used to install 100 radio over the next 10 months rather than simply 10. This is leverage and that leverage is accomplished because of the cash flow.
In month 11 five subscribers drop and 5 keep the service. The OEM gets $12.50, and the company gets $38.50. Meanwhile the initial $1,000 is still adding 10 more radios.
Month 12 sees the revenue share rise to $25 and the revenue rise to $77. The original $1,000 is still adding 10 radios per month.
Month 13 sees revenue share rise to $37.50 and revenue rise to $115. Now they can buy 11 radios, and put $15 towards the bottom line.
As you can see, the money is leveraged to work for the company, and as the subscriber base grows, they can either increase production, or put money to other areas.
After 13 months, there would be 15 self paying subscribers, yet the original $1,000 is still being used.
I would agree that a company “surviving” on prepayments is not a good idea, but this is not what is happening here. Anyone looking at the structure of this type of deal, and the installations that have happened, and the escalation in installations can see that this is not “survival mode”, but rather leveraging the cash in a way that allows the self paying base to grow.
>>> This is not correct. You are still at “apples and oranges” To be more correct you would add 1,500,000 PLUS a payment from the OEM to get closer to “apples to apples”
>>> OR You could simply deduct 860,000 from Sirius and take away the payment from deferred revenue.
Apparently, you’re still having trouble understanding deferred revenue. DEFERRED REVENUE IS A DEBT OF THE CORPORATION. If you take away the “payment” as you suggest, you decrease cash on hand and you also decrease liabilities. It has zero effect on the net worth of the corporation. As the other guy said, you clearly lack any basic knowledge of financial statements or accounting.
The prepayment does has ABSOLUTELY NO EFFECT on the counting of subscribers. It is a loan by a customer to a vendor.
DUH.
>> would agree that a company “surviving” on prepayments is not a good idea, but this is not what is happening here. Anyone looking at the structure of this type of deal, and the installations that have happened, and the escalation in installations can see that this is not “survival mode”, but rather leveraging the cash in a way that allows the self paying base to grow.
All is well and good as long as OEMs are ramping. But when they stablize, or god forbid, when production is cut back, it creates a cash flow problem going forward.
XM promo subscribers are simply not the same as Sirius promo subscribers — which is the reason XM has started providing an adjustment to put them on equal footing — something they should have done years ago. If you want to count unsold cars as subscribers, XM has 10.5 Million.
Adjusting for deferred revenue as you suggest reflects a total lack of understanding of what deferred revenue is (and isn’t).
hippo…..
I fully comprehend deferred revenue.
The issue you were trying to accomplish was getting to an apples to apples comparison so that the data has meaning.
To do this you can not simply ADD 1.5 million subscribers to XM. You would also need to add a payment for a subscription to begin to equate an apples to apples comparison. You do understand what would happen to ARPU if XM did this I hope.
OR
If you remove the “parking lot” subs from Sirius, you need to remove the payment as well.
Were you seeking a way to get to apples to apples to compare metrics or not?
Surely you understand that you need to take certain steps to accomplish this. My god, this is quite simple. You seem to be unsure of what you want to do.
>>>>All is well and good as long as OEMs are ramping. But when they stabilize, or god forbid, when production is cut back, it creates a cash flow problem going forward.
Do you at all understand the leverage of this deal? I made it very simple, and it went for months without a ramp-up. No ramp up is required to gain the leverage. A cut back does not effect it either. I thought the example provided was quite simple to follow.
I am not suggesting adjusting deferred revenue. Your goal was to get to a point for comparison. My suggestion was if you want to remove these subs from Sirius count then you also need to remove the payments for them. DUH (as you say). Who on earth suggests grabbing only a selective component?
>>>>>If you count unsold cars as subscribers XM has 10.5 million.
even this comparison is not apples to apples. The key is counting subscriptions you have been PAID FOR.
1.5 million subs that had a PAID FOR 3 month subscription would put $58 million in the coffers. To ignore this is foolish.
