Goldman Sachs analyst Mark Wienkes couldn’t have said it better. Sirius (and XM as well) is pursuing a “niche market opportunity” with a “mass market cost structure.”
This being the case, it should come as no surprise that Sirius’ preannounced results did little to change his opinion. Wienkes reiterated his Conviction Sell rating and is placing his targets and estimates under review pending the release of Sirius’ remaining Q2 metrics:
We maintain our Conviction Sell rating with our price target under review pending additional disclosures in the 10Q. We remain focused on the long term disconnect between an approximate $9bn EV set against a niche market opportunity and mass market cost structure. In our view, the indicators for consumer demand, i.e. ARPU and churn, do not bode well for future FCF to equity holders given the likely decreasing incremental contribution margin and apparent increased cost of financing.
Regarding the Q2 metrics that Sirius did release, Wienkes was mostly unimpressed:
Sirius’ release provided only limited data (subs, self-pay churn, revenue and adj. loss) and leaves us with as many questions about what was disclosed as what wasn’t. At the highest level, the disclosed data highlights rising all-in churn (we estimate 29% of gross adds were additive, down from 79% in 1Q06 and 56% in 1Q07); OEM net adds of just 246k vs. 360k at XM; an undefined conversion ratio 10% below XM’s; and what we estimate is another decline in ARPU both yoy and qoq.