By Relmor Demitrius
I can’t remember the last approaching conference call for Sirius XM Radio (NASDAQ:SIRI) that had this much attention. There is a lot of energy, excitement, and a general sense of relief coming from management and investors alike as long fought battles are being won. News of the NFL signing, Howard Stern, and any tidbit about new products will be the main focus on the new news front that might come from this conference call. Mel had promised that news of some sort would more than likely be announced before this conference call regarding Stern’s contract situation. The stock is on a tear of late, as debt towers that seemed insurmountable have all been removed (the latest finalizing just last week). The company has finally reported a profit to earnings and long ago reported positive free cash flow. Mel Karmazin (CEO of Sirius XM Radio) even mentioned the release of a brand new exciting product called Sirius XM 2.0. We can only speculate what this means, but hints by Mr. Karmazin in a recent media conference have left tons of fun speculation for investors and customers alike. So can their balance sheet be as exciting as the other news related to this company of late? After this latest 700 million dollar bond offering, the S&P and Moody’s credit agencies both have upgraded their general corporate ratings. Improvements are still being shown every quarter. This one is no exception.
Sirius XM already has announced that it has added 334,727 net subscribers during the third quarter. This brings their total subscriber totals to just less than 20 million. I did predict earlier that they would break this barrier by the end of Q3, but have probably already done it as I type this, considering how close they were, and projected to add at least another 200,000 in the last quarter of 2010. We saw the take rate increase to 48% (the rate customers kept the service after the promotion expired) from around 46%, and the overall penetration rate is near its 65% target of where Sirius XM would like to have it, as it tries to add subscribers with smarter penetration (meaning some class and models of cars do not receive pre-installed radios, or have similar choices of other models, etc…) These are encouraging and still improving metrics, year to year, and quarter to quarter comparisons. Since Sirius XM relies heavily on automaker deals, improved auto sales have really been helping Sirius XM add to their record subscriber levels during this quarter. As auto analysts keep raising future yearly car run rates, things look to only get better as well. The auto recovery is still in its infancy, so good things are yet to come.
The retail sector of subscribers (used car and over the counter purchases through dealers like Best Buy and Radio Shack) continues to shrink, but at a slower pace than a year ago. Retail losses were around 300,000 a quarter a year ago and today that is decreasing to closer to 200,000 on average a quarter.
ARPU I see as improving yet again. As more royalty charges hit even more new customers (the effect is now slowing drastically from when it began hitting subscribers) and more and more people pay for Best of packages, premium internet service, or additional lines this figure will only grow. It was at $11.81 in the 2nd quarter of this year and I expect it to be around $11.85 this quarter. Subscriber acquisition costs have hit a bit of a plateau on cost savings (huge initial SAC reductions were seen during the first year of the merger) but I still expect these to stay relatively low in a historical comparison. I see SAC coming in around $59.
Overall revenue should continue to show slight improvements as the economy improves and subscriber totals increase. This will bring in even more ad revenue. Mel Karmazin (CEO of Sirius XM Radio) in an expert at getting the most ad revenue out of the product. Since the product is generally billed as commercial free, there are clever and subtle ways needed to improve this figure. So far we have seen a steady increase in revenue from royalty charges, increased subscribers overall, and additional revenue besides subscriber fees.
On the cost side Sirius XM has made major strides over the years since the merger to realize some of these highly touted synergies that made the merger such a popular long term move with investors. I expect this to be a lower cost quarter than the 2nd quarter due mainly to the drop in net additions and gross activations that comes with lower overall subscriber acquisition costs.
Churn did see a small increase from Q2 to Q3 (1.8% to 1.9%) but this is minor compared to the increase in the take rate and overall growth in subscriber numbers. It is something to keep an eye on however, as the model works very efficiently at 2% or under.
Overall I see an excellent quarter with record profits, increased EBITDA, and free cash flow.
Revenue: 715 million
Costs from Operations: 555 million
Income from Operations: 160 million
EBITDA: 190 million
Free Cash Flow: 142 million
Earnings: 73 million
Earnings Per Share (basic): 02 cents (record)
Earnings Per Share (diluted): .01 cent
Guidance on EBITDA will be raised to 625 million this quarter, in my opinion, as EBITDA guidance from the beginning of the year will not be too close to hitting in Q3. This will force management to increase this number during the conference call.
Disclosure: Long SIRI