If you want to add the 1.5 million, and the costs of these 1.5 million are in the mix, and you are trying to get to an apples to apples comparison, you need to attach the revenue to the number. Remember, you are doing this to get to apples to apples so that you can compare metrics between the two companies.
You seem confused about what you want. I thought you were seeking a way to get to an accurate comparison of various metrics beyond a simple subscriber number. I thought you wanted to see how getting to apples to apples would impact metrics such as ARPU, SAC, Churn, cash, revenue, deferred revenue, etc. Perhaps you do not want to get to that point. I was not aware that all you are interested in is the subscriber number. I thought you wanted a meaningful comparison. Forgive me for assuming that you were looking for something that carried meaning. Oh well.
Hippo…..
Try this please.
Let’s compare ARPU apples to apples. Can we do this by taking the existing stated ARPU of XM and simply add 1.5 million subscribers to XM’s number?
Let’s compare SAC. Can we simply take the numbers already reported for SAC and compare them? Or do we need to divide the costs with consideration to the 1.5 million subs you want to add?
Let’s look at Liabilities. Can these be accurately compared if you add 1.5 million subs to XM without the payment for those subs?
This is why you an adjustment to metrics needs to be made. If you want to get to apples to apples you either need to have XM receive a payment for the 1.5 million and adjust the def. rev. line, or you need to take away the 860K from Sirius, and remove the pre-payment.
>>> Let’s compare ARPU apples to apples. Can we do this by taking the existing stated ARPU of XM and simply add 1.5 million subscribers to XM’s number?
If you were comparing ARPUs and IF Sirius includes parking lot subs in the denominator of the calculation, yes, you would need to make this adjustment before comparing ARPU.
>>>> Let’s compare SAC. Can we simply take the numbers already reported for SAC and compare them? Or do we need to divide the costs with consideration to the 1.5 million subs you want to add?
Obviously, 1.5M is a cumulative figure while unit SAC is not, so you would not make such an adjustment when comparing unit SACS. It would be a appropriate to adjust it by the net change in the parking lot subs, however, this would likely be an immaterial quantity.
>>>> Let’s look at Liabilities. Can these be accurately compared if you add 1.5 million subs to XM without the payment for those subs?
Anyone experienced with financial statements and financial statement analysis knows you don’t make these kinds of adjustments for comparison of assets and liabilities. Again, this is just your lack of experience showing.
>>>> This is why you an adjustment to metrics needs to be made. If you want to get to apples to apples you either need to have XM receive a payment for the 1.5 million and adjust the def. rev. line, or you need to take away the 860K from Sirius, and remove the pre-payment.
Okay, remove it. All it does is reduces cash by an amount and liabilities by an equivalent amount; it has no effect on the company’s net equity at all, so it is without consequence.
This is [part of] what you seem to miss – a prepayment has the same effect on the company’s financials as borrowing money — you put money in the bank and record a liability for the same amount. Just like going to the bank and borrowing money. It has no effect AT ALL on operating metrics.
hippo…
You love to be argumentative.
First we need to establish a FACT.
YOU CAN NOT COUNT A SUBSCRIBER UNLESS YOU RECEIVE PAYMENT FOR IT.
This is the case whether we like it or not. It is plain, simple, and straight forward.
This is the reason that you CAN’T simply “add 1.5 million subscribers” to XM. It does not get more simple. Until you understand this, the rest of the debate has no meaning. So, I will proceed with the assumption that you grasp this.
You seem to love to say that I do not understand how the accounting works. On the contrary, I am well aware of it. You had the stated goal of making a comparison “meaningful”. The only thing meaningful about subscriber numbers is the dollars associated with them. It is BECAUSE I UNDERSTAND THIS that I am trying to help you get to a point for what you consider a meaningful comparison.
We have determined that we can not simply add 1.5 million to XM. If we want to take that path, we need to establish a payment for the service. Only by doing this can you get closer to apples to apples.
