Sirius XM Radio (SIRI) is set to report first-quarter earnings on May 1, 2012. This is a day that will set the stage for 2012 and thus carries a lot of importance to investors. What will rule the day are several wildcards that present a bunch of unknowns. When this happens, the company can either deliver news that is well received or deliver news that is not.
Some investors out there say that Sirius XM will do amazing. However, when asked to define what they would term as "amazing," they back off and simply won't commit. This tells me that they want wiggle room and that they are perhaps too attached to the stock, instead of establishing and defining performance targets that meet specified criteria. These investors will celebrate the good news and provide excuses for the bad. Savvy investors already have goals in mind and the courage to put them out into the public realm for accountability.
This quarter, things are not typical for Sirius XM. A price increase went into effect beginning in January, and the company has guided to higher churn as well as lower subscriber numbers. Furthermore, the company has established record revenue, free cash flow, and EBITDA for 2012. Before moving forward we should review exactly what guidance for 2012 is.
Sirius XM -- 2012 Guidance
- Subscribers of 1.3 million net additions, with a year-end total of 23.2 million
- Churn rate of 2.1%
- Approximately $875 million adjusted EBITDA
- Revenue of approximately $3.3 billion
- Free cash flow of approximately $700 million
Now that we know the goals for the whole year we can begin to look at expectations for the current quarter, where the company seems to be on track, and where the pitfalls may be.
Analysts are expecting some interesting numbers this quarter. Highlights of expectations include:
- Consensus EPS of $0.02 per share, with a high estimate of $0.02 and a low estimate of $0.01. (This vs. an EPS of $0.01 in 2011.)
- Consensus on revenue of $803 million. The high estimate is $818 million and the low estimate is $790 million. (The performance in 2011 was $724 million.)
As you can see, the Street has a small range applied to Q1 of 2012 for Sirius XM. Breaking down how this company will perform is a challenge even in a typical quarter. This quarter, the lack of transparency in some metrics makes things even more of a challenge.
The company has over 4,000 dealerships providing three-month promotional subscriptions on any used car that is satellite radio equipped. This is great news, but as yet investors have gotten very little flavor on how this new supply of potential subscribers is impacting the company. Churn last year was 1.9%. Being conservative due to the price increase, the company has guided to 2.1% in 2012. This guidance is fine, but compounding the issue is how aggressive the company will be in retention efforts. It has been offering up six-months for $25 at an unprecedented rate. Keeping a subscriber on board, or getting a churned subscriber to re-sign, is great and will help the subscriber line, but it impacts metrics like average revenue per user (ARPU). A perfect example of this happened in Q4 2011 when the company hit the subscriber number but ARPU took a hit of $0.05, when many were expecting that metric to rise. Now with a price increase, the company needs to show an improvement in ARPU. This makes retention efforts more challenging.
Breaking Down Q1
As I do each and every quarter, I put my estimates on the line prior to the quarter and challenge other investors to do the same. As I stated earlier, this quarter will be challenging for several reasons. Some of my estimates will provide wider-than-normal ranges, but I will break down my reasons and provide my estimates regardless.
This is Sirius XM's bread and butter. Without subscribers the company would have no revenue. Showing growth in this metric is important. There are already those who are concerned that guidance for 2012 at 1.3 million is a substantial step down from the performance of 1.7 million in 2011. Netflix just got tortured on subscriber metrics being low, and while that company has lost rights to a free pass, Sirius XM needs to frame the subscriber picture carefully. Last year, Sirius XM announced Q1 subscribers of 373,000 on auto sales of just over 3 million. This year auto sales are just over 3.4 million. This equates to 400,000 more cars being sold this year vs. last. At 65% penetration (satellite radios installed in 65% of the cars), it would imply that 260,000 more satellite radio equipped cars were sold in Q1 this year vs. last. By this metric alone Sirius XM should be able to outperform last year's number. However, we need to consider the law of large numbers. Churn is based on a larger self-paying subscriber base this year. Compounding the issue is that the company has guided to higher churn.
In trying to project subscriber numbers, I will start with a churn rate of 1.9%, which I feel is the very best possible scenario for the company. This would imply a churn of about 342,000 subscribers per month, or 1,026,000 for the quarter. Churn makes up only a portion of the deactivated subscriber line item. The balance of the line item is made up from promotional subscribers that elect not to keep the service. Total deactivated subscribers with churn at 1.9% should be about 1,875,000.
Before moving forward, we now need to look at what the gross subscriber additions will be. Given the number of auto sales for the quarter, the company should be able to report gross additions of between 2,300,000 and 2,350,000. Thus, with churn at 1.9% the company should be able to report a subscriber number between 425,000 and 475,000.
