Wednesday, April 25, 2007

XM Q1 Preview

We here at SSG are not analysts, nor do we profess to be analysts. We do however review a lot of documentation and try to interpret what we see in the reports to arrive at our own estimation.

The XM Q1 2007 conference call will be happening tomorrow. There are a few items that we see that have potential to impact the EPS. While none of the make a huge impact, they should be looked or at least known by investors interested in this sector.

The first item relates to the merger. XM is the company that is being acquired. Therefore any costs related to the merger would be expensed in the quarter in which the activity occurred. This differs from Sirius, the acquiring company who’s costs are capitalized. Thus, these expenses for XM will show up in total as they are expended.

The next item that needs to be addressed is the method of counting OEM subscribers for non GM and Honda cars. As you may be aware, installs in Toyota, Nissan, and Hyundai are not counted as subscribers during the trial period. These 3 auto makers sold roughly 1,000,000 cars in Q1. If we were to assume a 10% install rate, that would mean that there are 100,000 cars receiving XM that are not yet counted as subscribers. The COSTS of these installs would be booked in Q1, but because these installs are not counted as subscribers, the GROSS subscriber number used to calculate SAC and CPGA do not include them. This is important because investors need to be aware of how this impacts these numbers.

By example, if each of these installs cost $100, then there would be $10,000,000 of expense. How does this impact the metric????? If the gross number of subscribers comes in at 950,000 and we assume a $100 cost to each sub, then the CPGA would be $95,000,000. However, if we add in the investment into the Toyota, Nissan, and Hyundai line of $10,000,000 we will have expenses $105,000,000, and instead of the CPGA being $100, it would rise to a bit above $110. There is nothing wrong with what XM is doing at all. It just needs to be understood by investors that there is an investment into future subscribers that is skewing the CPGA at this point. In time, this situation will balance out, but the learning curve has to happen at some point. This is why we always suggest going far deeper than simply the reported number. At this point the tradional XM definition of CPGA and SAC has changed and investors need to consider this as they look at the numbers.

With that being said, here is what I am expecting in the Q1 call from XM:


I am expecting GROSS subscriber additions to be in the area of 930,000. In my opinion, 580,000 will come from the OEM channel and 350,000 will come from the retail channel.

On a NET basis, I would anticipate deactivations of 660,000, bringing the NET number to 270,000. A potential upside to this number can be arrived at by a stronger performance in March at retail. If that happened, a NET number of 290,000 could be reasonable. Based on that I would throw my estimate in at 285,000 for NET Subscribers.


The popular number for XM’s reported churn number seems to be between 1.9% and 2.1%. I feel this is reasonable. Investors need to remember that the reported churn of XM does not include all deactivations. Subscribers coming off of a promotional period that decide against keeping the service are not calculated in the churn metric that XM reports. My estimation for fully loaded churn is at 3.0% (slightly higher than last year). I bumped up the number slightly because the increased penetration into the OEM sector and installations into car models that attract consumers that may be less likely to keep satellite radio.


It would appear that the street is looking for a loss of 39 or 40 cents per share, with the popular “Whisper numbers” having a the loss at 45 cents. However, there are many analysts that have not done revisions since the merger announcement. What is an investor to believe? Your guess is as good as mine. XM has demonstrated cost controls of late, and has been very aggressive on that front. I would tend to lean to them beating the street by a slight margin. Perhaps 38 cents per share.


My estimate - $268,000,000


My estimate $68 / $109

In the end, the losses will narrow, and the overall tenor of the call should be well received. There has actually been quite a bit of positive news from XM in the quarter, but sentiment seems overly focused on negatives. I would hope to see some flavor on how the non GAAP metrics are calculated, but that may not happen this quarter. At this point investors need something they can wrap their hands around. Please remember that we are not financial advisors, and the information in this piece is only my opinion. I encourage investors to look at as much information as possible.

4/25/2007 11:17:00 AM

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