Sirius XM Satellite Radio (SIRI) has announced that they will discuss their Q2 2011 operational results on a conference call set for August 2, 2011 at 8:00 AM. Investors can tune in to listen to the results by visiting the Sirius XM website, or by tuning in to channels Sirius channel 94 or XM channel 141. The call will also be available on the Sports Nation 2 channel on Sirius XM Internet Radio and through the Sirius XM Internet Radio.
With the conference call date now set, it is time to consider what the company may say, and where surprises may be. In my opinion one surprise that investors may see rests in the Subscriber Acquisition Costs (SAC).
In March of 2011 there was a natural disaster in Japan that carried a dramatic impact in the auto sector, and specifically to some of the Japanese brands of cars. As investors are aware, Sirius XM relies heavily on the auto sector to supply promotional subscribers for the service. In order to get satellite radio the company subsidizes the installation of satellite radios into cars. Roughly 60% of all new cars manufactured are equipped with satellite radios.
As my readers are aware, there are three distinct types of deal in the auto channel that impact Sirius XM's metrics in differing ways. Some manufacturers pay for a promotional subscription when a car is produced (Leading Subscribers), some when a car is sold (Point-of-Sale subscribers), and others when a promotional subscription expires and only if the consumer elects to keep the service (Trailing Subscribers).
These differing dynamics can impact SAC. Sirius XM reports SAC costs in an overall manner, and in an average per gross addition. The SAC per gross addition is the metric that most people use to gauge what the company is paying to bring on a gross subscriber addition.
This brings us to the dynamic where we will see a surprise in the Sirius XM numbers. To understand the story behind the SAC change gives a savvy investor an advantage over a typical trader.
The disaster in japan impacted the mix of Leading, Point-of-Sale, and Trailing promotional subscriptions. Typically we see a balanced blend from these three groups with each getting about 1/3 of the action. In Q2 we saw the Leading category have a share over 40%, while the trailing category was down well below 30%.
The Leading category [manufacturers such as Ford (F) and Chrysler] provides gross subscriber additions during the quarter. The Trailing category [manufacturers like Toyota (TM), Nissan (OTC:NSANF), and Hyundai (OTC:HYMTF)] provides gross subscriber additions from the previous quarter. With a distinct shift away from Trailing and toward Leading, the gross subscriber number will be artificially higher than the norm.
While the SAC number will be in line with expectations, and even slightly higher, the SAC per gross addition (the average number) will be lower. This happens because the Sirius XM gets the instant benefit of a larger amount of radios in cars from the Leading category, while also getting the benefiot of numbers provided by the Trailing category from Q1 (before the disaster in japan). In essence we are seeing a pull ahead in the Gross subscriber number from the leading category that was able to produce more vehicles for sale in Q2, while the contribution from the trailing category is normal because of the three to 4 month lag in this category supplying gross subscriber additions.
For this reason, the SAC per gross addition will be lower and show distinct improvement in the Q2 numbers. In theory, we will see an opposite swing happen in the Q3 numbers a few months from now.
A savvy trader will see this good news in the quarterly report and will be able to capitalize on it, knowing that at some point the condition that created this dynamic will correct itself later on, setting up yet another advantage for the trader in the know. This play will be accentuated if the street jumps onto a lower SAC per gross addition number as a sign of positive moves by the company.
Last quarter Sirius XM reported a SAC per gross addition number of $59. If the temporary impact of the Japan disaster brings this number to below $54, the likelihood of the street overreacting to this number is good. Play the news, but understand the mechanics behind it.