Investors already know that Sirius XM (NASDAQ:SIRI) will report strong subscriber growth when it releases results before the bell on Thursday. We know this because Sirius already announced it passed 30 million subscribers and had its best first quarter in total net adds since 2008. With the release of that news, the shares moved up a few pennies, but the price remains at approximately $4.00, unable to exceed the price of ~$4.20 first reached in October of 2013. This is despite growing its self-pay subscriber base every quarter for nearly eight years.
It can be endlessly argued whether the shares were overvalued in October of 2013 or whether the shares are undervalued today or whether it is a combination of both. My own view is that they were significantly overvalued in 2013 and are currently towards the low end of a range that I consider fair value. That view is subject to change, especially if the company can begin to demonstrate progress in two areas: Connected Vehicle Services Revenue ("CVS") and Average Revenue Per User ("ARPU").
Despite CVS being a separate entity within Sirius, the company has never reported CVS revenue, expenses or profitability. Investors willing to take the time can track the CVS subscription revenue each quarter by subtracting the subscriber revenue used to calculate ARPU from the total reported subscriber revenue. We will, once again, be able to calculate that figure when the earnings are released and compare it to previous quarters. For those interested, the year earlier Q1 CVS subscriber revenue was $23,089,000 and the fourth quarter of 2015 was $25,428,000.
It is also important to note that the revenue has been much more erratic than the Sirius radio subscription revenue which has shown more consistent quarterly growth. So, while the $23,089,000 in Q1 of 2015 was significantly higher than the 2014 Q1 figure of $18,632,000, it was down from the Q4 2014 figure of $24,884,000.
While these figures are not the total CVS revenue, it is the only data the company has chosen to provide. Ideally, at some point, investors should see consistent sequential quarterly growth.
The other key metric to look at is ARPU. Sirius regularly offers significant acquisition and retention discounts to acquire and retain subscribers. This is one of the major reasons that investors will rarely see revenue increases that reflect the posted increases in subscription rates. From the company 10-Ks and 10-Qs we find statements such as:
Subscriber Revenue includes subscription, activation and other fees.
- 2015 vs. 2014: For the years ended December 31, 2015 and 2014, subscriber revenue was $3,824,793 and $3,554,302, respectively, an increase of 8%, or $270,491. The increase was primarily attributable to an 8% increase in the daily weighted average number of subscribers and increases in certain of our self-pay subscription rates, partially offset by subscription discounts and limited channel plans offered in customer acquisition and retention programs.
On Seeking Alpha articles about Sirius, it is not unusual to see comments about the discounts that current and potential subscribers are offered. Adding to the anecdotal evidence, at a recent dinner, a relative who had recently purchased a Subaru SUV was telling me about the discount offers she was receiving in emails and over the phone from Sirius (including those for $5 per month).
I was not surprised to hear about the discount, but I was curious about the method Sirius was using to contact new car buyers by phone (in addition to e-mails). (A settlement with 45 states over the company's marketing practices had limited phone contact.) When I asked about it, she said that the dealer pushed so many papers in front of her, she said she just kept signing without going through the fine print. More interesting was the length of her trial which she said was four months. It's not clear if the four months is the extra month Sirius gives itself to convert the typical three-month trials, or if Subaru has a special arrangement with Sirius.
Paid Promo Trials
However, what is an inescapable fact is that the length of paid promotional trials has increased over the years as both Ford (NYSE:F) and Chrysler (NYSE:FCAU), among others, have lengthened the paid trials on many of their vehicles. These paid trials are one of the factors leading to an increase in the number of paid promotional subscribers and the number of total subscribers. Q4 of 2015 was the first time that the percent of paid promo trials was above 18% of total subs since Q3 of 2013, the quarter where one OEM (widely believed to be General Motors (NYSE:GM)) opted out of the paid promo trial arrangement. In addition to the company losing an increasing number of self-pay subscribers to churn, it will also face losing an increased number of paid promo trials to cancellations - last reported at 60%.
While the revenue, earnings and any changes to the company's guidance will obviously be the immediate focus of the market, investors should also pay special attention to ARPU and CVS revenue. The ARPU will give an indication of how the company is growing its subscriber base. The level and growth of CVS revenue should tell us how the company is progressing in that area.
Disclosure: I am/we are long SIRI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to my long position, I have $4 covered calls written against a portion of my position and I regularly trade blocks of Sirius. I also may sell $4.50 covered calls against my uncovered position at any time. I may also decide to sell Sirius shares and buy one or more of the new tracking stocks at any time. I have no positions in any of the other companies mentioned in this article.