Action and Reaction

November 7, 2006

As tends to happen in the satellite radio sector, people will grab one metric and focus on it but will not consider both sides of the equation. The danger of this lays on both those that are looking for a positive focus as well as those that are looking for a negative focus.

Prior to the Sirius conference call I thought it would be prudent to give readers an example which may well come up in the call.

A while back an article was published regarding the methodology by which Sirius satellite radio counts OEM subscribers. When a car is manufactured with a Sirius unit, the OEM pays for a subscription up front. In the case of DCX this is typically a 1 year subscription, and in the case of Ford this is typically a 6 month subscription. In essence, Sirius pays a radio subsidy to the manufacturer and books the cost. The manufacturer then produces a car and pays Sirius for a subscription. Sirius books this subscription as DEFERRED REVENUE. Deferred revenue on a financial sheet is actually a liability. Although Sirius has the money up front, they are not allowed to book that revenue until they fulfill the service for which the revenue was received. Thus, as each month passes, $12.95 cents comes off of the deferred revenue line, and gets booked as revenue.

With that explanation complete, we will get to the crux of the issue. There are cars on dealer lots that have not yet been sold, but are counted as subscribers. At last tabulation, it is estimated that there were between 375,000 and 400,000 cars on dealer lots. At that time it represented about 8% of the subscriber base. Look for that 8% to decrease in the Q3 call.

The benefit for Sirius is that they are counting these cars as subscribers. Some people seem to take exception to this, but in reality, it is not really a major issue when one considers that every car will be sold, and thus the subscription will be activated. Yes, it gives a bit of a “pull ahead” in the subscriber numbers, but that is only part of the story.

FOR EVERY ACTION THERE IS A REACTION

While there is a benefit to the subscriber line (whether you see that as a positive or a negative), there is another side of the coin to look at. ARPU. The benefit of counting these subs when they do is widely known. The impact on ARPU is rarely discussed, and frankly, many people probably are not aware that there is an impact. The fact is that ARPU is negatively impacted by this process. There are 375,000 to 400,000 cars counted as subs that are not yet generating “bookable” revenue. Because ARPU is a measure of revenue over the entire subscriber base, the cars that temporarily are adding $0 on a monthly basis bring down the ARPU. On an $11 ARPU, 8% would represent 88 cents.

You see, it is all relative.

If someone is going to complain about these cars being counted as subscribers, they should carry an equal complaint about the ARPU being lower as well.

If someone is going to praise the subscriber counting method, then they should have praise that is just as strong for the negative impact on ARPU.

Then there are those who simply understand THE BIG PICTURE and act accordingly.

On a financial sheet there is an action and a reaction. Investors need to find BOTH to understand the issues completely.

11/07/2006 01:24:00 PM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

0 Comments:

Post a Comment

SSG is not a Financial Advisor. Read Disclosure: HERE

--------------------------------------------------------