Mel Karmazin Archive

2

Sirius XM vs. Pandora/Internet Radio: Apples and Oranges?

By
king1
– October 3, 2011
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Relmor Demitrius

 

      Sirius XM Radio (NASDAQ:SIRI) has many competitors. In this series of articles, first of which was Sirius XM vs. HD Radio, I look to find which competitors are valid and which are fiction. I was going to write individually about Pandora (NYSE:P), Spotify and I Heart Radio, but I decided there is no point. In 6 months I’d have to talk about another start up or existing internet service that is going to “crush Sirius XM”. So in lieu of rewriting this article every 2 weeks, I have decided to just include all internet services in this comparision. First we must clearly define what this segment of the competition offers.

Music choices. Lots of them. Hundreds of them. There are literally hundreds of internet sites that store, hold, allow downloaded, or allow a random order of music to your computer or internet device(i.e. car, Ipod, laptop, or smart phone). In fact, there are probably more internet radio options every day. The car was the latest place to add the internet. OEM manufactures didn’t want to let the other guy allow easy internet access and went futher and allowed a few of the more popular programs to be accessed “hands free”. Nice features for any new car. What others won’t tell you is these features are also for use with Sirius XM Radio as well, which include their weather, traffic, and entertainment data services. These can all be accessed hands off with Fords Sync and Dodges U Connect as well as Pandora. So when you read somewhere that a car is “adding Pandora”, what they are really doing is adding the internet and making it easy to get to Pandora. You can get there anyway, regardless.

There are literally thousands of pay ways and free ways to access music on the internet. It has been this way since around 1994. Smart phones began allowing instant music access anywhere around 2005. The internet in the car has been around for about 2 years now, on a large scale. When I say large scale, do I in no way mean the majority of cars and trucks. This as a standard feature in all cars is still years and years away. Yes, all those cheap non discretionary money spenders will have to wait.

Spotify entered the US market recently as a competitor of Rhapsody. Every day more and more music choices are on the internet. The internet is the huge medium for music access. Terrestrial radio entered this market with many online products as well. On November 7, 1994, WXYC 89.3 FM in CHapel Hill, NC became the first traditional radio station to announce broadcasting on the Internet. So internet radio has been around 7 years before Sirius XM began its service. The internet itself and allowing music access through sites like Napster.com have been around for decades now, even decades before Sirius XM began service. I will include internet companies like Pandora and Slacker (much better product than Pandora, not even close) as a courtesy, even though these companies are not even close to radio, nor is Spotify. CBS Radio online streaming and I Heart Radio are the main competitors here, as these are actually radio services.

What is Radio? I define, in the 21st century, Radio as a two way communication device that broadcasts content to a mass audience. Talk, sports, weather, data services, and all forms of audio entertainment define radio. Unfortunately Spotify, Rhapsody, Slacker, and Pandora type services don’t qualify as radio. I Heart Radio and CBS Radio streaming is radio. It is just terrestrial radio rebroadcasted online. So it’s simply the poor product that created the need for satellite radio in the first place on the internet. And the other sites are Napster basically. Napster has been around since 1990′s, I hate to break it to all the Spotify and Rhapsody fans. Pandora is a new concept, a random music generator. Definitely not radio, but a cute niche free service that has no surge in revenue potential. Too easy to mimic and no unique content. Availablility is irrelevant in 5 years. Everything will be available almost everywhere on any device in 5 years. Your going to need more than “available” to make it in the future. What is radio is a good question but let’s focus on other aspects right now.

As you can see, there are many competitors for online music. Even traditional terrestrial radio has an online precense that competes with Sirius XM. So where does Sirius XM come in?

- Sirius XM is a unique service that doesn’t have an equal. It is true radio. Its closest competitor is terrestrial online radio companies. Here is where they differ.

- Commericals. It’s still the same radio you can get on your AM/FM radio. No difference. Doesn’t sound better, last longer, or have few commericials. They are not better DJ‘s, fewer commercials, or anything else to differentiate itself from their broadcasted airways counterparts.

