Thursday, October 19, 2006
A deeper Look At Jacoby's Report
October 19, 2006
I took a little time this evening to digest the Bank of America report issued by Jacoby today. I found some interesting theories, some of which are more rational than others.
Jacoby cites a preference for XM Satellite Radio during the next 12 months citing the lower market cap for XM, the OEM share for XM (Jacoby puts this at 60%), less exposure to the “Big 3” in Detroit, and the fact that he sees risk in Sirius sub guidance of 6.3 million. Lets look at each component of these theories:
MARKET CAP
This argument has some merit. There are many out there that on the face of things believe that the difference in Market Cap is too great. Justified or not, people carry this opinion. By nature of this, it would make sense that XM should see a greater appreciation than Sirius in the next 12 months. However, there are risk factors that Jacoby does not consider in his model. Appreciation for XM needs to come with confidence that management is executing. Litigation with the RIAA and the Class Action Suits could hamper confidence in the investment community. These are clouds that make real appreciation in share price difficult.
OEM SHAREThere is a common mistake made on the street regarding OEM share. Jacoby cites that XM has a 60% to 40% advantage in OEM deals. There are problems with this assessment:
The deals with car companies do not define OEM Market Share. TRUE OEM Market Share is the number of Sirius or XM installs relative to the number of cars produced and sold.
The market share of the exclusive OEM partners through September was at 40% SIRI and 37% XM. Jacoby and others seem to want to include Toyota and Nissan (15% and 6% shares) in the XM camp. The problem with doing this is that Toyota and Nissan install both Sirius and XM. In fact, there are very strong indications that Sirius is getting over half of the satellite radio sales from both Toyota and Nissan at this time. Both Toyota and Nissan do have factory install deals with XM, but these deals are not limited to XM. There exists a real problem in running calculations if you place all of the 21 points that Toyota and Nissan represent when maybe it should be closer to half. If you take the 21 points and assign half to Sirius and half to XM, the OEM world looks much different than Jacoby’s model. Instead of XM at 60% and Sirius at 40%, the picture becomes Sirius at 50.5% and XM at 47.5%. Subaru and Porsche are the other two companies worth 2 points. Split that and you get 51.5% for SIRI and 48.5% for XM. Remember, that Jacoby is looking out 12 months in his report. Simply stated, a company can have deals in place with OEMs that create more cars, but the number of installs could actually be less. Remember, TRUE OEM share is derived from installs relative to production.
Considering his 12 month outlook, we need to look at the fact that Toyota and Nissan will still be offering both Sirius and XM. Neither Toyota, nor Nissan has demonstrated a huge commitment as yet to SDARS installs. The numbers coming out of these two companies pale in comparison to what GM, Honda, DCX, and Ford have committed to. Unless Toyota and Nissan really step up to the plate, this segment of the OEM channel is not going to be a big producer, and at that, will be offering both during the period in question.
The next component that seems to not be considered is the terms of these OEM deals. The DCX deal and the Ford deal offer longer revenue generating promotional periods. This keeps subscribers on the books for longer periods of time. A take rate has not been publicized by Sirius, but Mel k has stated that he is comfortable with analysts using XM’s take rate. For XM, the Hyundai program is beginning, and will play itself out over the next 18 months with 100% installs being the end goal. XM will benefit from this, but the counting differs from the past. Hyundai subscribers in promotional periods will not be counted as subscribers (the promotional period does not generate revenue). The number of installs is an important consideration.
Jacoby assumes that the sector is transitioning into an OEM dominated phase. To date, OEM has never outsold retail. Additionally, if consumers have a preference, they have many ways to get the service they want. The consumers that don’t care which service will be happy to get something for a free promotion, but half of those churn out. One problem with an OEM install is that the subscription is not as versatile. With a retail unit people can drive with satellite radio, jog with it, have it in their home, on the beach, etc. Many OEM units do not have the features and capabilities of the retail units as well.
XM HAS LESS EXPOSURE TO THE “BIG 3”
This is an interesting comment because it can be looked at from a few angles. Sirius has deals with Ford and DCX, and XM with GM. Is having all of you eggs in one “Big 3” basket less risk? Or is it more risk because if they fail, you lose the partner with 25% of the cars produced? Ford accounts for 17% and DCX 13%. Is spreading out the “risk” to two companies better? Or does it make the job mor difficult? In my opinion, the “Big 3” are what they are. They will remain in business during the next 12 months that this report is concerned with, and will be within 2 points of where they currently sit in terms of market share. I do not see any real risk in any of these relationships over the next 12 months.
SIRIUS HAS RISK TO GUIDANCE OF 6.3 MILLION
This is the magical question. Sirius need 1,200,000 subscribers to get to guidance. Sirius reiterated the 6.3 million only two weeks ago. So far Mel K has a track record of meeting or exceeding his targets. There are many who see 1.2 million as a tall order. There are also many who see Sirius hitting this goal. At this point it is to early to tell. What we have to go on is Mel K., higher brand awareness than last year, Sirius Internet Radio, and as yet to be determined marketing. It would seem fair for someone to assume that 1.2 million is a tough target to hit. The question is whether or not a miss would carry a huge impact on the stock. If Sirius were to announce 6.2 million, but also reach CFBE and demonstrate that they can maintain it what would happen to the stock? A lot remains to be seen, and as the quarter progresses, we will likely see more opionions and reports from many.
10/19/2006 11:18:00 PM
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