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For the past few years I have written articles on Sirius XM Holdings (NASDAQ:SIRI) after the close of each quarter. The company would release detailed information about its subscriber activity, average revenue per user, what percent of subscribers converted from trials to self-pay subscribers, how many self-pay subscribers canceled, how much money the company spent per subscriber on customer service and billing, etc., giving investors and analysts a lot to think about. This will be the first of several articles that will examine different aspects of the year-end data. (Others will look more closely at conversion rates, churn and ARPU).

As the company moved from a retail model to one where it subsidized the manufacturers to place its satellite radios in new vehicles and offer their customers free trials, some of the data became less important and new information was provided. For instance, new vehicle conversion rates became more important while retail data disappeared. There was also data supplied in quarterly reports and during the conference calls that shed additional light on the state of the business. This included the penetration rate (the percent of new vehicles manufactured that included a subsidized radio), used car conversion rates, total number of trials, etc. Surprisingly, one of the metrics that had been supplied in press releases and during the conference calls was absent in the most recent report - the total number of trials.

Total Trials

Total trials included both paid promotional trials as well as unpaid trials. At the end of Q3, the Sirius XM press release showed:

Total paid and unpaid trials grew by 247,000 from the second quarter of 2013 to 6.9 million.

It was an all-time high for trials. For the fourth quarter, the press release made no mention of the number of total trials. Instead the only mention of trials was about the paid promotional trials,

Paid promotional subscribers declined from the third quarter by 434,240 as a major OEM shifted to unpaid trials during the period, resulting in the one-time decline.

Is it important? I certainly think so. The trial funnel is where the overwhelming majority of future self-pay subscribers originate, and therefore an important factor in determining future revenue growth. And, I wasn't the only one looking for some additional information on the current state of trials.

Last year the company announced a low cost subscription package targeted at the Hispanic market. In August, Sirius XM hired "Eddie 'Piolin' Sotelo, Spanish-language radio's top personality." In October, the company introduced an extended free trial and launched his show:

SiriusXM introduces $5.99 "SiriusXM Espanol" satellite package

Fans can listen to his show at no cost with the "Piolin y mas" trial, through February 15, ...

...SiriusXM is offering access to Piolin's new show and channel, along with a suite of Latino programming, through a special low-cost satellite subscription offer and at no cost, for a limited time, online and through the SiriusXM App.

During the recent conference call, Jessica Reif Cohen of Bank of America Merrill Lynch was also interested in the status of the program:

And maybe you can hone a little bit in on things like content costs. Will they go lower? Maybe Scott can talk about what he's doing here. And one of the offers you announced last year was this Spanish language offer. Maybe you can give us some color?

CEO Jim Meyer responded:

The Hispanic segment is one that I personally have had a bugaboo about why we can't do better. And over time, I think we can, and that opens up a different opportunity to us, that may be a lower ARPU, but certainly a profitable profile for us.

Scott, do you want to comment?

Meyer really didn't add much "color" and Scott Greenstein, Sirius XM Chief Content Officer wasn't too interested in commenting on the offer. Instead, he ignored the question about the trial program and the $5.99 package and talked about bandwidth issues and content costs going forward.

It's not as though the company did not speak about trials at all. Some of the management comments included the following:

We now have more than 11,000 dealers reporting previously owned vehicle sales to us, and we expect the volume of those sales and the 90-day trials we offer to those buyers to more than double in the next five years. ...

Our Service Lane initiative has proved to be an early success. If there hasn't been an active subscription in a vehicle for a while, when owners service their cars at participating dealers, we can now offer those customers an abbreviated trial, exposing them once again to our ever changing and improving programming lineup...

...In 2013, new car buyers converted at about 44% and used car buyers converted at about 34%. We ran about 13 million total trials in 2013, and we expect this number to be over 15 million in 2014. Incremental penetration into more mid and lower end cars may cause a softening of conversion metrics, but with declining SAC per new vehicle, we are more than willing to take this tradeoff. ...
In both the new and used car markets, we are seeing increased numbers of sub-$75,000 households coming through our trial funnels.
... So right now we don't see a growth in the inventory of paid trial subscribers. We do expect the total funnel to grow a little bit, but we won't see the same kind of growth that we've seen in past years. ...
...I think on the used cars, ... we believe that additions from that business will approach 2 million in 2014, and I absolutely stick by that. It's growing nicely. We're off to a strong start, and I think it bodes very well for growth, particularly once the recovery then starts going through on kind of the future years, for really big growth. And then I do eventually believe that we will end up with more trials and more new subscribers from that segment than the new car business.

The company management spoke at length about the trial program, especially the importance of trials in the used car program. But, two important figures about the number of trials were missing: the current number of total trials and the success of the Hispanic trial program.

Total Funnel

Examine the comment by CFO David Frear, "We do expect the total funnel to grow a little bit, but we won't see the same kind of growth that we've seen in past years." Part of the lack of growth would be attributable to the dual effect from a slow-down in the growth of new car sales and reaching a plateau of the new vehicle penetration rate. Still, it is somewhat surprising that there won't be substantial impact from:

  • An increasing pool of used cars available from 11,000 participating dealers,
  • The introduction of Service Lane and the 2500 dealers already signed up in less than a year, and
  • The Hispanic trials.

As noted earlier, the last reported total trial funnel was 6.9 million at the end of Q3, 2013. Below are the total year-end trials for the past several years:

Total Trial Funnel in Millions
Year2009201020112012
Trials3.64.35.46.1

It is impossible to know what Frear considers "a little bit" of growth, but consider the comment by Meyer. "We ran about 13 million total trials in 2013, and we expect this number to be over 15 million in 2014." That would be a growth of more than 2 million trials for the year. Assuming an average trial length of three months, it would indicate that there should be more than 0.5 million incremental trials outstanding each quarter.

Summary

When trying to model the financials of Sirius XM, The first step is trying to determine the number of subscribers and how much it will grow during the coming year. A key leading indicator to subscriber growth is the number of trials currently in the funnel. It was disappointing that the number was missing, and more surprising that the analysts didn't think it was important enough to raise the question.

Sirius XM management may have had valid reasons to withhold the information. Perhaps the Hispanic trial program was a phenomenal success and would cause the total trials to be distorted by this one time event. Then, when the February 15th expiration date is reached, significant cancellations would take place. Perhaps not. The Hispanic trial could also be a dismal failure. We just don't know.

As most Sirius XM investors are aware, on January 3rd Liberty Media (NASDAQ:LMCA) made an offer to acquire the minority interest of Sirius XM. The offer is currently being evaluated by a board committee of three independent directors. The uncertainty of the outcome hasn't been much help to the performance of the stock.

And neither is some of the uncertainty about the trials and the future business of Sirius XM.

Source: Sirius XM: One Small Step At A Time

Additional disclosure: I actively trade SIRI. In addition to my long positions in SIRI, I have January 2015 $4 covered calls written against some of these positions. I may initiate new covered call positions or close out or open new positions in SIRI at any time.