- Availablility. Sirius XM coverage area is still the most of any music service in the United States. No close second. None.
- Consistant pricing. Sirius XM has no additional charges to the consumer if your not in a “wi fi” hot spot. Same price in the city or in the country. Data charges start racking up for internet mobile users once wi fi hot spots are not being used.

- More than music. As is terrestrial radio more than music, so is Sirius XM Radio. Here is where Pandora and Spotify have to say good bye and all random music generators or music storage programs. These services do not offer human interaction. They do not offer traffic services, weather services, or allow emergency or relevant news to be communicated quickly to many people over a large area. They don’t cover the news, offer opinions, or an outlet to communicate to its listeners. Want to call in and talk about the presidential election? Pandora will not answer your phone call. Why? Because its not radio. Anyone who calls Pandora a Radio company doesn’t understand the space, ignore them and move on. Look at them like they are crazy and offer them professional councelling. Netflix (NASDAQ:NFLX) investors had the same look in their eyes when I told them their is nothing unique about your company. You have no content, hence no real power. Its hard for investors to grasp “power paradigms” but in some cases it just takes a bit of common sense. The key to any business is what makes you unique and the control you have over your content or product. Netflix wasn’t unique, in any way. What made them powerful was……………

AVAILABILITY!!! You guessed it. First to the XBOX, first to the internet and first to your mailbox. But what is Netflix? It is a 100% content distribution company. Some see Netflix as a Sirius XM. A content distrubution company. Not entirely true. They have a ton of unqique content you can only find on Sirius XM. It is also a content mega store. Want CNBC, NFL, and Martha Stewart on one service? Look no further. Want to hear local traffic and Bloomberg radio without missing your favorite stock quotes? Simply record your Bloomberg show and listen to the traffic. Then go back and listen to your Bloomberg Finance show at your convienience. Can Pandora do that? Of course not. Because its not really a competitor of Sirius XM. Analysts pumping Pandora and brokers would love to convince you that it is competition, but the numbers say otherwise. Let’s look at total revenue from radio and how it breaks down.

At end of year 2010, there was a total of 18.8 billion dollars in revenue generated by the radio industry. Although I do not include many of these companies in this space personally, Sirius XM has so I will include them here to humor them. Of that revenue, terrestrial radio produced $15 billion or 80% of it. Now that’s Sirius XM’s competition right there. Of that money, Sirius XM received 3 billion dollars. All internet radio companies combined, excluding Spotify which was not in the United States yet, was only 5%, or less than 1 billion dollars. So Sirius XM alone gross’s more than 3 times as much as all the internet radio companies combined. Who do you think record labels and performing artists like more? The 80% paying next to nothing in royalties, or Sirius XM paying 7% of their revenue? Even the pittance for a combined internet radio space doesn’t excite anyone. So who’s rooting for who here? Don’t discount where the content kings want their content to appear in the future. Part of a free business model with limited return, or a subscriber business model with consistant cash flow?

As for pay subscription service money for radio, Sirius XM is king. They receive 90% of all subscription money paid into the radio space. Of the total 3.1 billion dollars estimated for end of year 2010, 2.8 billion of that was Sirius XM’s. So approximately 300 million dollars left for all other services combined.

But you say, how much does each user generate for the radio companies involved. At the end of year 2009, Sirius XM generated $172 per subscriber and $72 a listener. Terrestrial radio generated $10 to $12 a listener and internet radio generated around $1.25 per user. If you were an advertiser, where would you pay more to advertise? Which of these user groups do you think has the highest percentage of disposable income? Sirius XM does of course. An Arbitron study done from 2010 clearly showed that. Age and income of the Sirius XM user is higher than those who listen to free music. It’s common sense. So can Pandora tap more free users? Of course they can. Can Sirius XM tap even more higher income users would prefer actual radio content over free? Of course they can. This isn’t an article to say if internet radio’s business models are substainable. Although recent comments from the founder of Pandora seem to indicate he isn’t even bullish his own model. This quote from Tim Westergren is revealing:

“One that is still fresh in my mind was the fight over royalty rates when we almost went out of business because the rates imposed by the copyright tribunal were astronomically high.

