By Relmor Demitrius

 

Howard Stern will soon announce his plans for beyond 2010.  His current five year, 100 million dollar per year contract with Sirius XM Radio (NASDAQ:SIRI) will expire on December 31^st, 2010.  Will he re-sign with the company that made him the highest paid radio or television performer in history or will he part ways?  His comments so far seem to indicate he is indeed staying.  Regardless of his decision, it is important to explore and weigh his options from his point of view and from Sirius XM’s.  Is any decision or path disastrous or a huge negative for either party?  Are their options best suited for both?  Here are the most logical choices and scenarios.  With each choice comes with its own set of consequences and effects for both parties. 

The most obvious outcome is Howard gets his way and works less hours.  He will probably try to work less hours while making the same salary as his current contract.  Since he got four days a week last time, I think this time he tries for three.  Current comments he has made in the last few months on air seem to indicate he is at least contemplating a three day work week.  What would happen if he re-signed and worked less days?  His fans would care and the show would suffer.  Just too much away time.  Now this cast of characters is away from each other more than together.  Four days off, three days on.  If Mel Karmazin (CEO of Sirius XM Radio) allows this to occur, expect his audience to drop off even more.  Now you’re asking your fan base to “go find other entertainment” two days out of the work week rather than one.  Already he is away a lot of the time.  Jim Rhome works 5 days a week.  Rush Limbaugh works a full week.  Michael Savage clocks in to put out a show every day.  Howard Stern apparently doesn’t feel it is necessary.  He is special.  That’s fine.  His listeners will learn to do without him more and more.  This is a positive for the company, as it directs frustration and malaise toward Howard and his show, and none at Sirius XM or management.  This scenario overall would be beneficial to the company but not ideal short term.  I think Mel gets some degree of a salary drop out of Howard if he wants to work less time.  He may also even let him start the show an hour later, as well.  Another huge mistake by Howard and disappointing to his fans.  It is a morning show after all on the east coast.  Half the country will be at lunch when the show is finally getting going.  This once again would direct frustration at Howard and not the service.  So if Howard does work less and comes in later, SiriusXM would benefit in one regard because it will ease the transition from Howard to eventually no Howard with no ill feeling toward the company.  This would be Howard Stern’s 100% decision to do this, because Sirius XM wants Howard to work the same amount and arrive to work at the same time his loyal fans are used to.  Howard claimed yesterday Sirius XM should be called “Howard Radio”.  More like Lazy Radio, in actuality.  Factually, that is a much better name.  Or Howardless Radio, or Howard Lite.  Or Half Howard.  Discount Howard.  Whatever works.  All are more accurate and make more sense than “Howard Radio” considering his stated new demands on the company.  As my last article proved, the OEM market transition and XM subscriber base being still higher than Sirius’s proves he is not the end all for satellite radio.  If you did not catch yesterday’s article, it can be found here( http://www.kingofalltrades.com/2010/09/02/how-much-of-sirius-xms-success-is-howard-stern/).  He has overstated his value and I believe Mel Karmazin being in the business almost all his life and being very intelligent is well aware of this.  At the time he was announced in 2004 the new platform needed the popularity and publicity of signing a huge name like Howard Stern.  Today that is not the case at all.  The content offering is so vast one talent does not define the service.  Remember, Mel did not sign Howard to this huge and expensive contract.  Ex Sirius CEO Joe Clayton did.  Howard also received millions in stock options as well in this deal.

The best case scenario is Howard re-signs for the same money and works the same amount of time, but gets another channel to groom his replacement.  He mentioned today on air that he might get a third channel.  His budget might go up if this happened.  This would be ideal for Stern and his fans, as they would still get him the same amount of time at the same start time, and good for the company because his replacement would be created by maybe a still part owner of the company, Stern himself.

Howard Stern could take his talents to South Beach….  Ok just kidding.  Stern can offer his own platform, utilizing internet technology.  I am not an expert in exactly how this would work, but I do know it’s something Howard has never done before and would be completely out of the ordinary for a radio personality.  Internet service only is inferior exposure, as is offering it directly to smart phones.  Howard would be narrowing his audience greatly if he did this.  The delay from being off the air to back on would also be a large gap.  People might consider this confusing and lose interest in him and his cast of characters all together.  They may feel its too complicated or Howard has now insufficient avenues of communicating access to his service and loses the ability to generate new listeners (New Sirius XM customers signing up for the NFL, etc.. wouldn’t be exposed to his content).  Plus he would have to set up his own billing or hire someone to do that, handle customer service, and maintain the network.  This is more work and more costly than what he is doing now.  Sirius XM can possible one day offer a global distribution network, with the help of part owner, Liberty Media.  Anyone in the world might one day be able to hear Howard Stern anywhere.  Would he pass up the chance to be a part of this future?  Howard also already has 100% freedom on this channels.  He left terrestrial radio because he was being censored and the money was so much better on satellite radio.  Leaving for his new platform might net him less money, less listeners, and possible higher stress levels.  Howard Stern isn’t the type of personality to enter this phase of his career into an unknown entity and possible find out there aren’t that many people willing to directly pay to access him alone as he thought there was.  Howard Stern sees Sirius XM and satellite radio as part of him, and has pride in its success.  On the verge of breaking out and making it putting all the naysayers to bed and shoving it in the face of the FCC and terrestrial radio is too much to pass up.  I don’t see Howard doing this new platform scenario right now.  This is the least likely scenario happening.

