While many investors in Sirius XM (SIRI) were celebrating an unexpected announcement of 622,000 subscribers added in the second quarter of 2012, an increase in subscriber and revenue guidance, the savvy stock market players were busy digesting and analyzing the news to determine what it all means.
We have heard time and time again that Sirius XM CEO tends to "under-promise" and "over-deliver". The mantra is now so old that it carries little impact anymore. In fact, many investors are frustrated by that type of guidance. After all, guidance is supposed to paint a picture of where the company is going to be, not a guaranteed home run.
At the beginning of 2012 Mel Karmazin outlined that the year would deliver 1.3 million subscribers and a churn rate of 2.1% of. He stated that the guidance was conservative because the company was just implementing a price increase and they were not sure how consumers would react. While being conservative might seem prudent, many that follow the company were critical of the 1.3 million subscriber number, feeling it was to far removed from the 1.7 million subscribers the company signed up in 2011.
By the time the company saw the Q1 numbers delivered, it was able to raise guidance on the subscriber line by 200,000. With new guidance set at 1.5 million, investors and the street were more at ease. While everyone expected the company to be able to beat that number, it was at least closer to the reality most expect.
Now the company has added an additional 622,000 subscribers in Q2 and raised guidance to 1.6 million. Is that number too low? Many think so. Consider the following:
- Sirius XM has already added over 1 million subscribers in 2012.
- The new guidance implies that less than 300,000 per quarter (in Q3 and Q4) are needed to hit the mark.
- Churn in Q1 was an impressive 1.9%, well below the initial guidance of 2.1%. Given the reported Q2 subscriber number, churn should again be at about 1.9%.
- The auto sector is well positioned to bring 14 million in sales this year.
- Sirius XM has grown a new and viable supply bucket with the used car market.
From many standpoints it would appear that Sirius XM is well positioned to blow away the guidance of 1.6 million. Why set the bar so low if all of these factors point to the possibility of matching or even bettering the subscriber performance of 1.7 million in 2011?
The possible answers are many, but here are some thoughts to consider:
- Production does have a slowdown in July and August as plants re-tool. This impacts promotional subscribers from the likes of Ford and Chrysler. It also presents challenges to the Q3 subscriber numbers.
- The Trailing category of auto partners, which includes Toyota, Nissan, Hyundai, and Kia are taking back market share. This category supplies no subscribers unless the consumer elects to keep the service after the promotional period. A surge by this category in Q3 could give the numbers challenges.
- Karmazin is simply being cautious.
- The law of large numbers is taking root again. It takes more gross additions with each passing quarter to offset a higher number of deactivated subscriptions
- The boost in the Q2 subscriber number was driven in large part by promotional subscriptions, 55% of which will not keep the service.
- There is now room for another raise in guidance to 1.8 or 1.9 million in Q3.
- The company simply wants some wiggle room. With the price increase investors are expecting a jump in ARPU. If that jump is not substantial enough because of heavy discounting, the company may need to scale back on the $5 per month retention program. That would mean a slight increase in churn, but ARPU would look better.
While it may be tempting to say that 2012 will deliver 2,000,000 subscribers, we should not apply that number quite yet. The determining factor of the final number for 2012 will be what we see in Q3. Once that is known, we can give a much better assessment to what the final numbers for 2012 will be.
In the end I would say that Karmazin cam in just a bit too low with this guidance increase. Had he said 1.7 million instead of 1.6 million there would be no doubt that this year will meet last. At the annual shareholder meeting Sirius XM indicated that 66% of the subscriber base had been exposed to the price increase. The company is now 6 months into that process and should have a very good idea what the consumer reaction is and how it impacts metrics. The bottom line is that investors should expect at least 1.8 million in 2012.
Raising guidance is a good story, but there is a fine line in setting up expectations.
Disclosure: I am long SIRI.