Our next great challenge is going to be tackling the licensing issues internationally.”

Basically Pandora was out of business if those representing the royalty side, SoundExchange or whoever it happened to be, got what they wanted, seen to them as a fair deal for their rights. They settled on a temporary agreement that now puts revenue step and step with costs. As their revenue goes up so do their costs. As more users use the product, so do their costs. Once Sirius XM adds a subcriber, that cost is 100% done. They system is already in use, and their total revenue is adjusted percentage wise, 7%, to pay the royalties on that added revenue. Also 1 difference. That money is paid by the consumer, not Sirius XM. Sirius XM passed along this free to its customers and they paid it and the company still added over 1 million subscribers since it was instituted. Here is another quote from Westergren.

“Pandora plays the music of over 90,000 artists. This translates into a substantially larger number of rights owners — the artists themselves, labels, publishers, etc.

Without a one-stop shop for licensing, it’s administratively difficult to enable the service. Where these centralized entities do exist, they have demanded royalty rates that are completely uneconomic. I would argue that in so doing, they are failing to serve their very constituents.”

I would argue, uneconomical for who? So Pandora feels that royalty demands should fit into their model. That’s ludicrious. Could you imagine if a corporation called the IRS and asked them to suspend their tax payments because they are ”unable to fit them into their model”. They would laugh at the company and hang up. That is what the Sound Exchange and other agencies representing the music performers/labels and songwritiers should have told them. Never heard such illogical ranting in my life from a “CEO” of a company. Terrestrial radio business model relies on a basically free royalty situation. Artists and record labels have fought long and hard to break the NAB controlled FCC and Congress on this issue. Without legal protection from the government, terrestrial radio’s business model becomes obsolute as well. The times of music labels and record companies needing terrestrial radio to promote their new music offerings are over. Sirius XM not only will promote your music, they will pay you more than anyone else for it, per dollar of revenue generated from that music. I sense a larger relationship between Sirius XM and record companies in the future. We should just call them music content originators really. Some analysts even see trickery in how Pandora reported their latest earnings. By delaying royalty payments and with cash from the IPO, they appear stronger then they really are. So Pandora, in my opinion, is in big trouble. I believe their model is unsubstainable. According to Jim Edwards of BNET, the SEC has informed Pandora that their model is unsubstainable. Seems like there is some agreement here from higher parties as well. Here is what the SEC stated.

“In order to provide greater balance to your summary, highlight that:

You currently operate under a business plan strongly reliant on lobbied concessions and federal court and federal agency consent decrees and settlements, setting reduced royalty and licensing rates that expire in 2015 and that ordinary rates, not subject to such extraordinary measures, to which you may be subject upon the expiration of these exceptions make your current business plan unsustainable, as discussed in your risk factors on page 15 and 16;”

So as you can see, some are some aren’t. One thing is true always since the .com explosion. Internet companies will come and go, and they usually are never bigger than when the media is pumping them. Yahoo has been around for decades now. They still struggle with growth. Ebay has trouble growing. Amazon.com is good. Google is a search engine and Facebook is our social network. Can you name 10 websites that have stood the test of time outside of these for 10 years? I can’t either. Actually you couldn’t even include Facebook if you go back 10 years. Anyone remember Myspace? Exactly. At least no sites that generate signficant profits and are exploding with growth potential still 10 years later. Why? Because in the end, forget the website or where you can access it, it ultimately comes down to unique service and content.  Just because Pandora is heard in a car, doesn’t mean the driver is watching the ads stroll by, or they get better users. Geez, I hope not. Internet radio is unsafe then as well. If these ads turn to audible ads, then you are no better than what Sirius XM was created for; to avoid commericials and noisy interruptions in your day, and maximum variety. If I wanted to be blasted with ads and listen to the same songs over and over I’d just turn on my AM/FM radio and probably get better reception and no data charges to boot.

