Where Sirius XM Gets Their Bread and Butter
One thing investors always need to understand is that a typical public company paints the picture they want you to see. There is nothing at all wrong with this, as human nature dictates that we seek out the good things and tend to avoid the bad. Further, we will often make what is marginally good seem better than it actually is in an effort to tell ourselves that we made the right decision. essentially we tend to want to justify our choices.
With Sirius XM there is sometimes a tendency to project upon the company expectations that simply are not reasonable. Investors also tend to try to find the focal point to watch instead of digging deeper and making the determination of exactly what it is that makes a company money.
For Sirius XM that is SUBSCRIBERS. It is SUBSCRIBERS that generate the cash that will lead to improved EARNINGS. If there are fewer subscribers, or those subscribers are paying less on average, the EARNINGS, REVENUE, and FREE CASH FLOW will all suffer. It is for this reason that tracking what is happening with subscribers is still important even though Sirius XM management would tend to focus people on cash flow and EBITDA.
That focus is great as long as your expectations on subscribers are met. It is actually impossible to build a realistic analytical model for Sirius XM unless you start with the BREAD AND BUTTER of the company…SUBSCRIBERS. Ever since the day that I “dared” to point out that there is perhaps an issue with 2011 subscriber guidance I have been under attack. As I laid out the facts, people seemed to rethink their stance on the issue and came up with statements such as, “they may miss by a little bit, but that is not a big deal…2012 will be huge”. The problem is that HUGE YEARS have been projected and then put off until next year for years now.
I have even seen some project that Sirius XM will meet their guidance while at the same time projecting that gross additions for Q4 2011 will be at 2,250,000. Apparently digging deep is just not in the DNA of some people. Consider this:
- Deactivations last quarter were at 1,804,000.
- The company needs 442,000 to meet guidance.
- If the company keeps churn rate (on a percentage basis) exactly the same the deactivations number will be higher than 1,804,000 this quarter. This happens because the number of self-pay subscribers is higher (i.e. if a company had 1,000,000 subs last quarter with a churn rate of 5%, then 50,000 would deactivate – That same 5% applied to 1,100,000 subscribers would mean deactivations would be at 55,000. The churn rate stayed the same, but the absolute number rose).
- If the projection is 2,250,000 gross additions, and the company is going to meet guidance, that would imply that deactivations will need to be 1,808,000 (only 4,000 more than last quarter). Meanwhile since mid 2010 deactivations has gone up every quarter, from 1.4 million in Q2 of 2010 to 1.8 million in the most recent Q3. That is a jump of 400,000 deactivations or an average jump of 67,000 per quarter. Is it realistic to think that Sirius XM will announce a decline in deactivations in Q4 2011? Not without raising eyebrows. Essentially, anyone who projects that the company will meet guidance, AND projects that gross additions will be 2,250,000 is saying that the company will somehow find a way to improve churn to a point that absorbs 67,000 (bringing it down substantially), and/or implement retention programs that bring down the value of a subscriber. These are things investors will want to know sooner rather than later. The short term investor needs to know because a potential guidance miss adds risk. A long term investor needs to know this because if you are tracking your investment you are making an assumption of a certain level of growth when it may actually be lower.
The biggest point here is not whether or not they hit the number, but the way in which they hit it. If it happens through natural growth then that is quite acceptable. If they hit the number by devaluing subscribers, then that could bring a problem. As we look to 2012 investors are excited about a year that includes a price increase, limited capex expenditure, and limited debt issues. This could stack up for some wonderful news on the EBITDA and Free Cash flow metrics. As long as the subscriber picture shows reasonable and valuable growth, it will indeed be a stellar year for the company. If the subscriber picture (THE BREAD AND BUTTER OF THE COMPANY) is slow to grow, then that presents a long term issue that should be considered.
With a price increase the company has a lot of new and built in wiggle room. Trying to determine what that wiggle room is the trick. What if ARPU would normally rise $0.15 cents in a quarter, but because of retention efforts and discounting it rises $0.10? The reason this potential wiggle room exists is because it will take about 2 years for the company to fully realize the price increase due to prepayments of consumers locking in at the lower rate for a long period of time. As long as the company guidance takes that into account, and investors temper their expectations, there is no issue. Keeping subscribers, even at a lower rate, is part of the business.
In summary, the subscriber number is the most important metric of this company. It is the very foundation of how Sirius XM makes money. It is an essential ingredient of Earnings, Free Cash Flow, and EBITDA. Having the ability to accurately model subscribers gives you the heads up as each month passes. Waiting for Mel Karmazin to announce EBITDA, Free Cash Flow, etc. each quarter gets you the information later than you need it. In order to analyze this company one MUST be competent at looking at the subscriber picture, or know where to find that information.