Howard Stern could retire.  He is still a relatively young man.  He is only 56 years old.  Speaking into a microphone for three hours a day, four days a week (even three days a week if he has his way) isn’t exactly taxing.  He has supporting writers, hundreds of on air personalities, bits and a busy interview schedule.  It is not like he has to write a three hour Academy award winning cinematic event every day.  I would think this world we live in can provide endless material for someone as smart and clever as Stern.  I believe he has the energy for another full contract.  Five years wouldn’t surprise me, but I feel three or four might be in the cards this time.

Mel can decide Howard is asking for too much money and simply refuse to pay him.  Howard leaves bitter maybe even being fired for on air comments.  His fans leave in mass exodus and his stations are immediately transitioned into another talent or some other product.  Sirius XM losses 500,000 subscribers (about equal to what they gained last quarter).  Within 1 year Sirius XM hasn’t missed a step and its business as usual.  They save the 100 million dollars a year they paid Howard.  They can now use this money to improve the product.  Obviously, what’s being described here could also be done if he simply retired as well.  Whether this is signing away Rush Limbaugh or Michael Savage who knows.  I would expect Mel to make his first big splash if this money frees up.  Don’t bet against Mel actually hiring someone or even two talents here for less money than Howard and capable of adding even more subs than left because Howard left.  It might be one service, one content provider, one talk show host, or two, or a combination of all these.  It would be fun to find out how Mel would do this.  With all the added revenue since the business model in finally generating positive cash flow, Mel might be looking to make a big splash soon anyway, so this would definitely up the time table and necessity.

Howard can retire on good terms, at the end of his current deal.  Howard’s contract expires on December 31^st, 2010.  After that he can do whatever he wants with his time.  He may choose to decide its been a long career and wishes to spend the rest of his life with his family.  His crew is well taken care of and he can help them with their careers from the sideline as well.  This is an okay scenario also for Sirius XM because his fans are not angry with the company.  In this scenario even less subscribers would cancel.  Likely,  a very small percentage would cancel in this situation.  Now him leaving can be transitioned well, and Sirius XM can move on in strength.

Howard decides to go back to terrestrial radio…..  Just kidding.  Let the ignorant approach this subject with you.   I won’t waste your time.  This is next to an impossible scenario.  Only reason I won’t say impossible is because it would be irresponsible for me in this setting to say such a thing.  Anything is possible of course.  Ask me in chat on kingofalltrades website, and I will tell you the real chances of this happening.

If Howard Stern did leave in any of those above scenarios, what exactly could Mel get for 100 million?  I am not sure exactly about how their contracts would work but there is a long list of talent Sirius XM could go after if needed.  They could afford more than one of these fine talents.  Howard Stern makes more than double of any of them.

Rush Limbaugh.  Has millions of listeners and loyal fans across the country.  A perfect fit for satellite radio and a big draw for new customers.

Michael Savage.  Has over 8 million listeners across the country and is widely respected.  His is smart, funny, and intelligent.  Conservative in some ways like Rush, but not myopic or a Republican apologist.  Broader range of target audience.

Tom Leykis( The Sam Kinison of Radio).  He still works and his show would work much better on a satellite radio uncensored national audience.  This guy is smart, worldly, funny, and controversial. 

Adam Corolla.  Not a fan but some people find him funny.  I however do not.

Russel Brand (already been reported talking with him).

Jim Rome.  Huge sports audience across the country.  An LA guy that has national appeal.

Colin Cowherd (Smartest Sports Talk Show Host in the Country).

Joe Rogan (Surprisingly intelligent funny and talented, a true sleeper.  If you only know him from Fear Factor, you don’t know him).

Buy Pandora outright.  Incorporate the service into theirs.  This would be in effect like Mel shopping for steak and throwing in some bananas.  The cost to buy Pandora would be very minimal.  Wouldn’t take the entire first years salary of Howard Stern to do it.  This company barely makes a penny and has a business model that is near impossible to monetize.  But stripping their program down and using it in some way with their services might be beneficial.  Same below with Slacker. 

