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When companies host their quarterly conference calls it is often more important for investors to "listen" to what management does not say than to focus on what they choose to emphasize. We can expect management to stress those factors that are positive and gloss over those that may have negative implications. There were many positives during the Sirius XM Radio (NASDAQ:SIRI) call, and management made sure to emphasize them. There were also some negatives, and it is the negatives that can often catch investors by surprise. This article will focus on two of those negatives.

Subscribers

Sirius XM had a good quarter in terms of adding subscribers. As new CEO Jim Meyer pointed out during the call:

Auto sales certainly provided a tailwind to our growth in 2012 with SAR climbing 12% in the fourth quarter to around 15 million and growing about 13% to 14.4 million for the full year.

That's important, since new car sales will drive trial subscriptions and eventually lead to self-pay subscribers. And self pay subscribers are the ones that tend to generate, on average, the most revenue.

However, as Spencer Osborne in a recent article pointed out:

Did you know that Q4 of 2012 actually had less subscribers than Q4 of 2011? That's right. Q4 of 2011 delivered 543,000 subscribers while this past quarter delivered 535.000.

So, despite these strong tailwinds and new car sales growth, Q4 subscriber net adds declined. Here are two more factors to consider. First, the company added only 6,198 paid promotional subscribers in the quarter. The 10Q's show that this was the smallest increase since there was a sequential quarterly decline in the third quarter of 2011. Why is this important? Because the paid promotional subscribers are a major source for future self-pay subscribers.

Sirius XM investors know that the company also has a lot of unpaid trials that don't show up in the subscriber numbers until they become self-pay subscribers. Not only do these free trials come from new car sales by many of the OEMs, but they also come from the used car channel, and knowledgeable investors know that the used car channel has been growing. So, if there is another source of trials for the self-pay subscriber funnel, what's the big deal? Especially with that used car channel increasing significantly. During the call Meyer stated:

Our used car trial program has now been implemented at over 8000 dealer locations across the country, including all of those run by many large retailers such as CarMax, AutoNation and Penske.

In an earlier article I discussed the growth of used car dealers in the program:

At the UBS conference, Frear presented a slide showing the growth in dealers participating in the program, increasing from 103 in Q1 of 2011 to 7,075 in Q3 2012.

Quarter

Q1 '11

Q2 '11

Q3 '11

Q4 '11

Q1 '12

Q2 '12

Q3 '12

# of Dealers

103

1,570

2,822

3,734

4,640

6,098

7,075

It's another strength, right? And Meyer also stated this about the number of trials from the used car program:

As we mentioned last year, we expected to do approximately 1 million gross adds in the used car channel in 2012. We surpassed this number and in 2013 we are targeting used car gross additions in the range of 1.5 million.

This also sounds great, since the used car channel is growing and the "gross adds" are growing, the total trials must be increasing. And, up until this quarter, they had been growing. On the Q3 conference call CFO David Frear had this to say:

We entered the year with nearly 5.5 million trials in the conversion funnel. Growth in new and used car sales has led to consistent growth in the inventory of trial subscriptions, which now exceeds 6.2 million.

The total trials had been consistently increasing. Here's what Frear said on the Q4 call:

Growth in new and used car sales has led to consistent growth in the inventory of trial subscriptions, which ended the year at 6.1 million.

Well, 6.2 million falling to 6.1 million is not consistent growth. Is it a one quarter aberration despite a strong Q4 and a growing source of used car trials? It's something for investors to keep an eye on.

Subscriber Acquisition Cost

Subscriber Acquisition Cost, or SAC, has been another metric that Sirius XM management has focused on.

SAC, per gross subscriber addition, is derived from subscriber acquisition costs and margins from the sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period.

While I have always had an issue with this particular measurement, Sirius XM management would proudly point to how this metric has been consistently falling. During the call, Frear said:

Subscriber acquisition costs were up 7% for the quarter and 8.7% for the year on the strong growth of new car installations while SAC per gross add fell $1 to $54 for both the quarter and year.

Well, to an extent this is true. The number certainly fell for the year, and compared to Q4 of 2011, it was also down $1. However, it was also UP from $51 in Q3. Even more curious is that the SAC for the nine months ending September 2012 had SAC at $55. Clearly there are some rounding issues, and several extraneous components that impact the number, but the number bears watching. It is the single biggest expense for Sirius XM at $0.5 billion. (The line item that combines "Revenue Share" and "Royalty" costs is larger, but each of those by itself is smaller subscriber acquisition costs.)

Summary

Subscriber growth was significant, but as Spencer had previously pointed out, less than last year's fourth quarter. Also, the funnel for new self-pay subscribers saw a small decline. These are factors that took place despite an aggressive ramp in the used car program and stronger new car sales. On the expense side SAC continues to be a major expense for Sirius XM and should be followed closely.

It is often the unexpected result that will damage a portfolio. Declining trials and increasing expenses both warrant close attention.

Source: Sirius XM - What Management Did Not Say

Additional disclosure: I also have January 2014 covered calls against a portion of my position and may open new positions at any time.