One thing that I learned long ago was to try to drill down to the root of an issue. Only by understanding the basic components will you be able to have success in making informed decisions. The way you do this is to collect, study, and analyze the numbers, not by pulling a number out of thin air. Yes, it takes time, but in the end you will be much better informed than if you say gross additions will be 2,250,000, the company will hit guidance, and ignore what it takes to do that.
Long ago, in another article, I said time and time again that Sirius XM needs gross additions of over 2,300,000 if they want to hit guidance. I also stated that reasonable deactivations would be at 1,875,000 (with 1,850,000 being a reasonable low end). My opinion is that the mix of auto sales (the raw sales and production figures) were not as helpful as they could have been. Production is less than Q2, trailing suppliers were less, and point-of-sale suppliers is substantially less. In addition, the failure of the company to get out the Lynx put a damper on retail. The company can indeed meet guidance, but we as investors better hope it is because gross additions are up over 2.3 million rather than deactivations going down to 1.8 million.
The simple lesson here is that only a fool would ignore the subscriber picture in a business that has subscribers as their bread and butter.
Overall, it would be stupid to argue that subscribers are the bread and butter. The more and the cheaper siri gets them, the better off is the entire financial picture of the company.
I have been watching siri very closely this quarter. Literally watching TV with Sirius/XM. As you know, siri ads are used to be few and far between in the past three years. This December was awash with sir’s commercials. They ran an ad even during the prime time of the Republican debate in Iowa. GM ran a ton of ads with siri. It appears that Mel is taking the target of meeting 1.6M sub target very seriously and open up the lid of his money coffer a little bit.
As you know, Mel can squeeze money out of a rock and tighten the belt so hard that no one would spend a single penny without thinking twice. So far Mel has made tons of money due to savings. But at the end of the day he needs more subs via economical acquisition. This is a tough balance to maintain. I do believe that due to a relatively strong ad campaign, high enough Q4 OEM numbers, more aggressive penetration into the used car market and much better consumer spending during this holiday season than in 2010 Mel has a strong chance to meet the target via retention and new subs acquisition while maintaining the ARPU balance.
You keep saying that it is a routine event for Mel to show up at media conferences. Not exactly. He sent Frear many times. The fact that Mel is taking pains to show up at the Citi Investment Conference on the 4th of January (that early in the year where he could be on a winter break doing something else) may be very well indicative that he is planning to make a few important announcements. Of course I may be wrong but this is my hunch. The good news is that we have only a few days to wait to find out.
Happy New Year and keep writing “fair and balance posts” having in mind that there are still a lot of folks smarter than you (just joking!!!)
I think your first sentence is off a bit.
Mel and the company meet with these banks all if the time. A lot if these meetings are never even publicized. Mel will speak about 3 or 4 times a year. That was the only point I was making.
My mensa membership is in good standing…lol
My first sentence basically says that it is hard to argue with your point and do I agree that manageable sub growth is the bread and butter of the company at the end of the day.
By the way, the Lynx is out. The consolation sounds, per one real genius, as “better late than never”. At least this uncertainty going forward into 2012 has been removed. THE LYNX IS OUT!!! HURRAY! HURRAY! HURRAY!
I asked this in your Subscriber Challenge article 2 days ago, was a little late on posting and no reply. Hoping to get anyone’s input here:
“I’m constantly getting offers to come back for 6 months for $25, but it’s only good for an older specfic receiver that i don’t own anymore. I still have 2 active receivers.
A co-worker got the same offer for a car he doesn’t own anymore, but would like to use this offer for his new leased-car. SIRIXM said no and now he’s turned off with satellite radio.
Question: Why on earth does SIRIXM care what receiver it is? Why not just activate the bleeping thing and get a new subscriber?”
The company is offering a discount because the costs of that old radio have already been paid and accounted for in a quarter long ago. They could not apply such pricing to a new radio because it could be a money losing proposition and not help the SAC line.
If they were to offer it on any radio, they would risk losing money in the deal
Having followed and invested in SIRI over the past 7 years and to see the stock price to be sitting at its current levels, one can only look at Karmazins latest move and understand the real problem with the company, the much hyped (and i am sure ultra expensive) launching of satrad2.0 and the new LYNX is officially announced the week AFTER christmas? WTF is the matter with the total incompetence with MELVIN AND HIS CRONNIES and how can they possibly be part of the company?
Did it ever occur to you that the FCC might of held things up? Or how about an F*ing Tsunami in Japan? Ultimately Mel takes the heat but there are other factors to consider. Frustrating as it may be, at least 2012 has a little more clarity. Now they just need to launch their Satellite. Wonder if it will bring even more functionality.
flap….
what exactly would the FCC hold up? They have not held up anything at all.
