Friday, November 03, 2006
SSG Q3 Preview - Sirius Satellite Radio
November 3, 2006
Here at SSG we typically do a Conference Call preview of what to expect, and topics that may be on the table from the satellite radio companies when they report earnings. Bear in mind that SSG is not a financial advisor, and this is not an offer to by or sell this equity. This report contains both opinion and fact. Investors should perform their own research and consult a financial advisor.The Q3 conference call for Sirius Satellite Radio is set for Wednesday, November 8th at 8:00 AM.
As with XM, we feel that this call is very important to not only Sirius, but the sector as a whole, and again, the reason is not so much with the Q3 results, but more along the lines of what is happening going forward.
So far, we are all aware of the subscriber numbers for Q3. It is the conference call where we get to here the rest of the details. For Sirius we expect Mel to deliver a concise report and for him to focus on the metrics that will drive this company going forward. Mel’s matter of fact style bodes well for Sirius, and he offers a commanding and believable presence on these calls.
We expect Sirius to cover all of the typical subject matter as well as to address some newer items that may need clarification, or additional guidance.
SUBSCRIBERS
Sirius announced subscribers at the close of the quarter. The NE subscriber number was a bit over 441,000. This leaves Sirius needing 1.2 in Q4 million subscribers to reach current guidance. Mel will likely touch on this subject right away. Currently analysts are split as to whether they think Sirius will hit that mark. Should Mel maintain this guidance, I think he will be crystal clear that Sirius is not going to spend money foolishly to obtain it.
We anticipate GROSS retail subscriber to be in the 380,000 range with NET retail adds being about 181,000
We anticipate GROSS OEM to be 335,000 with a NET of 260,000
We expect the Family plan subscribers to rise from about 12% in Q2 to 14.5% in Q3. Sirius did more Family plan promotion than in the past. We anticipate Sirius to maintain a strong marketing presence in this category until a level of 22% is reached. We anticipate targeted marketing to grow the Family plan at a rate of 2.5 to 3 points per quarter going forward.
Although we think it is time that some flavor be given to the OEM take rate, we do not anticipate Sirius disclosing this information quite yet. The DCX program is fairly well established, but the Ford program is less mature. This type of disclosure by Sirius is likely a least 2 quarters away.
We also expect that there will be some flavor given about the success of Sirius Canada
CHURN
We are anticipating a churn rate of 1.9% for Sirius. We anticipate that they will reiterate a 1.8% churn rate for the entire year. Q4 typically helps out the churn rate because of the rate at which subscribers are added.
We feel that it is possible that Sirius may give some flavor of self paying churn. Sirius and XM count churn differently. Sirius’ reported churn rate is fully loaded and includes all deactivations, while XM separates out promotional subscriber deactivations from churn. Now that Sirius is seeing more substantial churn from the OEM channel due simply to the numbers of installs, they have an opportunity to disclose a self paying churn number that would be quite impressive and differentiate Sirius from XM. We estimate that a self paying churn rate would be in the 1.3% neighborhood.
REVENUE
We are expecting to see revenue of $172,000,000 vs. a street consensus of $169,000,000. We anticipate a slight upside to advertising revenue as the subscriber base has continued to grow.
LOSS
We are anticipating a loss of 13 cents per share. This number is slightly better than street consensus of 14 cents. We feel that Sirius was judicious in marketing expenditures in the quarter, and kept a tight reign on the purse strings.
SAC
Sirius guidance for SAC for the entire year is “towards $110” We consider that to mean $112.50. Sirius will show improvement over Q2 and will come in at $127 for the quarter. Investors need to bear in mind that Sirius pays substantial subsidies in Q3 that are for radios sold in Q4. Knowing that Q4 has a high demand at retail, this additional “build” needs to be considered. Sirius’ OEM chipset subsidies are still much higher than that of the retail chipset, but newer chipsets are now finding their way into the OEM channel. This will help Sirius reach their overall guidance of “approaching $110”. We feel Sirius will reiterate this guidance.