Now we will step up to the guided churn of 2.1%. Total deactivations would rise to about 1,984,000. Subtract this from the gross additions line and you wind up with a range of 316,000 to 366,000. A scary thought by any measure. More realistically, we will see a churn rate of about 2.0%. This would imply deactivations of 1,930,000. Subtract this from the gross additions line and you wind up with a range of 370,000 to 420,000.
Personally, I'm looking for subscriber additions to be 416,238. This will imply a pace of over 1.6 million for the year, and given that information we should look for Karmazin to raise guidance to at least 1.45 million.
The Street is looking for $803 million. That number would fall in line with what I would anticipate, absent the price increase. While the full impact of the price increase will take about 18 months to saturate, there are other challenges here. Do the car companies that do pay for a portion of the subscription now pay a higher rate themselves? At this point I do not have that answer. That lack of transparency makes it difficult to project with a degree of accuracy.
I am looking for the company to surprise the Street here, but not by as much as some may think. Watch for Sirius XM to report revenue between $808 million and $812 million. I am pegging my estimate at $809 million.
Average Revenue Per User
This metric represents the average of what subscribers (self-paying and paid promotional) are paying Sirius XM. With the price being increased, we should see this metric begin to climb. Last quarter, the company got away with a lower ARPU than what they should have reported by hitting guidance and announcing subscribers early. They will not have that liberty anymore. ARPU will be closely watched by the Street so that the impact of the price increase can be gauged.
In my opinion, we will see the company report ARPU between $11.65 and $11.75. If it comes in below that range the implication will be that the price increase is not reaching the bottom line in an effective manner. I would consider $11.65 poor growth in this metric. Satisfactory growth is at $11.70, and good growth would be $11.75. My estimate is $11.69.
Subscriber Acquisition Cost (SAC)
This metric measures the cost per gross subscriber addition. While not a sexy metric, it does demonstrate what the company is spending on this and gives us a measure of how successful it is with its subsidy spending and advertising.
I look for the company to remain pretty steady here and report SAC of $57.
This is a real wildcard. As stated earlier, the company is guiding to higher churn at 2.1% per month. Churn last year was 10% lower at 1.9% per month. I am pegging my churn estimate at 2.0%.
Free Cash Flow
Sirius XM has guided to full-year free cash flow of $700 million. This would imply that each quarter the company needs to produce about $175 million in free cash flow. I do not see this as a real problem and anticipate that free cash flow will come in at about $165 million.
The company has guided to approximately $875 million in adjusted EBITDA. Again, I see no real problem here. The company should be able to report about $215 million in this metric for the quarter.
Earnings Per Share
The Street is expecting earnings per share of $0.02, and I do not look for Sirius XM to disappoint. Look for the company to come in at the $0.02 the Street is expecting.
What I Would Like To See
Overall the company should report a good quarter, and should be able to raise some key guidance metrics. I would like to see the company give some flavor on the used car channel. It will need to demonstrate how this channel will be impacting the subscriber line going forward. Sirius XM needs to be transparent enough to allow the Street to build realistic models and thus give investors realistic expectations in their stock reports. One drain on Sirius XM is the lack of analyst coverage and the ability for those who do cover the company to build models that set proper expectations.
I would also like to see the company address the Liberty Media (LMCA) issue. Many investors out there are very confused about what Liberty can and cannot do.
Another key item people want to understand better is what Sirius XM will do with the ever-growing mound of cash they have. CEO Mel Karmazin once spoke of share buybacks, but that was put on the back burner when it became apparent that Liberty Media would not participate and the result would be an increase in the ownership stake (on a percentage basis). Karmazin did not seem keen on dividends, and has stated several times that he has not seen an acquisition that suits him (although Liberty would have the ultimate say in that). One interesting acquisition that went by the wayside recently was the purchase of Internet radio service MOG by Beats Audio for a reported $12 million. Interestingly, MOG has direct deals with the record labels that Sirius XM seeks. While such licenses are not transferable, it would have been a cheap way to open a lot of doors. This leaves the repurchase of debt. Sirius XM may do just that later this year, and getting an idea as to the intent for this cash is important to investors.
While I would love more flavor on the lawsuit against Sound Exchange, I fear we will hear very little. Sirius XM agreed to allow the defendants additional time to file their response. The new response day is May 7.
For Sirius XM history buffs, it was three-and-a-half years ago that the company issued long-term guidance as it was trying to refinance debt. It issued the following guidance for 2009 through 2013 in November 2008:
|Free Cash Flow||$0.0||$0.4||$0.6||$1.0||$1.4|
It is always interesting to look back in time when we are attempting to look forward.