Flap….I considered the Tsunami in Japan. In fact I wrote extensively about it. I also covered the floods in Thailand prior to anyone else.
Regardless of these things, the company will add about 1.6 million subs on auto sales of 12.8 million.
The satellite is not scheduled to include more functionality.
Well, it seems Mr. Matthews has his panties all twisted up over this. He says (These are his comments (unedited) that he wanted to submit here:
“by the way Osbourne, here’s a little more to upset you..man this has got to hurt…
Gross Additions
March 2009: 1,338,961
March 2010: 1,720,848
March 2011: 2,052,367
June 2009: 1,380,125
June 2010: 2,020,507
June 2011: 2,179,348
September 2009: 1,606,446
September 2010: 1,952,054
September 2011: 2,138,131
December 2009: 1,882,950
December 2010: 2,075,418
December 2011: 2,250,000 (Projected)”
Brandon…..Does not hurt at all. In fact it proves your overall ignorance when it comes to the company and the metrics. We all knew that you can not project things relating to Sirius XM. You demonstrated that when you projected 1.2 million NET additions for this past Q1. The actual number was about 900,000 lower than you thought it would be. Perhaps your overzealous projections are what make you so bullish on the company all of the time.
You provided gross additions….WOW….Deep research man! I would have never been able to find that information in the publicly filed 10Q’s myself. I mean really, It would have been beyond my ability to go to the sirius XM website, click on Investor relations, click on reports and filings, and set the filter to quarterly reports. REALLY!!!
Then This One:
“by the way osbourn…here’s the free article…man do I hope this gets out to all of your syndications…I am going to have a field day with it!”
He then links to his article telling people subscribers do not matter.
People are welcomed to visit his site and read it as he has made it free. I wont link to it here, because there have been many reports that free articles from his site wind up only being free for a limited time, then people have to pay.
Brandon, go ahead and spread that article anywhere you desire. The numbers in it, as well as the thesis, show that you do not have a clue.
Then This:
“Hey Osbourne…
You will eat these words, and I will see to it. Let me show you something. the rest of the world has seen this…I think its time you did. (alink to a chart showing gross additions, and other subscriber metrics)
Now…if I were you, I’d stock up on alcohol and precription narcotics. You’re gonna need em. by the way..I know you wont publish this…So I took a screennshot and will be posting it all over the place…by the way…the article you refer to without linking to me, is free and available to everyone…you might want to go read it rto see just how foolish you made yourself look with this.”
1. My name is Osborne, not Osbourne or Osbourn. Some day you may get it right.
2. Not sure what precription drugs are….perhaps you meant prescription. I have no need for them though, nor a need for alcohol.
3. I published this…..you were wrong YET AGAIN.
4. You are taking a screenshot… I really think it is fantastic that your computing abilities now include screen shots. You have come so far. You can post it all over the place as you pimp out your pay site all over the place.
5. Brandon, you are the one looking foolish. You are just not smart enough to see it. Then again, there is something to be said for the ability to live in complete ignorance.
Run along… there are certainly at least a few more suckers out there to cater to.
Spencer,
You are like a kid. How many times did I tell you not to get in a fight with a pig. You will both get dirty and the PIG loves it.
Take it easy and do not waste your time on this “siri must do r/s genius!” He has been wrong from day one.
This started when brandon tried to be a wiseguy and posted a comment in a snarky way. He was, as usual, shooting from the hip and way off base. He then went on and on, only to ultimately concede that my numbers are sound. At this point he decides to shift to a stance that sub guidance does not matter.
I am not sure what is more fascinating….the antics of brandon, or the fact that there appear to still be suckers that fall for his stuff.
They will hit a limit-if they pass comcast to be top dog and gross 3.3-3.5B, they only need to maintain to become solid company. Everything else will be gravy.
Enjoy reading your posts Spence–Happy New Year!
My 2 cents about SIRIUS for 2011—PR stats Lynx is out FINALLY!! Jeeze, someone blew their early 2011 marketing plans for this intro as any CEO would have wanted to have this out a month or so BEFORE Xmas in LARGE quantities-Mel had stated it was a 4thQ release in the spring–I didnt think it would literally be with only a few days left-It seems its release is still in limited quantities and they have missed the best chance to promote the crap pout of this new product and make some holiday sales-Unless this isnt considered a major product intro-Seems like we have been down this road before, no?
