Wednesday, July 26, 2006

Sirius Q2 Outlook

July 26, 2006

Sirius will be having their conference call August 1, 2006 at 8:00 AM. SSG would like to outline the street expectations as well as some possible items to watch for. Please remember that these are opinions.


The loss expected currently by the street is 15 cents. The opinions of analysts range from a 13 cent loss upwards to a 19 cent loss. Sirius lost 13 cents last year.

We here at SSG were actually surprised that the 15 cent expectation has held. When Sirius announced subscriber numbers significantly higher than expectations, there should have been some impact on the financial metrics. Subscriber additions all have SAC associated with them, and in particular, the OEM subscribers tend to be more expensive. We are expecting a bigger OEM contribution to the subscriber base than in previous quarters, and thus the metrics should have revised upward perhaps to the 16 cent range. To date only a few analysts have taken this into consideration and issued reports subsequent to the subscriber announcements. We are expecting Sirius to come in at a loss of 15 cents per share, and feel that the possibility of 14 cents is far more likely than 16 cents.

A wild card here is capital expenditures. Sirius had budgeted $110,000,000 in capex for 2006, but has not given a breakdown of when that money will be spent. If capex expenditures were more weighted in this quarter, then expect that to impact the loss accordingly. We feel that capex expenditures in Q2 and Q3 will outweigh that spent in Q1 and Q4


The street is anticipating revenue of 146.7 million dollars with ranges between 140 million and 154 million.

We here at SSG feel that the street is not taking into account enough impact from advertising revenue and that Sirius will beat the streets expectations on this metric. Sirius announced at the Q1 conference call that they advertising revenue was booking quite well, and that they were guiding to ad revenue representing 10% of all revenue by the end of the year. Given Sirius’ tendency to beat such guidance, we feel that there are many not taking this into account. We are expecting to see revenue top street expectations slightly.


Sirius has already announced NET subscriber additions of over 600,000 for the second quarter. We expect that for the first time that the OEM channel MAY represent more additions than the retail channel. In our opinion the OEM channel will represent between 49% and 53% of the quarters subscribers. This effect is happening because the Sirius has a large number of 1 year OEM subscribers, and the ramp up of OEM installs was not as substantial last year as this year. From this quarter forward the OEM churns will begin to represent a bigger piece of the overall churn pie.

Sirius performed strongly at retail in the quarter. The retail additions for the quarter will prove this out. At this point there is still a strong demand for Sirius in the retail channel.

We had believed that there was a chance that Sirius would raise subscriber guidance at the call, and believe this is still possible, but less likely given the f the FCC’s requirements for FM modulated units. Should the FCC change the testing requirements, it is possible that Sirius and XM would have to once again recertify these radios. At this point Sirius has already reiterated their guidance of 6.2 million subscribers by years end.

Sirius, it appears, will have room to raise guidance in the OEM channel. The last guidance offered by Sirius in the OEM arena promised about 826,000 NET additions for 2006. Sirius will already be over 500,000 with this quarters announcement. This leaves a lot of upward room for Sirius. If the FCC issue is resolved and there are no hic-ups in the supply chain, Sirius may be able to raise guidance.


Watch for SAC costs to come in near expectations, but to be slightly higher than last quarter. This will be in part due to a much more substantial OEM ramp up than people are expecting, and as discussed earlier, the SAC for an OEM subscriber is greater than that of a retail subscriber.

Watch for Sirius to maintain the SAC guidance for all of 2006. If an improvement in guidance in SAC is to come, it would likely come at the Q3 call.


Sirius has guided that churn will be at 1.8% for the year. For Q2 Sirius should be in the 1.8 to 1.9% range. Sirius will likely keep their 1.8% churn guidance in tact. It is important to note that the reported churn rates of Sirius and XM can not be directly compared. Sirius reports a “fully loaded” churn number that includes OEM promotional drop-offs. XM does not include OEM promotional drop-offs in their number.

Sirius may add some flavor to the OEM take rate, but we do not find it a likely event in this quarter. They are asked the question each quarter, and to date have indicated that they are comfortable with analysts using XM’s take rate in their assumptions. This is another case, in our opinion, of Mel Karmazin being very comfortable with that guidance because they are likely to beat it.


Overall, watch for Sirius to focus on the financial metrics of the company, and to outline how Sirius will reach CFBE. Sirius will likely discuss hardware, and the release of their new Stiletto, as well as some other hardware tid-bits. Watch for analysts to ask about the FCC issue, and for Sirius to offer an update to that issue. Watch for analysts to speak about WIFI as well as “on-line only” subscription models. Sirius will also likely add some new flavor in the OEM sector.

Street reaction to the call will likely be positive, and could be very positive if some concrete dates for anticipated events and launches are given. Investors in this equity should watch the rest of this week with caution. XM Satellite has seen some shake-ups, and their call is scheduled for July 27, 2006. Many are expecting some lowered guidance on the part of XM, and bad news for XM has had a tendency of impacting the sector as a whole.

7/26/2006 01:37:00 PM

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