Clarity On Sirius XM's Subscriber Picture

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) is in the subscription business, and while that may seem simple, trying to track the subscriber story is anything but. There are subscribers, family plan subscribers, paid promotional subscribers, unpaid promotional subscribers, subscribers in cars that are not yet sold, and subscribers that are getting the service at steep discounts. At the end of the day, it can be a daunting task to put the subscriber picture together in a manner in which the average investor can assess in a meaningful way.

Perhaps the most important metrics when looking at the subscriber story is the self-paying subscribers and the average revenue per user (ARPU). A self-paying subscriber is as simple as it seems. It is a subscriber that is paying money to receive satellite radio.

If we look at the self-paying subscriber line from the most recent quarter we will see that the company has 19,041,519. If we look at ARPU we will see that on average Sirius XM is able to get $12.14 per month from its total subscriber base.

In Q3 of 2012 Sirius XM had operating costs of $633,292,000. The company typically will have interest expenses of about $70,000,000. All together, the cost of doing business (excluding one time events) was about $703,000,000.

This is where things get interesting. If you apply an ARPU of $12.14 per month to 19,041,519 subscribers you will arrive at $693,492,121. This is about $9.5 million shy of the $703,000,000 in costs. For all intents and purposes, the self-paying subscribers (THE MORE VALUABLE ONES) are just about covering the cost of doing business, and it is the paid promotional subscribers, some 4,323,864, that are providing the gravy that is Sirius XM's profit.

This is not a bad thing. In fact, the company is getting ever closer to having the most valuable part of the subscriber pool, the self-paying ones, foot the bill and themselves add to the bottom line. Last quarter the company was about $13 million shy of having the self-pay base foot the bill. That is a decent improvement quarter over quarter, and is exactly what we want to see.

In the most recent quarter it would have taken a self-paying subscriber number of 19,300,000, or 260,000 more than the company currently has to carry the costs.

As you can imagine, getting to a point where the company is self sufficient from the self pay base will be a critical time for Sirius XM. It will not happen overnight, but could come to pass some time in 2013 provided the cost side of the business stays in check.

Understanding this is important because the day that self-payers are footing the bill means that having a surplus in that category will be VERY accretive to the bottom line. Understanding this is important because over the next several months there are some factors that may delay that event a bit.

As many readers know, Liberty Media (LMCA) is in the midst of getting control of Sirius XM. One thing we know is that Liberty feels that Sirius XM is under levered. Simply stated, Liberty feels Sirius XM can take on more debt. If Sirius XM were to take on an additional $1.5 billion in debt, it would take an additional $20 million per quarter to service that debt. That extra $20,000,000 would require 500,000 self paying subscribers at an ARPU of $12.14 to pay for.

While there are some that feel a more global macro picture is the way to look at Sirius XM, there are many reasons to drill down into the micro details. That reason is that there is a pivot point in the future that will deliver some pretty compelling numbers. Being able to assess when that happens gives you as an investor an advantage. That pivot point is currently about 2 or 3 quarters away. It could potentially shift to 4 to 6 quarters away. The story overall is bullish either way, but it is a matter of timing.

With auto sales in 2012 set to be at about 14.5 million, and with that number projected to run to 15.5 million next year, there is still room to grow organically with new vehicle sales. That will likely cap off in 2014. Building the used car channel to garner self-paying subscribers will get more important as each month passes.

While the subscriber dynamic that is Sirius XM can be a puzzle, the self paying subscriber base as compared to costs can be a decent way to gauge when the real gravy comes in. Stay tuned, because November auto sales will prove interesting and we will certainly see some headlines that will be bearish. Knowing that this company can perform even with auto sales taking a hit on the chin from Superstorm Sandy may give you advantages the rest of the street is missing.

Disclosure: I am long SIRI, LMCA. 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.

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