With the second quarter having recently ended, there have already been many articles on Seeking Alpha about just what Sirius might report. Not only will there be the results of revenue, earnings, free cash flow and subscriber activity, but there will be an expectation of what changes might be made with respect to guidance for the remainder of the year and what will be disclosed during the conference call. Spencer Osborne just predicted that there will be an increase in subscribers "north of 400,000" based on an analysis of auto sales in Q2. A couple of days earlier, Cameron Kaine concluded: "Sirius is notoriously cautious when it comes to guidance..." and "... I expect guidance to be raised, and for the stock to respond with a price target of $2.75." And in late June, Rocco Pendola wrote an article titled "What to Look for on Sirius XM's Next Conference Call"
Keep in mind the initial guidance for 2011 from the year end press release, where Mel Karmazin said:
With continuing improvements in auto sales, and self-pay churn and conversion rates for 2011 similar to our strong performance in 2010, we expect to grow our net new subscribers by another 1.4 million in 2011, continuing our track record of solid subscriber growth. We also expect this year's free cash flow to approach $300 million.
During the 2010 year end conference call when Karmazin was asked whether the subscriber growth was conservative, he replied:
...But we certainly are thinking of a SAR number that is around the mean number today, which is about the 12.5 million and that's where the numbers seem to fall. You should assume that if, in fact, the car sales are greater than that, then our subscriber numbers will grow.
Also, keep in mind that during the Q1 conference call, Mel Karmazin said:
Our outlook for free cash flow for the full year has improved, and we now expect it to approach $350 million compared to our prior expectation.
So what is now in store for the second half of the year? Will Sirius increase guidance again?
As those that have read my previous articles are aware, I tend to be more conservative in my outlook. My expectations for positive surprises are minimal. Management might do a repeat performance of Q1 and modestly increase the free cash flow guidance. It is an area where there is some control, and certain expenses and expenditures can be cut or postponed, and that could move the stock. There could be comments about the recent used car deal with GM, Satellite Radio 2.0 or plans for the use of their free cash flow that also have the possibility to move the share price in the short-term.
I am a relatively long-term investor, and I will be far more interested in learning about revenue growth. Since a price increase is not on the table for this year, I will be looking closely at the subscriber activity, the self-pay monthly churn rate and the conversion rate that Sirius will report. These are the factors that will drive the revenue for the remainder of the 2011.
The 10Q subscriber activity reported for the first quarter showed a solid performance with gross subscriber additions of 2,052,367. It was noted by David Frear, Sirius VP of Finance on the Q1 Conference Call:
Total subscriptions increased by 1.6 million over the first quarter of 2010. Self-pay subscribers were up by one million over the prior year at 16.8 million while trial subscriptions were up about 600,000.
If you include unpaid trials, we finished the quarter with more than 4.8 million total subscriptions and trial, an increase of approximately one million from the prior year, reflecting the strong recovery displayed by the auto industry over the course of the last year. That's one million more self-pay subs and one million more subscriptions and trial than we had one year ago.
I view the trial info as a double-edged sword with positive and negative implications for the second quarter subscriber data that is going to be reported. The 3.8 million paid promotional subscribers, as well as the other 1 million unpaid trials, represent a significant pool from which new self-pay subscribers will be drawn. It is also a pool that will be contributing to a significant number of deactivated subscribers - the Sirius euphemism for cancellations. The 10Q reported that there were 1,679,303 deactivated subscribers in the first quarter. That is a HUGE figure. It straight line annualizes to 6.7 million cancellations and would be a new high for Sirius. I am actually anticipating cancellations will exceed 7 million this year, as the spike in paid promotional subscribers declines to 3.5 million. It means that Sirius needs to come up with at least 8.1 to 8.4 million Gross Subscriber Additions to achieve the targeted subscriber growth of 1.4 million referenced in the year end press release. Where will these subscribers come from?
If the 8.1-8.4 million Gross Subscriber Additions were all to come from new car sales, and if 60% of new car sales come with a SiriusXM radio, new car sales would need to be 13.5 -14.0 million. I don't see that happening, so they need to be made up from other channels and marketing programs.
WardsAuto.com reported that:
Unlike May’s dip below trend, largely attributable to Japan-based auto makers’ inventory shortages, June’s results suggest an industry-wide slowdown." and "June deliveries brought U.S. LV sales for first-half 2011 to 6,310,655..." and the article concluded with "In the face of such volatility, buyers may be opting to defer purchases until the market situation stabilizes.
Additionally, there are still ongoing power related problems continuing in Japan. The Epoch Times reports:
Three months after the triple disaster earthquake-tsunami-nuclear meltdown struck Japan, the Japanese car industry is still crippled by the limited electricity supply. The car manufacturers are altering production schedules and hours to relieve the pressure on Japan's power grid.
As I noted above, Cameron wrote: "Sirius is notoriously cautious when it comes to guidance..." With all of these auto issues still out there, I'm guessing a cautious Sirius management won't be increasing guidance above 1.4 million new subscribers. For investors with a longer term horizon, these issues should only represent a pause in the Sirius growth story, and I am still looking for significant appreciation by year end. I wouldn't mind be wrong about that pause, though.
Disclosure: I am long SIRI. I have no positions in any of the other companies mentioned. I have written Jan 2012 covered calls against a majority of my position, including 300 contracts at a $3 strike price. I may close out my call positions or write additional calls at any time.