David "Newman" Phillips

Sirius XM (SIRI) is set to report their Q3 numbers on Thursday November 5th. Of course, Satwaves will once again be providing live blogging coverage of the event using the CoverItLive Platform. I felt it would be prudent to let our readers know exactly what I am expecting. Brandon has already given his numbers, so now it is my turn…

SUBSCRIBERS
As far as subscribers go, I think Q2 was the last quarter for subscriber losses. Regardless of what was portrayed by the main stream media, the losses were never as bad as The Motley Fool (TMF) and TheStreet.com (TSCM) made them out to be. You see, for the past 2 quarters, nearly all of the losses came from the number of TRIAL subscriptions, as opposed to SELF PAY subscriptions. Self pay remained relatively flat, while the company reported a significant decrease in the number of trial subs – people that may not have even known about satellite radio or even known that it was installed in their new car. Of course, the Fool and the Street will never give you those details. I wonder if the media will differentiate this quarter? Why? Because I think self pay subs are going to remain flat, but overall subs will be up significantly.

The trick to the trial subscriptions is this: Many of the OEM manufacturers such as Ford (F) and Chrysler pay for the radios up front. As soon as that radio is paid for, it is counted for a subscriber. The problem with this is that the radio may be sitting on a shelf at an automotive plant,  sitting in a new car on a parking lot somewhere (hence the term Parking Lot sub), or activated as a trial subscription. GM (MTLQQ), Chrysler, and Ford all had factory shut downs in Q2, and then inventory shortages at the beginning of Q3. In my opinion, the inventory at the end of Q2 was minimal. Today, most lots are full. This means that you are going to see a significant increase in parking lot subs and trial subs thanks to Cash for Clunkers. We also must not underestimate the power of the Certified Pre-Owned programs that Sirius XM has been signing on all year. My projection on overall subscriber number: 18,510,000, an increase of approximately 95k subscribers.

Key Metrics
With huge ramp ups and inventory building done in Q3, Sirius XM will have a significant increase in costs.  Granted, as soon as the car is sold, Sirius XM receives payment for the full trial period, but that amount is amortized over the life of the trial period. Also, one must take into account the costs associated with developing and bringing new retail options (such as the XM SkyDock) to the market and advertising like they did with the Apple (AAPL) iPhone application. Costs will be up significantly, while revenue remains relatively flat.

Churn – Mel already tipped his hand at the Liberty Media (LMDIA) Conference call regarding this. He said that it inched up slightly. Last quarter, the self-pay churn was reported at 2.0%. This quarter will come in at 2.1%.

EBITDA - Here is the disappointing number for many. Q1 EBITDA was reported as 108.8 million. Q2 EBITDA was 132 million for a total of $240 million. Their projected EBITDA for the year is $400 million, which means they only need to make $160 million for the year to meet their current guidance. I foresee Q3 EBITDA being nothing, plus or minus about 25 million (Sorry, no EBITDA song this quarter). I do not expect to see management upgrade their forecast of “over 400 million” at this conference call, but I do foresee them making (and beating) their own guidance for year end with a strong Q4.

SAC - Will increase significantly due to advertising and increase costs with radios. It will approach the $64 area. (Q2 SAC was $57)

ARPU - Will decrease significantly because all of the parking lot subs that are added are not producing income and trials which produce it slowly. It will approach the $10.55 area. (Q2 ARPU was $10.66)

One Time Charges
Back in August, Sirius XM was able to successfully refinance the Liberty Media (LINTA) financing of 250 million dollars, and reduce their interest rate from 15% to 9.75%, and extend the maturity out quite a bit. Sirius XM recorded a discount amount associated with the loan of $123 million. This discount represents interests and costs associated with the loans that was paid for up front. The funny thing about accounting is that the discount means that they were not carrying the full loan amount on the books as debt. When Sirius XM paid off the debt, it left an imbalance that has to be written off as a one time expense related to the retirement of debt. This $123 million will be discounted slightly, but the company will still have to write off approximately $100 million in one time expenses, or approximately 2.5 cents per share. While many will harp on this, it was done with the sole intent of improving the cash flow and decrease the quarterly interest payments which is a win/win for Sirius XM and its shareholders. Take note that this is merely an accounting procedure and absolutely does not affect the cash on hand. It should be looked at as a good thing.

Earnings Per Share
There are so many unknowns this quarter that it makes any sort of estimates difficult. The toughest of all is an earnings estimate. Traditionally, Q3 has come in somewhere between Q1 and Q2 numbers. Q1 earnings per share was (0.07) and Q2 earnings per share was (0.01) excluding one-time charges of which they had (0.03) in one time charges. I actually see significant improvement in EPS, but not quite to the profitable mark just yet. I see earnings come in at exactly the same as last quarter of (0.01), and a onetime charge of (0.03), bringing the total EPS to (0.04).

Think I’m right? Think I’m wrong? Please let me know why over in the Satwaves Forums!

David “Newman” Phillips
Disclosure: LONG SIRI, no position in any other equity mentioned.
Contact the author at newman@satwaves.com

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