The perpetual delays in getting the approval from the Federal Communications Commission may be the least of worries for Sirius and XM.TheStreet is reporting
that analysts are expecting XM Satellite Radio Holdings Inc., which TheStreet says is set to release its results on Thursday, to post a loss of 39 cents a share, according to a Thomson First Call survey. Sirius Satellite Radio Inc. is expected to lose 7 cents a share as well, when it reports on April 29th.
Shares of Sirius and XM have fallen more than 15% since the last reporting quarter's results in late February.
"Excluding the merger proposal, we do not believe the fundamentals, subscriber growth curves, or risk-adjusted estimates support a premium or equal valuation for Sirius versus XM," wrote Goldman Sachs analyst Mark Wienkes in a February 26th research note, adding that "trends in subscriber adds, churn, and [average revenue per subscriber] confirm our cautious view on the industry."
For Sirius, increases in the churn rate and subscriber acquisition costs (SAC) are what especially trouble analysts, especially in a troubled economy. Monthly churn is expected to rise slightly from 2.3% in the fourth quarter. At the same time, SAC will likely rise from $90 to a range of $95 to $100, according to several analysts. Inreasing churn and growing SAC are also a concern for XM.
But it's the concern of transforming from a retail-based business model to an OEM-driven model that seems to be the most troublesome, according to TheStreet.
Penetration rates have increased in the automotive sector, but in March auto sales fell 12 percent
from a year earlier on an unadjusted basis.
"Recent comments from the automotive industry indicate that many of the issues impacting the subprime [and collateralized debt obligation and loan obligation] market are projected to trickle down and carry negative implications on new car sales, implying around 15 to 16 million units sold in 2008," said Goldman's Wienkes. "As satellite radio operators progress toward an OEM-centric model, watch for primary and derivative effects of a housing and auto slowdown to temper the subscriber ramp."
What TheStreet doesn't mention is that Sirius and XM aren't blind to this, and have said that the increasing penetration rates will offset the declines in auto sales. Whether or not this holds to be true will be seen soon enough.
Analysts also anticipate that the conversion from OEM promotional subscribers will decline - although during the fourth quarter the conversion rate actually increased from 52.4% to 53.9% year over year. For the full-year though, the conversion rate fell slightly from 53.3% in 2006 to 52.7% in 2007.
"Sirius installs will approach 70% of manufactured cars at Chrysler and Ford by year-end 2009 with penetration in other models such Volkswagon and Audi approaching 80%," said RBC Capital Markets analyst David Bank in a note in February. "But the outlook for auto sales is soft, and retail ... demand is anemic, so near-term upside to subscription estimates is probably limited."
As for average revenue per user, or ARPU, TheStreet says that Sirius is expected to see ARPU tick higher in the first quarter, many analysts expect it to go down for XM. And in the event the merger gains FCC approval, ARPU is not expected to improve much as the time progresses.
"We assume no ARPU synergies as the combo may have to agree to price restrictions to get a deal done," said Stifel Nicolaus analyst Kit Spring in a March 25 research note. "We calculate a net ARPU impact over time of a negative 2% to 5%, getting worse over time as the percentage of radios that are a-la-carte capable increase."