It's hard to enthused about slogging through the just released Q4 and FY 2005 numbers for XM Satellite and Sirius, wondering which will be better, since 1) they both seem pretty bad, and 2) the whole world is already talking about their communal headline failings. Perhaps we can still find something unique though, since everyone seems to think XMSR is the better buy, and we, so far, have disagreed (here vs. here).
We're not investment bankers attempting a takeover, so enterprise value doesn't mean much to us. Rather, we just want a small cut of a big pie, so the main thing we're interested in is path-to-profitability. Both companies had unrepresentative activities in Q4: Sirius brought on Howard Stern and as a consequence had a big bump in subscriber growth, and XM spent like crazy on advertising to try to counter that move by Sirius. As a consequence, projecting from the latest quarterly numbers is likely to be even less accurate than a normally inaccurate extrapolation. On the other hand, we view the new developments as moving both companies to a somewhat new competitive plateau. We're skeptical that XM will have an easy time ratcheting down their increased spending. Long term we expect there is ample room in the marketplace for both companies. Both have compelling product line-ups.
We'll use FY 2005 data as the best forward representation. Their pricing plans are now essentially identical.
1. 5.9M subscribers, 2.7M added in 2005.
2. $558M revenue, for $94.5/subscriber at $7.88/month (that is $2.69 less than what they are trying to report).
3. Hard to believe, but they do not give a churn rate in their press release.
4. Only 54% of OEM users convert to paying customers.
5. Operating revenue of $163M, for $27.62/subscriber at $2.30/month. (they put $10.058M of advertising under "cost of revenue" - we don't know why, so we backed it out).
6. Operating expenses of $573M (G&A of $43.864M, Marketing of $497.614, R&D of $31.281M)
7. Holding operating expenses fixed, they need 20.7M subscribers to break even ($573M/$27.62/subscriber), which will take 8 years at current addition rates.
1. 3.3M subscribers, 2.2M added in 2005.
2. $242M revenue, for $73.33/subscriber at $6.11/month.
3. 18% of people drop the service.
4. They do not give the OEM user's conversion rate in their press release.
5. Operating revenue of $57.3M, for $17.36/subscriber at $1.45/month.
6. Operating expenses of $625M (SG&A, Marketing, "subscriber acquisition costs", and R&D)
7. Holding operating expenses fixed, they need 36M subscribers to break even ($625M/$17.36/subscriber), which will take 16 years at current addition rates.
The above model breaks expenses into two categories, gross revenue expenses (used in (5)) that are inherent in providing their service and that are expected to scale with their service, and operating expenses, that may or may not scale and are more discretionary. Operating revenue is essentially "gross revenue" and is what they get to keep from their overall revenue. Operating expenses are how they use that left over revenue to try and generate new business, etc. That is why we view it as fair to look at the ratios provided in (7).
With 8 years vs. 16 years to break even, I guess it is fair to say that XM looks "better" than Sirius (I was wrong), but given both these companies' 2005 performance, all the directors should resign, and they are both heading to bankruptcy. They have paid modest lip service to improving prospects, but the way they are running their businesses is so phenomenally out of line with their profit model, that they can't make it without a serious slash-and-burn. Their projections for cash flow positive by end of 2006 look like fantasy to me. Yikes!
Note: Shorting them is another matter - we've only talked Company and Story here, not Stock.
[Disclosure: As of this writing, I am very regretfully long SIRI]