Terrestrial radio is becoming less powerful by the day as Clear Channel is struggling and other companies are selling off markets to local control. It’s all about the nationally syndicated shows now and the national advertising dollars. The evolution of any business is that way. Look at the cable and satellite TV industries. Local shows are practically extinct except for the local news now and a few day time TV shows run by individual networks. My local radio stations pick up a ton of national content now. Most talk stations run national shows now not local shows. This pulls them further out of the communities and ironically makes them less of a competitior to satellite radio due to its declining influence on the community itself. National syndicated shows are all over Sirius XM already and easily available. You don’t need to worry about if or when your local station manager will pick up this guy or that guy. Your one stop radio site is already available.

If internet radio appears to be growing, it probably is. In 2006 the OEM side was in its infancy. Penetration into the OEM market was a tiny 21%. The next wave of new car buyers, about every 5 year cycle, would not have been exposed to the product as of yet. Sirius XM is still expanding their exposure. By 2015 approximatetly 75 million cars will have a satellite radio in it. One difference. The two industries are not going after the same audience. Those who have no money for discretionary spending are internet radio listeners mostly. Those who can afford to pay for radio will. Those who can’t will find nice cheap options. So as you can see, there is an entire country still to expose to both sets of products. With added internet availablility and access will come more exposure to their services. But it’s still free, it’s still not radio and it’s still not Sirius XM’s target customer base. Availability, OEM cars, wi fi, or whatever expands exposure to all these products. As Sirius XM customer base grows so could internet radio’s customer base. Anyone who is foolish enough to point out that growth in Spotify or Pandora means declining interest in satellite radio doesn’t understand this concept, has a poor grasp of the sector, and probably shouldn’t have an opinion on the subject.

Another problem now with internet radio is you can’t hear it anywhere you can’t hear Sirius XM. Period. Not one place, not one car, not one computer. Not one cell phone,Ipad or Ipod. If you can get online, you can access Sirius XM. If you have a satellite radio you will pick up the signal anywhere within the continental United States, parts of Canada, Mexico, and Alaska. Off the coast, in the desert, or on a river in the middle of no where, it doesn’t matter. So still Sirius XM has a greater coverage area. Sirius XM is still expanding their exposure with used car markets and new car buyers. Internet radio is as well. Keep in mind, Sirius XM has grown through the introduction of internet radio.

Still free is free. It’s never been a business model that has been a game changer. Facebook has 500 million users worldwide, and they still don’t generate the revenue Sirius XM does with only 21 million subscribers. In the world of business models, subsciber ones are simply better than ad based free models. It takes an insane amount of users to even hint at big profits in this format. If terrestrial radio ever had to pay streaming rights on their station’s rebroadcasts over the internet, I Heart Radio would fail the next day. If Spotify, Rhapsody, and Pandora ever had to pay up for their real usage like satellite radio does, they would be out of business in short order. Basically any internet music company is a law away from extinction. As is they are stuggling with a very small market share of money to divide up.