Alternatively, I suggested another route of removing 860,000 subscribers from sirius, as well as the payment that Sirius has received for those subscriptions.
If your desired goal is to get to apples to apples, you must conceed that a simple addition of 1.5 million subscribers to XM without any other adjustment does not get you there.
I fully understand that a prepayment is a liablity. That is why it is in deferred revenue. What I am outlining is that the structure of the deal allows for leverage. For whatever reason you simply can not see this.
>>> This is the reason that you CAN’T simply “add 1.5 million subscribers” to XM. It does not get more simple. Until you understand this, the rest of the debate has no meaning. So, I will proceed with the assumption that you grasp this.
you do not understand the issue. At all.
Xm has been very specific — if they counted subscribers in the same manner as Sirius, they would have 1.5 Million more subs. And we already know that if SIRI counted subs the way XM does, SIRI would have almost 1.0M fewer. We know this; there is no debate; both companies have made these disclosures.
That 1.5M is unsold cars on dealer lots plus those that have been manufactured and not yet received on a dealer lot. The issue of a loan between the OEM and the vendor has absolutely nothing to do with it. Nothing.
>>> You seem to love to say that I do not understand how the accounting works. On the contrary, I am well aware of it.
As a CPA since 1981, I am saying it is obvious to me you don’t understand the concepts involved. That a person who doesn’t understand the concepts BELIEVES they do isn’t surprising.
>>> We have determined that we can not simply add 1.5 million to XM. If we want to take that path, we need to establish a payment for the service.
Nonsense. The overstatement by SIRI involves non-revenue generating subscribers. That’s the entire problem with them.
>>> If your desired goal is to get to apples to apples, you must conceed that a simple addition of 1.5 million subscribers to XM without any other adjustment does not get you there.
Personally, I can only go with the statement the company made. After years of not disclosing this figure the last two quarters they have elected to do so. They said that was the adjustment that needed to be made, and I suspect they are correct, and I (and you) certainly have no basis on which to challenge their statement.
XM managament said, “If we counted our subscribers like Sirius does, our figure would be 1.5 Million higher”. I just don’t know how it could be any clearer.
>>> Alternatively, I suggested another route of removing 860,000 subscribers from sirius, as well as the payment that Sirius has received for those subscriptions.
I think the figure is closer to 920-940K, but in principle, I don’t disagree with this. Although, removing the prepayment (a loan, basically) has nothing to do with it and in no material way does it affect the company’s financial position or results of operations.
hippo….
I fully understand the issue.
>>>>Xm has been very specific — if they counted subscribers in the same manner as Sirius, they would have 1.5 Million more subs.
If XM counted subscribers in the same manner as Sirius THEY WOULD NEED TO RECEIVE A PAYMENT FOR THEM. It is really that simple.
As I said, I fully understand the concepts here. You seem to not understand them. If you don’t get the fact that these subscribers are tied to a payment, it is little suprise that you are taking the stance you are. XM does not count them because they can’t. They can’t because there is no payment.
>>>>>>Nonsense. The overstatement by SIRI involves non-revenue generating subscribers. That’s the entire problem with them.
Whether they are non-revenue generating is not the issue. The issue is whether a subscription has been bought. Try to follow along. A subscription was purchased, and thus a subscriber is counted. The revenue part of the equation follows suit. Again, this is quite simple. You seem to be confusing the payment with revenue.
>>>>>Personally, I can only go with the statement the company made. After years of not disclosing this figure the last two quarters they have elected to do so. They said that was the adjustment that needed to be made, and I suspect they are correct, and I (and you) certainly have no basis on which to challenge their statement.
It is amazing that you fail to grasp the situation, and are going to rely on what the company has said. You should know that you can not count a subscriber unless you receive a payment. XM knows this as well. Of course they are not going to walk you through all of the metrics. They were quite selective. They mentioned that SAC and churn would improve, but never mentioned the negative impact on ARPU. You should know that there would be an impact to ARPU, but because XM did not mention this, are you trying to pretend it does not exist?
You are really reaching here.