Buy Slacker outright. 

Jesse Jackson.  Enough said.  This would be a huge channel.

Sarah Palin.  Popular political figure with time on her hands.

Al Gore (Pollution Channel…)

Could you imagine the Bill Clinton Network….. “Cigar Hour” followed by The “Best Night Spots in Mexico”.  It would be a national sensation.  As ludicrous as that sounds, what satellite radio can offer is limited only by the imagination.  If I was handed 100 million dollars and told to add subscribers and you could do anything you wanted to do, I would be like a kid in a candy store.  Sirius XM is just now beginning to understand the amazing freedoms they enjoy and possibilities in the satellite radio format and distribution model.  The future is bright for the company with or without Howard Stern.

Stay or go I see a nice future for satellite radio.  They have enough income to maintain a large subscriber base by simply adding talent lost.  Nobody is irreplaceable.  And if Howard Stern leaves satellite radio he will find that out too.  The age of the content provider and the platform and the model are more important than any one person or entity.  Just ask Comcast or Apple how true that is.

 

Disclosure:  Long SIRI

By Gino Lattarulo

Last week Maxim Group initiated coverage of Sirius / XM (NASDAQ:SIRI) with a “buy” rating and a 1.40 price target. It appears that most analysts share Maxim’s upbeat opinion — Reporting site Zacks shows four “strong buys,” two “holds” and zero “sells”. Hedge Fund mogul George Soros got in on the action as well by purchasing 29 million convertible notes ( valued at 28 million). With 5.6% of SIRI’s float being short interest I think that some squeezing will begin to take effect in the near future as the bearish trades begin to unwind.

For Sirius, the real confidence comes not only from its debt issue being resolved by Liberty Media, but from increased subscriber sales fueled by the ever important auto sector which is once again experiencing growth. Ford (NYSE:F) , Toyota (NYSE:TM), Honda (NYSE:HMC), and the newly minted GM have all reported solid quarterly numbers with encouraging forward guidance.

The satellite radio subscriber base at the end of the second quarter was 19.5 million which is an increase of 6% over 2009.  Sirius expects to add another 1.1 million subscribers by the end of  2010, has generated higher average revenue per user,  and lowered costs to help fuel net profit.  Subscribers paid  $11.81 per month (11 % from the same quarter in 2009) due to demand for the “Best Of” programming. These strong results also show that the negative impact from free services may not be as high as expected as the company reiterated its annual estimates of $2.8 billion in revenue. It was the third straight quarter that  Sirius reported better than expected results. (more…)

By Relmor Demitrius

 

Sirius XM Radio (NASDAQ:SIRI) is offered many opinions of what their shares are actually worth.  It just depends on who you listen too.  There seems to be a vastly different view of just how much one should pay for this equity and ultimately what is their appropriate market cap.  If readers know my style, they know I do not work with subjectives or opinions.  I like cold hard facts when I tackle a problem.  The pulse of the investor community seems to be right now on trying to understand how an equity so obviously undervalued is still priced at $1 a share.  What is Sirius XM’s real fair value?  Well why waste a second longer, let us begin.

Without boring anyone on just how dangerous it is to attempt to use the stock market current price at any one time to try to determine actual retail sale value of a company and hence what one share is actually worth in reality (meaning if every share were to be purchased at one time, at what price could they buy the company) might offer a little insight.  Here is a good example of this from 2008. (more…)

By Relmor Demitrius

 

Sirius XM Radio (NASDAQ:SIRI) announced in a press release yesterday some of their second quarter numbers for 2010.  Some journalists and analysts were skeptical of how this would affect their bottom line right away, and noticed that although this growth is good, it still is trailing the pace from 2008, before the merger.  Others warn of the high costs associated with these subscriber additions and how that can effect their bottom line.  Let us address some of these issues.

Sirius XM added way more subscribers than was forecasted even by the most bullish estimates, increased their take rate on auto conversions, and their churn went down.  Here is a summary of the points Sirius XM mentioned in their PR from July 8th.

They added 583,249 net subscribers in the second quarter of 2010.  My personal estimate was going to be around 300,000 to 350,000 net additions for Q2.  Most analysts had much lower than this.  Sirius XM had to raise their subscriber guidance off this news to 1.1 million net additions for 2010.  This is more than double their original estimate.

The take rate on auto conversions (percentage of people exposed to the product that actually keep it past the free trial) went up to 46.7% from 44.3% for the second quarter of 2009.  This is also an increase from Q1 to Q2 as well.  The take rate is an important metric, especially as penetration grows.  More cars with satellite radio combined with a higher take rate seems to indicate smarter penetration by Sirius XM is working.  Smarter penetration from Sirius XM means that they are targeting what cars that have the radio standard.  This improves their chances to acquire a subscriber by using data on the success of past brands and models.  An increased penetration rate combined with an increased take rate is evidence this might be working.

