By Relmor Demitrius
In this preview of the much anticipated Sirius XM Radio (NASDAQ: SIRI) Q3 Conference Call, I will address what many investors feel will be important factors in determining whether Sirius XM’s third quarter results are considered a success, neutral, or if it has points of concern. In analyzing any company’s balance sheet, a clear history of their past performances compared to current results is important. Apple (NASDAQ: AAPL) making $1 a share is considered a failure, while Sirius XM making $1 a share would be considered the biggest financial turnaround in the history of the market. It’s all perspective. A wise man once said, perception is reality.
This is mostly true, but a more important factor is whose perception of reality we should be concerned with here. Retail investors? Retail investors do control to a degree short term price movements on high volume, this is true, but for true value and sustained gains most experienced investors know its big money that moves the markets. Especially any one stock. Huge institutional interest (Sirius XM did indeed gain a higher percentage of ownership through institutions from Q1 to Q2, and I would expect this to be a trend as long as the stock price is low and the company continues to improve) moves stocks and keeps them stable investment vehicles.
The best thing to do in 2009 was to just give up on guidance as a clear indicator, as the economic environment was very hard to gauge accurately across the boards. Rather than miss on guidance completely, and not really have it be a problem with the company itself, companies (Sirius XM was one of these companies, choosing instead to only give guidance on a popular metric of valuing media companies, EBITDA (earnings before interest, taxes, depreciation and amortization)) just stopped giving guidance.
Mel Karmazin, CEO of Sirius XM Radio, has given guidance on only EBITDA, at 400 million dollars. The company has already realized around half of this estimate, with Q4 still looming, and historically (I have no reason to believe this year will be any different, and with so many new revenue streams) Sirius XM’s best earnings quarter, this target is well within reach. I feel it is time for companies to start giving out earnings guidance again, and they are. Sirius XM needs to follow suit. Give some guidance now, and surprise some people with it.
One year after the merger, with now solid financial footing (and even possibly making money now) I think some guidance is warranted from management at this point. It will help stabilize the stock price, and add support to existing levels. If using EBITDA guidance as a media company, current prices are too low. If using a typical P/E ratio many technology and global growth stories can receive (see Steve Garcia’s article Sirius XM Radio and Liberty Media Pursue Other Markets), 50 times earnings are not unheard of. So whatever method we use, it isn’t as important as what institutions and Wall Street are going to use, and more importantly what they will be looking at with this company.
The number 1 metric Wall Street wants to know about is subscription totals. With heavy debt loads and a cost heavy business model (although shrinking now due to merger related synergies), when you are on the cusp of making money (Sirius XM actually achieve free cash flow this year, before accounting charges, etc..) it is important to show your potential investors you have the ability to grow. Companies can only cut expenses so much. At some point higher revenues are going to be the answer. And obviously with more subscriptions would come more revenue (it is a subscription based business model after all with some advertising revenue).
Earlier this year Liberty Media Corporation (NASDAQ: LINTB) CEO John Malone, who is now on the Sirius XM board of directors, and also the intellectual genius behind Liberty’s success, owns a 40% stake in Sirius XM due to loans given to Sirius XM in February of this year. Mr Malone declared that Sirius XM needs to “grow themselves” out of debt. Greg Maffei, CEO of Liberty Media (formerly CFO of Oracle (NASDAQ: ORCL) and Microsoft (NASDAQ:MSFT), and a huge proponent of the Sirius XM business model) has reiterated this point at a Goldman Sachs investor conference in September, as well. If Wall Street is going to listen to anyone on the inside of this company, it’s probably going to be these two gentlemen. So the stakes have been laid, declarations of a solution presented: Growth.
So the number 1 question will be, Sirius XM, are you growing?
I have that answer for you here hopefully. Let’s take a look at the numbers. Sirius XM adds subscribers in one of 3 major ways now.
Through the new car market (and used car market as well now), retail radio sales (over the counter sales), and through various internet offerings. New car sales are the major provider of new sub growth. Sirius XM is enjoying right now, according to Mel Karmazin, a penetration rate into the new car market at around a 52% clip, minimum. In the latter half of 2009, he was stated as saying it would be in the “upper 50’s”. Due to Cash for Clunkers injection of car sales, these subscriber numbers got a nice shot in the arm this quarter. Since Q3 is indeed in the latter half of the year, I could use a 55% penetration rate. Since lower penetration models (lower cost cars) sold well during this stretch, we should use something lower to be more accurate. The churn rate for Q2 was at 2 percent (meaning every month Sirius XM loses 2 percent of their total subscribers). It was 2.1 % earlier in the year, so let’s use the higher of the two, to be safe.