>>>> As I said, I fully understand the concepts here. You seem to not understand them. If you don’t get the fact that these subscribers are tied to a payment, it is little suprise that you are taking the stance you are. XM does not count them because they can’t. They can’t because there is no payment.
This is a crock. Sirius counts non-revenue generating subscribers, but XM “can’t”? XM has chosen NOT to, while Sirius chosen to count them. It is that simple.
You are totally confused about the concept of revenue versus payment. These are two different, unrelated items. That SIRI is getting a payment before the car is sold has NOTHING WHATSOEVER to do with their decision (or ability) to count these subscribers. When the payment is made has nothing to do with the issue. It could be made a year ahead of time or a year later. It just doesn’t matter.
>>>>> Whether they are non-revenue generating is not the issue.
You seem to be confusing the payment with revenue.
Ha. That’s a laugh. you do not comprehend the issues. It is pointless to argue this with you.
>>>> It is amazing that you fail to grasp the situation, and are going to rely on what the company has said.
Of course I am. XM’s management (unlike SIRI’s) has no history of misstating results. Unless there is some reason to doubt what they say, I’m going to take their claim at face value.
>>>>>>That SIRI is getting a payment before the car is sold has NOTHING WHATSOEVER to do with their decision (or ability) to count these subscribers. When the payment is made has nothing to do with the issue.
The payment is exactly why they count the subscriber. There are cars with installations and NO PAYMENT tht are not counted. I would suggest you refer to the reports issud by Sirius.
“Our subscriber total include subscribers under our regular pricing plan; subscribers that have pre-paid, including payments received from automakers for prepaid subscriptions included in the sale or lease of a new vehile……”
You simply need to understand that is is the payment that differentiates a DCX install from a Subaru install, and why one is a subscriber earlier than the other
>>> The payment is exactly why they count the subscriber. There are cars with installations and NO PAYMENT tht are not counted. I would suggest you refer to the reports issud by Sirius.
Sorry, you don’t understand the issue. Never have, and apparently, never will.
hippo…..
I fully understand.
The subscription is because they get a payment. How do you account for Mitsubishi, Subaru, etc. not being counted? You can’t.
It is really that simple. I would suggest you make some calls. Your stance here is way out of whack
>> I fully understand.
Obviously not.
>>> The subscription is because they get a payment. How do you account for Mitsubishi, Subaru, etc. not being counted? You can’t.
Nobody disagrees about the counting of subs that are revenue generating only. Both companies policy is the same on this issue.
Where they differ is WHEN the counting happens — in XM’s case, subs are counted when the subscriber becomes revenue generating. In SIRI’s case, the promo subs are counted MONTHS before (on average, 4-6 months) the first nickel of revenue is generated.
>>> It is really that simple. I would suggest you make some calls.
I don’t need to make calls. The documents describe the process adequately. If it were so simple then you would probably understand it.
hippo…
You say that it is when they are counted, and tie it to revenue. That is only part of the equation.
XM counts subs when they receive payment for them. That payment happens to coincide with when the sub generates revenue. In point of fact, for 33% of the time a GM promo is counted as a subscriber there is no payment at all because XM covers one of the three months.
Sirius counts when they receive payment for a subscription. That payment will become revenue when the services are delivered.
These companies sell subscriptions to a service. The service they deliver is satellite radio. When a subscription is bought, what would you like to call it?
Accounting firms seem to comprehend this with relative ease.
Additionally, only a few days ago you were arguing that this payment happens 3 to 4 months in advance of the car being sold. Now you are saying 4 to 6 months. I already provided you chryslers inventory numbers which are at 74 days. Somehow now though you arrive at up to 180 days.
>>> I already provided you chryslers inventory numbers which are at 74 days.
You may want to check on the actual number of days between manufacture and sale, not the days held in DCX’s FG inventory or in dealer inventory. You have to combine the two figures to get the real picture.
3-4 months when sales are moving well, 4-6 months when they’re slow. The average changes from month to month.