Friday, October 13, 2006

SIRI and XM - Some Things To Watch

October 13, 2006

Neither Sirius nor XM have announced when they are planning the Third Quarter conference calls as yet. In our opinion they are at least 3 weeks away from happening.

The calls this quarter are very important to the respective companies, as well as the sector. The importance does not lye so much with the Q3 numbers, but rather where guidance is going forward.

Both Sirius and XM have spoken about the possibility of reaching CFBE in Q4 of this year. This is the conference call that will lay out the path for how CFBE will not only be reached, but whether or not it will be maintained going forward.


1. The subscriber number breakdown. How many gross additions were there? How many were OEM? How many were retail? What is the deactivation rate? What is the OEM conversion rate?

2. Subscriber guidance for the end of the year. Currently XM has stated that they will have somewhere between 500,000 and 1,000,000 subscribers for Q4. This is a very wide range, and clarity on this metric is needed by investors considering an investment in XM. Those that speculate that XM will guide to the higher end of this metric may look at current prices as a buying opportunity. Those that look at the lower end of the metric may stand pat, or wait to see what the reaction is in the market. It is my opinion that XM will guide to either 7,900,000 or 8,000,000 which would mean 700,000 to 800,000 subscribers for the fourth quarter. I believe this will be the case because I feel that XM will not be aggressive in their projections (a reason for class action law suits we saw filed earlier this year).

3. A status of where the class action suit and the RIAA suit are. These are clouds that still hang over XM. For some investors these issues are enough to keep them on the sidelines awaiting more definitive clarity.

4. CFBE – A metric that is very important to this sector. Cash flow is what allows a business to run and operate. The bigger question than reaching CFBE is whether or not it can be maintained. If it can be reached and maintained going forward, investors will have a very good reason to jump into the sector once again.

5. Board of Directors – This issue may be resolved prior to the call, but as yet we have not seen any news. With two board resignations this year, and one of them carrying negative comments, this is another cloud over XM. XM has made several management changes this year, and it will take time to see how effective those changes are. What the street needs to see is a Board of Directors that they can have faith in. Currently XM is out of compliance with NASDAQ because the Board is not made up of an independent majority. If you were dissatisfied with XM management, the current make-up of the Board may leave doubts in your mind. If you are satisfied with management, and are looking at the changes as positive, then the status of the Board may not be bothersome. They key here is getting into compliance.

6. Satellite Launch of XM-4. This is currently scheduled to happen in a bit over 1 week. There is a lot of money invested into this satellite, and this could be a factor in the stock over the next week. A successful launch could be a motivation for investors who feel that the Q3 call will be positive to hop into this equity. A launch failure (rare) would be a big negative, but the likelihood of this happening is very remote. Should a failure happen, XM has launch insurance, and thus the impact would be more time to build new rather than a dollars issue. If the launch is a success, I feel that it would be beneficial for XM to touch on the satellite constellation during the call, and what the plans are going forward.

7. XM’s sentiment towards retail. XM has expressed on a few occasions this year that retail has been weak. Whether this was because of competitive pressures, or the FCC issue, it is not a sentiment that gives investors a warm fuzzy feeling. If XM is expecting a strong retail quarter they should indicate this at least to some extent.

8. OEM’s – XM should spend some time on this subject. Hyundai has just begun their program and although cars are rolling into dealer lots this quarter, the earliest they will be counted as subscribers will be in Q1 of 2007. This is also the case for any Toyota or Nissan factory installs. This means that depending on the brand of car purchased, the subscriber may or may not be counted right away. Many people have been confused about this new counting method, and some clarity, and rough numbers would be very helpful to investors. Additionally, how the various counting methods impact ARPU, SAC, and churn would be well worth it.

9. Hardware – Some new XM hardware has been seen on the net, but release dates are not yet known. Will this hardware be released for the holiday season?


1. Subscribers – A big topic for investors. Current guidance is to finish the year with 6,300,000 subscribers. This means Sirius needs about 1,200,000 Net subscribers for the quarter. This seems like a tall order considering that last year Sirius got 1,100,000 in Q4. What differs this year? Brand awareness this year is actually higher than last year. Sirius now has Sirius Internet Radio, and this service in our opinion will be marketed heavily. Additionally there is the NasCar move from XM to Sirius, and there is sure to be some promotions. Sirius also has some room to boost the family plan. At the end of Q2, the family plan made up about 12% of the subscriber base. We expect that to be between 14% and 15% when Q3 numbers are announced. This gives Sirius room to boost it substantially if the choose to do so. If they target 20% as a goal, this would mean that the family plan would grow from about 742,000 (SSG estimate for family plan at the end of Q3) subscribers to 1,260,000 subscribers in one quarter, a boost of about 520,000 subscribers.. We know that XM sits a bit above 20% on their family plan, so it is an avenue that Sirius could easily take should they decide to do so. Is all of this enough? This is the question that is on the minds of many following the sector. Will Sirius outline some plans at the call? Perhaps. For some the current guidance seems to be a “tall order”. Until it is shown that Sirius can hit it, there will be question marks in the minds of some investors. If you speculate that they hit the number and are correct, you could do well.

2. CFBE – This is actually more important than the subscriber number. A small miss on subs coupled with reaching CFBE and showing that you can maintain it would be a trade-off most savvy investors would take. Of course, hitting both would be the golden prize. CFBE carries importance in this sector because it is a large step towards showing that the business plan is viable. It is one thing to have a cool idea that people like. It is another to have a cool idea that people like that is viable as a business.

3. Marketing Plan – We have seen XM launch their new marketing plan, and have not yet heard from Sirius. Surely they have something in the works, it is just a matter of what it is, and when it will launch.

4. OEM Update – At this point the OEM partners are well known. Interestingly, there is no current guidance from DCX on what they will be doing for an install rate as 2006 closes out and we march into 2007. Some additional flavor on this metric would be beneficial for investors.

5. SAC – The most expensive subscribers for Sirius are in the OEM channel. Chipsets for OEM’s tend to lag behind those for retail hardware. If OEM’s are going to a newer chipset, SAC costs can come down. Some flavor on this would be nice since the OEM channel is ramping up substantially for Sirius. Current guidance for Sirius’ SAC is “SAC towards $110”. We here at SSG take that guidance to mean between $110 and $115. For our estimates we apply a SCA of $112.50 (splitting the difference).

6. Howard Stern – How active will he be in marketing? He was a big factor last year. What will he do this year.

7. Hardware – The new units are now reaching retailers. The question is will there be enough inventory to cover guidance and demand? I believe there will be enough hardware, and that we will not see shortages that Sirius has experienced in the past.

The key for both equities lays with sentiment of investors with respect to each particular equity, and with the sector as a whole. Feelings of a strong sector benefit both. Feelings of a weak sector hurt both. It is a very simple and straight forward concept……..BUT…..The bigger question is can people see their way into allowing these equities to trade independently of each other? CFBE may be the metric that allows this to happen. CFBE may be the metric that allows people to look at these equities on their own merits rather than automatically assigning the problems with one company to the other. The next few weeks can be very flat or very interesting, but it is the third quarter conference calls that will set the stage for SDARS going forward. Investors in this sector should make it a point to listen to these calls, and further, should make it a point to watch these equities closely in the week before and the week after the calls.

SSG will do a more detailed Pre-Conference call article when the dates are announced.

10/13/2006 11:36:00 AM

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