Friday, August 18, 2006

A Look At SAC From A Different Perspective

August 18, 2006

There are many ways to look at things......

Subscriber Acquisition Costs (SAC) are often a subject of discussion relative to the satellite radio industry.

SAC measures the cost to obtain a subscriber. The problem here is that SAC is not governed by Generally Accepted Accounting Principles (GAAP). GAAP is defined as, “The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information”

Because SAC is not governed by GAAP each company is free to define SAC as they see fit for their operations, so long as they define how they calculate the metric.

The next issue relative to GAAP is that the structures of deals may or may not impact SAC. For example, the costs associated with the revenue share portion of any deal are not covered in SAC, nor is equity granted to third parties, nor is content and programming costs, etc. One company may rely heavily on outside marketing representation, while the other staffs such operations very strongly from within as direct employees.

For this reason, it becomes difficult for investors to compare the SAC of Sirius and XM on a “straight-up” basis. Often times it is better to compare the company to itself, and look at the trends within a company. Investors should also make efforts to look at other metrics when considering SAC. Investors should look at ARPU, overall revenue/losses from operations, etc.

SAC is not a metric that determines the financial viability of a company.

There are many ways to look at subscriber costs. SAC measures costs per GROSS addition. A good metric, but what happens when you are not keeping a lot of those gross addition? What kind of revenue can you expect to help offset the SAC (for example, 1 year in a Chrysler install, 6 months in Ford, and 3 months in GM))? What happens if you look at cost per NET addition (after all, these are the ones that will at least help you offset costs)?

SIRI Q2 2006 SAC PER NET ADD - $181

XM Q2 2006 SAC PER GROSS ADD - $64
XM Q2 2006 SAC PER NET ADD - $149

The reason the numbers change so starkly rests in the deactivations. Sirius had GROSS subscribers of 830,571 and NET subscribers of 600,460. This means their deactivations tallied 230,111. By contrast, XM had GROSS subscribers of 926,281 and NET subscribers of 398,012. This means XM had deactivations of 528,269. Part of the bigger deactivation number is attributable to XM having a larger subscriber base, but XM’s deactivations were more than double that of Sirius. Another aspect rests in the OEM deals. XM’s OEM deals are mostly 3 month deals, where Sirius has 1 year deals with DCX. This means that OEM subscribers will deactivate more quickly with XM, while there is a wait to see what happens with Sirius on the 1 year subscription deal. Will having the service longer in a DCX vehicle lead to a better take rate? Only time will tell.

What investors need to be aware of is that in many cases it is difficult to accurately compare many metrics between these two companies. The key here is whether or not the trending of costs is headed in the right direction. When considering an equity try to look as deeply as you can into several key metrics, and always look deeper than the surface to understand what is behind the metrics

8/18/2006 01:09:00 PM

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