Churn was 1.8% versus 2% from a year ago.  This means less people are canceling the service.  This will improve their self pay numbers (core long term users who are a guaranteed monthly revenue stream, talked about by Greg Maffei (CEO of Liberty Media(NASDAQ:LINTA)) as one of the major reasons for acquiring an interest in the company).

Sirius XM subscriber growth projections for the rest of 2010 will put them well over the 20 million subscriber mark.  This current subscriber mark has significance as it now gives them more subscribers than at any time in its history.  They are growing their business model while many companies are retracting and cutting back.  In the worst economic environment in my lifetime, Sirius XM has managed to grow its revenue and subscriber base, while cutting costs at the same time.  

The old adage that Sirius XM pundits spout about how adding subscribers is a huge drag to their bottom line, is no longer a relevant argument.  Ignore these people.  They are old school Sirius XM thinkers.  The metrics of this company are very very different than pre merger, or even just after.  That was pre merger, pre royalty rates, and pre renegotiated GM contract, among many other factors.  The money Sirius XM is saving on the new GM contract has turned out to be substantial percentage wise compared to the old deal, and this is just the first of many contracts they will rework over time.  ARPU is dramatically more now and costs to acquire subscribers have dramatically dropped.  Also huge auto sale jumps are uncommon, and a steady increase in auto sales is ideal for quarter to quarter growth and a balance of immediate benefits to their bottom line.  Yes, a huge jump in auto sales would be a drain temporarily on their cash flow.  But no longer will this prevent them from adding cash even that quarter.  They have such a wide operating margin now, these things no longer hurt them as in the past.  That was before the tipping point of costs to acquire no longer restricted cash flow, or prevented forward spending. 

Do you know how much more cash it took to add 550,000 subs verses the expected 300,000?  15 million dollars more.  That’s it.  Do you know what they took in from royalty charges alone that were nonexistent in Q2 of 2009?  60 million dollars.  As you can see, affecting the bottom line with cost increases to add new subscribers is much harder to do now.  70 cents of every added dollar of revenue, according to CEO Mel Karmazin, goes right to their bottom line.  How many companies can say that?

Sirius XM raises their average weighted subscriber totals (used with ARPU to calculate subscriber revenue) as they increase their total sub base.  This money is immediately calculated in based on the flow of subscribers from last Q.  And the Q before.  To say, well, costs to acquire new subs is high, that cuts down on profits.  True, and you can say that until the end of time, or Sirius XM stops adding subscribers.  These same people better be happy the day that Sirius XM stops adding subscribers, so their costs stay low that quarter.  As you can see the logic is laughable.  The costs to acquire are now nothing compared to their self pay revenue generating machine.  New subscribers only help this and it becomes exponentially more positive to the bottom line every quarter.  Will they get a rush of cash flow in once sub growth stops?  Yes.  Is this something to look forward too, or as the logical end conclusion to the argument that adding subs hurts their bottom line.  I don’t think so.  I think most investors would agree. 

 

For up to date financial news, fundamental and technical analysis, and forum discussions on all trades and investments, visit www.kingofalltrades.com.

 

Disclosure:  Long SIRI

By Relmor Demitrius

 

One June 25th, this Friday, the Russell family of indexes will have its yearly reconstitution event.  This event adds and deletes companies on their Russell index’s and tracking funds. Sirius XM Radio (NASDAQ:SIRI) will be one such addition.  It is not 100% official, as the official list doesn’t come out until next Monday, but its about as sure a lock as you can get in this type of situation.  Sirius XM was listed as an addition on the first two lists released, one on June 11th and the other on June 18th.  This is good timing for a stock that has been in an uptrend now since 6/9/10.  The equity has been moving up into this planned buy. 

Russell reconstitution is usually a high volume event that can result in massive volatility of price movement on that day.  On Friday, over 200 million shares, maybe much more, must be purchased.  Last year the market dumped these Russell shares, now the company enjoys the benefit of the reverse of that scenario.  One of the best advantages of being added is these shares will now not trade anymore.  They are used for exposure, not to be traded around.  This is great news for Sirius XM investors as any reduction in the tradable float can help sustain price levels and reduce downside volatility.  I believe Sirius XM will be added to the Russell 1000, which is a list of the top 1000 companies, based mostly on market cap but not entirely, which would require even more stock to be purchased.  The more lists they are on, i.e. Russell 1000, Russell 3000, Global funds, mid cap funds, etc.. the more shares will need to become available.  It has been speculated as many as 500 million shares may be required.  But who’s going to sell them the shares? (more…)