Sirius XM (Nasdaq: SIRI ) reported better-than-expected earnings on Wednesday.
I talked about those earnings with Orbitcast managing editor Ryan Saghir and Sirius Buzz writer Spencer Osborne. Orbitcast and Sirius Buzz cover satellite radio news and are not affiliated with Sirius XM. Spencer owns shares of Sirius XM. Ryan does not. This transcript has been edited for clarity.
Mac Greer: Spencer, the headline in the piece you wrote post-earnings, "Sirius XM Hitting on All Cylinders." Obviously, you were very, very bullish on the earnings report. What, in your opinion, were the highlights?
Spencer Osborne: I think that for the first time in a long time, there wasn't this little red thorn that was sticking out that everybody would pick on. They [Sirius XM] were able to keep their costs in line. They were able to report good EBIDTA growth year over year -- a little bit down from last quarter, but with adding a bunch of subscribers, they have some costs associated with that and so it was to be expected. They hit what analysts were looking for. They were able to raise some of their guidance.
The reason I used that headline is I have had this mantra for a long time, that if a million cars sell a month, satellite radio will be able to report positive metrics across the board. And that is what happened today. And the average for the quarter was a million cars a month, and we saw it again in July. So I think that's a real positive. Earlier in the week, [CEO] Mel Karmazin said that the business model works well with 11 million cars sold a year and works really well with 12 million cars sold a year. I think we are seeing that start to happen. It's the first time in a long time that there wasn't this little red herring sitting there that everybody would kind of pick on and say, well, what about this? There is not much in that call today that would lead anyone to say, well, what about this?
Greer: And Ryan, when we last spoke, you said the two key numbers you were looking for were the revenue per user, the RPU, and the subscriber acquisition cost. How do those numbers look and what was your headline for the earnings report?
Saghir: Well for the financial side, revenues increased by double digits. And considering we are definitely not out of the economic downturn just yet -- to see that the level of consumer confidence has improved to that point -- my headline was we increased by double digits. If we stayed flat, I would have been happy.
As for RPU, RPU coming in at almost $12, it was like an 11% increase, and that is really good to see. We are seeing that they are not just spending a lot of money to bring in subscribers, but they are trying to do it in a very cost-effective manner, and I think that is really, really a key point, and they really drove that home during the investor call where they are trying to make sure that they are not just looking at growth, but looking at prudent and cost-effective growth, and that is extremely important, in my view. Subscriber acquisition costs actually increased, and that is also very interesting. They really made sure to say, 'Well, look, SAC is up because of a 103% increase in OEM production.' And so they have contracts, and they have to pay that stuff out. There are definitely costs associated with the growth in the OEM automaker section. I think it is interesting to see that; I don't see it as a negative. I am glad that they gave the rationale behind it, and I think all signs seem to be pointing toward the positive. We are not looking at propaganda. We are actually looking at true, cost effective, prudent growth, and I really like to see that.
Greer: And Spencer, one of the things that we talked about recently was auto sales. Auto sales in July look very, very healthy, including Ford (NYSE: F ) , which has a deal with Sirius, so what do you make of the state of the auto industry right now as it relates to Sirius XM?
Osborne: Well, I think that what people really need to understand is that Sirius XM relies very heavily on the auto industry, but what we are seeing is that they don't need to see the auto industry come to full recovery. They can do it with the auto industry only selling 11 million cars. Sirius XM can have good numbers. They can have really good numbers with the OEM industry selling 12 million cars a year. The pace for 2010 is between 11.5 and 12.5 million, depending on which analyst you are looking at, but it is right in that sweet spot neighborhood that allowed Sirius XM to show real and true growth and real and true good numbers. I think that going forward, the forecast for next year are to have about 13.5 million cars sold, so you can start to see the potential as the quarters begin to stack on.
The cautiousness that we need to still carry is that as an equity, Sirius XM is sensitive to any news that happens in the auto channel, and what we are going to come up on now is in August and September, that are going to be compared to last year's August and September, which had Cash for Clunkers. Sirius XM and their management team did a good job of pointing that out in the call, so there should be a little bit of cautiousness because the news might be flat year over year in August; it is down slightly in September. Well, you are comparing to Cash for Clunkers, which was kind of a cash cow for the auto industry, and what they also pointed out, which was real important, that Cash for Clunkers was a lot more of a retail car buyer-driven program, rather than fleet sales. The government is not going to go pay for satellite radio subscriptions in a government car that happens to have satellite radio in it.
So to Ryan's point, that is where the smart growth comes in. That is where they are starting to pick and choose which vehicles and how much penetration they want in those vehicles. I think that it was very good that they said, hey, right now we are comfortable being in the low 60s for a penetration rate. We don't need to get into every car. We want to do it smartly. And I think investors will start to realize that and see that even with the current state, as long as sales are about a million vehicles per month, Sirius XM can be very stable and put together some very good numbers and very good quarters, time after time.