18,413,435 total subscribers going into Q3. Remove churn and you are left with a loss of 1,160,040 using a churn of 2.1%. Due to improving economic conditions, and bankruptcy scare well behind them, as well as channel changes well into effect now, and internet charge being almost 2 full Quarter in now, I believe this rate has topped out, and may even reverse this quarter. 1.9% would not surprise me. Let’s use 2.1 percent anyway though.
The new car market added 2,997,997 units in Q3, using a 53% penetration rate, would give us 1,588,938 sub additions for Q3. Due to added used car deals, and a strong used car market, I’m going to assume used cars at least added as many as they took away this quarter. I expect Q4 and Q1 of 2010 to be a significant increase in this area. So for now, we will make it a dead heap. Additions from this avenue would not surprise me, however.
Retail subscribers have been dropping as well. In Q4 retail lost 131,333 subs. In Q1 they lost 368,061 subs, and in Q2 they lost 301,295 subs. Most of these losses came from new car owners cancelling old radios, upset consumers over XM lineup changes after the merger, and terrible economic conditions. Plus, no new or innovative radios emerged from Sirius XM due to the long merger delay. That issue is now laid to rest, as Sirius XM launched a series of new radios this year, including the exciting XM SkyDock for use with an Apple Iphone or Ipod/Itouch system.
No one has officially stated this is an Apple “partnership” between the two companies, but it’s been hinted at by more than one reputable source that this is indeed the case, at least to a small degree. Considering the Skydock is on sale in Apple Stores around the country, I don’t think this is too much of a stretch.
Even though the retail sub numbers and conditions and environment for retail sub losses are easing, and improving, I’m still going to give them an estimated 200,000 retail sub loss for Q3. Economic conditions are still bad, and improvements in the retail sector might not show fruition till later quarters.
The Sirius XM Radio Iphone application was introduced in July of 2009, to much fan fare and excitement. Over 1 million people downloaded this app, and probably many more by now. I don’t credit many new subs coming from this avenue, but some must have bit. I’m going low here, and adding 20,000 new subs from the Iphone app. Very low cost sub additions, and very little cost to acquire, so any help here is huge. Iphone app address’s consumer retention and value, as well as getting more revenue for the internet upgrade the Iphone requires of existing subscribers.
Let’s summarize.
Now we know how subscribers are calculated let’s see what we have: 1,588,938 total new subs from new car market.
Churn indicates Sirius XM will lose 1,160,040.
Subtract 200,000 retail sub loss to this net.
Add 20,000 for Iphone app, and other applications.
Used car market will break even, possible adding subs on this metric.
So I am predicting a net sub gain of 248,898, bringing the total subscriber total to 18,662,424.
Next most important issue in my mind will be earnings. As will all companies, in the end, this is all that really matters. Did you make money? I will address this tomorrow, in part 2 of my 3rd Quarter preview.
Also will discuss….
Cost
Revenue
SAC
ARPU
Best most resonable Earnings preview I have read…anywhere….
Very conservative approach…and balance. I am thankful to be able to read this and look forward to the second part of the preview. I know it is not easy dealing with company numbers….thank you for all your hard work.
Good sound reasoning and yes it is about show me the money time..this bussiness model is expanding out from OEM auto’s ,still bread and butter for subs,but SXM needs more rev streams to grow and prosper and finally they are attacking with a plan..Excedllent article,keep these types coming,but as always show negative side also,there are some..
I like the conservative approach. It really looks like you are trying to come up with an acurate estimate. Rather than offering hype, your conservative estimates all seems very plausable. Looking forward to part 2.
Thanks for the efforts on the estimates. Although you have a lot of “probably’s” and “let’s go with’s,” I think your numbers seem reasonable.
It’s too bad the CPO program is going to result in a “dead heap.” That doesn’t sound good!
I expect higher sub numbers. Good article though.
@brad
I could have used other diction, but the concept is the same. There is literally zero chance of me ammending statements on a “preview” to read… this will be for sure… this will be the exact number.. i guarantee this….Then I would be a fortune teller, and I would just tell you what the numbers would be.
Thanks for the comments, I understand what you are saying though, just realize there is no other option. Some bloggers wont even explain their thought process’s on how they pull numbers out of the air, I wont do that to you.
Nice work here. Thank you! I do think the subs could be a little higher but we will know tomorrow.
Very sound non- fluff info! So what wee are looking at is where the economy is headed. Sirius Xm has cut the fat off the bone, set up new ways to sell their goods and positioned themselves to be a strong winner when the economy turns around. Sirius Xm has restructered itself to hold it’s own during these tough economic times with maybe some improvment moving forward. This solidifies in my mind a long position attitude is very sound thinking. If we get a pop in the short term that’s even better. But stepping back an looking at the overall picture it seems to come down to the basics. Sirius Xm out of survival has cleaned up a lot of the waste, taken advantage of the merger synergies, while taking off the blinders by looking for new markets. All in all they are doing what they have control over to refine the company, know for this company to really prospure it comes to what is out of their control, the economy.