CPGA
This metric is not really discussed by Sirius. CPGA, along with SAC are a favorite subject of analysts and the message boards. People often try to directly compare the SAC and CPGA of Sirius and XM. This is a mistake, because the structures of deals have a major impact on these metrics. Even the companies philosophies about sales force differs, and impacts these metrics. Direct employee expenses are backed out of marketing costs. Sirius outsources their sales force, and thus the costs attributed to the sales force is not backed out. By contrast, a substantial portion of XM’s sales force is directly employed by XM, and thus those expenses are backed out. That being said, investors should look at SAC and CPGA in comparison to how each company is performing itself. Further, investors need to consider far more than SAC and CPGA when looking at the companies in this sector.
You wont hear a CPGA number from Sirius, but many analysts do try to calculate one. We estimate that the CPGA would be in the $175 range
MARKETING
There will likely be a little discussion on this subject, but don’t look for Mel to spill the beans. He will likely address the success of the recent Sirius Internet radio campaign, and may even give some clarity on the number of visitors Sirius got due to the promotion. Given some strangely low estimates out there, we think it would be good to put at least a little color on that campaign.
We anticipate that the conference call may be the forum for a couple of marketing campaigns going forward. Watch for a AAA campaign to be launched in mid November, as well as a few other possibilities with national organizations.
Yes, Mel will likely discuss a bit about a Howard Stern and NASCAR promotion as well.
PROGRAMMING INITIATIVESLook for NASCAR to be a topic of discussion, as well as a focus on women’s programming and the launch of the Catholic channel. In addition, we suspect that some long anticipated news regarding video will also be touched upon (see OEM section).
We anticipate a few words on the sports, talk, and news programming and how successful it is. We see this as a critical section because of the royalty rate negotiations with Sound Exchange. Mel will likely comment on how balanced the programming line up is.
OEM
We look for Mel to give a little flavor on the Ford program, and perhaps the DCX program. Those that follow the equity should be aware that DCX has yet to announce their install plans for the 2007 model year. Many have been waiting to see what DCX is planning on bringing to the table. We feel that it is possible that Sirius video could be in the works for the first half of 2007, and that DCX will be the first OEM partner to offer the service. If this is the case, Sirius may announce that their hierarchical modulation system is either already deployed, or will be in the very short term.
We also expect that Mel, without naming companies, will give flavor on the market share Sirius is seeing in programs such as Toyota and Nissan.
DEALS AND NEWS
Look for Sirius to talk a bit about the success of SiriusBusiness, and the volume of deals that have been made over the past few months.
Look for Mel to give some flavor to Sirius internet Radio and global reach with CD quality music and Howard Stern.
HARDWARE
Watch for Mel to touch briefly on hardware and availability. He will likely discuss the solutions for FM modulators as well.
LEGALLook for brief discussion about the FM modulator and repeater issue. On repeaters, look for Sirius to state that they identified the issue, turned off the repeater so as to get into compliance, and properly applied to have the ability to turn them back on.
SATELLITES
Given the recent launch of XM4, look for Mel to touch on Sirius’ new satellite and the progress on it.
CFBE
The all important topic of the call. Analysts are split as to whether Sirius will get this in Q4. look for Mel to remain with current guidance of “possibly reaching CFBE in Q4”. There is no reason to put himself out on a limb here, but his conviction and tone will tell the story.
QUESTIONS AND ANSWERS1. Look for a question about RIAA, the Stiletto, and whether the device can be updated should XM prevail in their case.
2. Look for a question relating to CFBE
3. Look for a question about OEM ramp-ups and take rate
4. Look for a question about Howard Stern and compensation
5. Look for a question about the Sound Exchange negotiations.
6. Look for a question about merger/buyout
7. Look for a question about content costs and how to account for them (NASCAR)
11/03/2006 09:33:00 AM
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