Sunday, November 26, 2006

Sirius' Aggressive Guidance

Sirius confirmed guidance of 6.3 Million subscriber during the last conference call. It is an aggressive target, especially in light of the reductions in guidance that XM has made. Satellite Radio TechWorld examines here what Sirius has to do to make it. According to our calculations, Sirius will have to net 1,180,692 subscribers for the quarter. So, how many gross subscribers will they have to add this quarter? As the chart below indicates, churn is inexorable. There are actions that can be taken to trim churn, but it is relentless part of the growth cycle. The chart below shows Sirius' churn over the last several quarters, along with a trend line into the fourth quarter 2006. The fourth quarter projection suggest a churn in order of 370,000, nearly triple of what it was last year.

In order for Sirius to hit its target, it will need on the order of 1,550,692 gross subscribers. In fourth quarter 2005, Sirius added 1,266,674 gross subscribers; therefore, Sirius needs to add about 284,000 more gross subscribers this quarter than when Stern was coming on board.

The chart below represents the year over year growth in the net subscribers. Projecting into the fourth quarter, one might conclude that the growth would be flat to negative. In the fourth quarter 2005, Sirius netted 1,142,640 subscribers. If growth is flat, it will be very, very close. If it is negative, Sirius won't make it.

Without any major drivers out there, it might be worth comparing the percent increase in growth that XM experienced last year between the third quarter and fourth quarter. XM had a hefty 37.7% increase in gross subscribers. We could call this the holiday effect. If this percentage was now applied to Sirius, Sirius might expect 1,008,523 gross subscribers this quarter. To hit 1,550,692 would require a 112% increase over last quarter. Sirius did better than that last year, but that was with Stern coming on board. Sirius is doing all the right things to attract subscribers. They are leveraging off their NFL deal, there is cheap hardware available, they are pushing the family plan, the internet plan, and they are marketing extensively. It sounds a lot like XM last year.

It is going to be a challenge to meet the numbers. First indications are the the Big Box sales are not that spectacular in this holiday season, and Sirius needs a spectacular quarter. Perhaps we will see even more aggressive marketing.

Alternative views are welcome.

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jeff said...

Agree 100% My calculations put sirius at 960,000 net and XM around 680,000 net for the 4th Q 2006. Anyone who thinks NASCAR is going to atract people like Stern did is simply High.

Anonymous said...

Great Analysis. I agree that short of outright fudging the sub numbers, it is impossible for Sirius to meet it's guidance. Either that or XM will beat it's guidance by a substantial margin. Of course Sirius insiders already know they will not make it and have started selling shares.

Bert said...

I wouldn't bet against Karmazin. But it reminds me a lot of the position XM found itself in last year. XM almost reached its goal, but even if the goal had been met, it would have still been a failure because of the price they paid. Karmazin has made some boastful statements and even raised guidance precisely when XM said the market was going soft. My main concern is that Sirius loses control of spending in order to satisfy the ego of management. That's exactly what happened to XM. Plus, XM had cheap hardware out there. I bought 3 radios for $10 each. XM counted on many of these cheap radios becoming subscriptions. I bought one with the intention of taking it apart and for spare parts. One I activated as a gift. One will likely be activated a year later. So, that was one in three that got activated for me that year. I wasn't the only one. Sirius is in danger of falling into this same trap.

And, if Sirius does make it, there will be many that will remain skeptical, me among them. It's nothing against Sirius. The numbers just don't add up. XM's management disgraced themselves last year. Hopefully, Sirius isn't doomed to repeat XM's mistake. Of course, Karmazin may know thing that I don't know.