Subs will always be a factor as thats what the headlines will always read(see Direct tv, Dish, Cablevision) People want to know if the company is growing and subs show the trend–I do think the kety go forward is to lower those deactivations and increase by a large margin their used car efforts
We need a pleasant postive unforseen large surprise in 2012—Something no one saw coming that is a major postitive for shareholders and the company that Wall Street takes notice with–Ive been waiting for this for years now
Stay safe everyone
Shortly after the tsunami I made the point that all sorts of electronic devises would be negatively impacted by components shortages. Mel was asked to address the issue at the Q2 conference call and he responded that Radio 2.0 would not be effected…apparently a misstatement.
Whenever your much anticipated new product misses the Christmas selling season it is a negative. The FCC approval process was known ahead of time and was or should have been expected.
The question you should have been addressing is why the delay in the Lynx was not mentioned in the Q3 CC in Nov. There is probably a story there.
You took away a point I was going to make Sunday with this article. Nice job.
Duke
Brandon just keeps on trying.
His Comment:
“No..I simply suggested you look at auto production numbers…
you took offense to that and decided to take it to this level. Want those screenshots too?
I was very nice in the way I said it. you came back with some offensive topic about being smarter than me and spamming for clicks …. i dont need clicks. you have been a psycho since a suggestion was made.
Don’t put this on me pal. I have tried to mend fences with you for over a year. It’s all about YOUR ego.”
My Response:
Brandon, you did not “simply suggest that I look at production. You said something to the effect of, “UMMM….you may want to look at the most important category….production…production is up 75% among Sirius XM’s most important partners. A little research before you play on people’s fears would be good…Here’s a hint: (link to your website).
That was not simply suggesting something. You were being snarky, and thought you had done some “neat” research. The problem was that you had no idea what you were talking about, and no idea that the very quarter (Q2) you were saying would be easy to beat has SUBSTANTIAL differences than this Q4. The numbers prove that production is down from that quarter, as is the trailing category. The BIG PROBLEM is the point-of-sale category which will be off by 160,000 units or more. Thus, SALES, not production is the driving factor of why Sirius XM meeting subscriber guidance is a challenge.
It was then YOU that decided to post an article with bogus information. You then took that bogus information and submitted it to Trefis. That same bogus information was then sourced to Forbes. Forbes and Trefis BOTH edited your article so that it would at least have accurate figures….something which you did not bother to do.
As for me being smarter than you….You finally got something right. I am indeed much smarter than you.
You spamming for clicks….Yep, that is exactly what you do. You pimp yourself out wherever you can and violate policies of many websites in doing it. You have a sub site, but you also run ads. The ads get you money even if someone clicks on a link to some outrageous headline. Your hope is that people wont be able to resist and will pay you for the read. You do need clicks….because without them you are out of business. Instead of having a site and working for a living, you want to sucker enough money out of people so that you can do a website full time. Me….I just do what I do, and realize that the money isn’t anything to write home about. I do not spam anyone, nor do I run around to message boards dangling teaser carrots in front of people.
You have tried to mend fences??? Dude, after what you did, and continue to do you expect me to mend fences with you. Do you have any idea how many people leave your site disgusted and go on and on about how you obsess over all of the other sites, spend hours slamming other sites instead of doing research, and apparently have conversations with screen names you created?
Brandon, you will never be successful, because you are not capable of seeing things from the proper vantage point
Talking about price increases makes me laugh and wonder about the intelligence of those considering it a major factor. A black cup of coffee, depending where you are, can be the same cost as 4-7 days of SiriusXM.
Speaking as a traveler, I wouldn’t bat an eye at paying $20/month for siri. It’s worth it as a tool and a boredom killing entertainment device.
How is it a tool? Access to CNBC and Bloomberg has made and saved money for me while traveling. On two trips, the weather and traffic channel has kept me from driving into major tie ups.
On the financial side, look at siri’s labor factor. It is very low cost at around 1500 employees versus 23K at Clear Channel, the last time I looked. That may be lower now but it would still be a huge multiple to siri.
I agree that the subs. number should be what Spencer says if for no other reason than it protects the share price.
However, SiriusXM is a premium service and if it had to be marketed as such it could.
Look at the heyday of GM. Whether you had a Chevrolet franchise that sold lots of cars or a Cadillac franchise that sold fewer, you still made big bucks.
SXM has always stated that 2.0 would be released at the END of 2011. It seems that the company wanted to exhaust its stock of the older 1.0 receivers for the 2011 season. At some point those that have these now outdated receivers will opt to purchase the 2.0 version.
Everyone talks about sub growth, I’m wondering what SIRI’s breakeven point is (ie how many subs does it take to cover all expenses)? Could be tough to get the info with SIRI’s complicated capital structure, but I’ve never seen anyone talk to this. Not to say growth isn’t important, but a breakeven point would be interesting number to keep in mind.