Duke: Buffetts & Earnings Disster? 4 minutes ago
Vegas is famous for the all you can eat buffet. The Bellagio probably has the best on the strip but if you are looking for something that does not cost a king's ransom you might try Paris, Las Vegas for comparable quality. If you have been here before you know what happens, everything is included so you eat too much and wind up stuffed.
This week SIRI added over 580,000 new subs and while everyone hailed the achievement SIRI may soon have that bloated overstuffed feeling itself. The problem has to do with accounting rules that you may not totally understand.
When a casino builds one of the mega resorts for a billion dollars the government and accounting rules say that it is a capital expenditure and must be depreciated over 31.5 years or longer. That means that earnings are going to take a hit to the tune of 32M a year and FOR THE MOST PART depreciate is the same every year which makes predictions easy.
SIRI is in a different kind of business. It pays an outright subsidy to auto makers for each radio installed in new autos or in some instances pays for radio that is installed. The problem is that SIRI has no control over how many autos are built in a quarter and so can not accurately forecast its quarterly expenditures. What is worse is that SIRI's expenditures are considered expenses rather than capital expenditures and must be counted against income immediately rather than depreciated over the life of the radio.
What that means is that a big spike in subs implies a big spike in immediate costs. If you read the David Joyce piece carefully he said Sub acquisition cost could rise to 74 from 59 last quarter. This would have a substantial negative impact on second quarter earnings.
Your next question should be, but what about the payment SIRI receives from the auto company. Typically, it will be paid after the car is sold which will means payment in the third quarter. In some cases, it is paid when the auto rolls off the assembly lines. But that does not solve the problem even if SIRI got more money than the subsidy. Let's suppose SIRI paid C $72 for a subsidy in April and got $96 back for a six month sub on June 1. Everything is great...a nice profit. Sorry it does not work that way. For accounting purposes SIRI recognizes $16 in income in the second quarter, 48 in the third quarter and 48 in the fourth quarter. It is called deferred revenue and you can find it on the balance sheet.
So what does it all mean. When there is a big upswing in subs, the costs are borne upfront on the P&L and the income is recognized later. This could lead to an ugly earnings report in Aug. The company will be better off financially but the headline numbers will not reflect the reality. This is the bear strategy.
The Duke will be plying in the second day of the Main Event this weekend and hopefully beyond so maybe LR or Dixon can rep0st this Sunday.
