Monday, December 04, 2006

A Deeper Look at New Sirius Guidance

December 4, 2006

Today Sirius announced that they are lowering subscriber guidance. The announcement comes on the heels of a weaker than expected retail channel since Thanksgiving.

Reaction to the news in after hours saw Sirius drop 18 cents.

This news serves as a reality check for the sector, and unfortunately puts a black mark on Mel Karmazin’s track record.

The question for investors to ask is this:

“Is this news a scar that will build character in the company and sector, or is it a cut that will still go deeper?”

The Sirius subscriber number was the one aspect of this sector that seemed to be up in the air in the minds of analysts as well as investors. Now that the news of lowered guidance has been delivered, can the Sirius as well as the sector move forward with their best foot?

On the positive side of things, Mel Karmazin and David Frear will be speaking at events in the coming days. These speeches will surely have questions relating to subscriber numbers, but the focus will likely be on reaching Cash flow Break Even, and the financial metrics involved in the satellite radio business.

I would not read anything into the timing of the announcement. They likely wanted to get one last weekend of sales data prior to making the decision to cut guidance. I would read into the fact that Mel Karmazin and David Frear will be speaking at conferences very soon. The subscriber news has been delivered, and now these men will face the audience, discuss the issue frankly, and point out the metrics that really matter.

Investors should watch for new analyst reports to be issued in the coming week or so. The new guidance does far more than lower subscriber numbers. There is a direct impact on other metrics. 200,000 to 400,000 less subscribers means that substantial changes will happen on the balance sheet as well. Revenue will be impacted, as will costs. The estimated earnings per share will need revision, as will ARPU, etc.

In my opinion, Sirius is anticipating the higher end of their guidance, and they have built in a cushion below the new expectation. The lower end of the new guidance can still deliver Cash Flow Break Even, and that is likely the lowest number of subscribers needed to obtain CFBE.

My take on this is similar to my take on video. I would rather reach and maintain CFBE and have fewer subscribers as long as those subscribers were obtained in a responsible and cost effective manner. With video, I do not care when it launches as long as when it does, it has a sound business plan behind it and will generate revenue.

SSG has been critical of some analysts at times regarding how they follow the sector and how they formulate their opinions. It is easy to say that a company will hit or miss, but one still has to look at all of the factors involved. Calling a 10% miss at retail without considering growth in OEM, Sirius Internet Radio, stronger non NPD sales, and a more aggressive family plan does not really make someone right…..nor does it make them wrong. In this case the analyst (Jacoby) appears to be right about retail (at least so far). The question now is where he will set his sub estimate, which currently sits at about 6,200,000 (something many are not aware of). In my opinion we will likely see most analysts come in with a number slightly above 6,000,000 for Sirius. Jacoby is usually among the last to issue a revised subscriber number on Sirius, and typically his number stays on the high end of the scale until just prior to the end of a quarter.

While all of this can be very frustrating for investors, there are many components to consider. Have you though about how subscriber number correlate to financial metrics? Do you believe in satellite radio as a concept? Do you believe that this sector will be reaching CFBE and maintaining it? Do you believe that CFBE and narrower losses in coming quarters will have a positive impact? Do you see satellite radio penetrating deeper than 5% into the population? Do you think news such as this could weigh in on the chatter about a merger? Do you think news like this would make a merger more likely?

Do you have a right to be frustrated? Yes, you do. The key is in the actions you take when you have considered this news in a RATIONAL manner. Does this hurt the credibility of Sirius? Yes, it does. Can that loss of credibility be regained? Yes, it can, and investors should pay close attention to what Karmazin and Frear have to say in the coming days, and where the other metrics come in at for the quarter and the year.

12/04/2006 11:03:00 PM

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