Itunes, Amazon.com, Rhaspody, Spotify, and Pandora all make money on the backs of artists and record labels who are catching on to what is really important, content. Netflix is starting to see that too. With Starz bolting , just wait until Sony, EMI, or BMG pulls their rights from all internet radio stations for more money and control of content flow. When their libraries start shrinking you will see the last dying grasp of a chaotic industry that never should have existed. Record labels have failed their artists and industries allowing this to run rampant. Sirius XM is a record label companys greatest supporter. They pay more money a year than any online site combined. Sirius XM pays over 220 million dollars a year for the rights to play its music selection. If Pandora had to pay that, they have more users why shouldnt they, you wouldn’t see them pumping that 90 million users, you would watch it drop to 5 million faster than you can blink. Their honesty would be forthcoming then. Well , we really don’t have that many users, it’s more like 5 million, not 90 million. Hilarious of course. Numbers are fun to play with aren’t they?  Reality is this. Pandora generates around zero dollars in cash profit. Sirius XM is generating around 180 million dollars a quarter and rising in profits. Sirius XM with cash on hand could buy out Pandora today. At least a majority stake. Why hasn’t Mel Kamarazin? Because he’s not stupid thats why. Do you think Pandora  going to an IPO is a coincidence.  No, it’s called getting venture capilatists their money back. Same reason Facebook sold some control. Hard to monetize a online business like Facebook, FORGET PANDORA. Pandora is near impossible to value. With no barrier to entry and no loyal fan base (any random music generator online would suffice if exposed) I don’t see Pandora or any internet music company competition for Sirius XM.

With the advent of internet radio, Sirius XM has grown from zero subscribers to over 21 million subscribers. Effect of internet radio to date: None. No effect shown. I will update this topic every year to make sure. Remember, internet radio was available over 6 years before the very first Sirius XM subcriber even existed.

Next up: Sirius XM Vs. Terrestrial Radio

Disclosure: Long SIRI

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2

What Exactly Does Sirius XM’s 2012 Guidance Actually Mean

By
king1
– September 20, 2011
Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin on September 14 announced during the BOA Media Conference their guidance for 2012. His presentation was almost entirely new information, which was a bit of a surprise to the media present and investors who were listening. In years past these conferences held tidbits and hints of information but this time Mel was candid and forthcoming with news on Sirius 2.0, the upcoming price increase, plans for the future, and in fact guidance for 2012 earlier than promised. Mel had stated that guidance for 2012 would come during the third quarter conference call in November. Why did Mel release this information earlier than planned? I’m sure at the time Mel knew he was presenting at the Bank of America conference. It could be possible Mel was so excited about the news of 2012 and what it meant for the company (2012 was a targeted crucial year in Sirius XM’s recovery) going forward. Apparently from the lack of upgrades, price target increases, and general malaise about the presentation, I apparently am needed to explain just what exactly Sirius XM is guiding. It is more than just some numbers on a piece of paper. But first let us address some of the other aspects of the conference and what we learned from his discussion other than guidance.

By Relmor Demitrius -

Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin on September 14 announced during the BOA Media Conference their guidance for 2012.  His presentation was almost entirely new information, which was a bit of a surprise to the media present and investors who were listening.  In years past these conferences held tidbits and hints of information but this time Mel was candid and forthcoming with news on Sirius 2.0, the upcoming price increase, plans for the future, and in fact guidance for 2012 earlier than promised.  Mel had stated that guidance for 2012 would come during the third quarter conference call in November.  Why did Mel release this information earlier than planned?  I’m sure at the time Mel knew he was presenting at the Bank of America conference.  It could be possible Mel was so excited about the news of 2012 and what it meant for the company (2012 was a targeted crucial year in Sirius XM’s recovery) going forward.  Apparently from the lack of upgrades, price target increases, and general malaise about the presentation, I apparently am needed to explain just what exactly Sirius XM is guiding.  It is more than just some numbers on a piece of paper.  But first let us address some of the other aspects of the conference and what we learned from his discussion other than guidance.

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I could talk about Mel’s hints and his tone.  I could discuss how Mel appears to show disdain toward the “Doctor”, John Malone, as he called him, to a huge laugh.  When an ignorant questioner tried to foment an opinion that wasn’t true about Malone and the stock price, Mel was quick to embarrass her and show that he isn’t amused anymore by media fomenting, especially on that touchy subject of Malone stealing 40% of the company.  He was clear in his intent that Liberty was a necessary evil and that he would prefer they not be involved in the company going forward.  Although he appreciates their board experience and input, he admitted there is no advantage to date of Liberty Media (NASDAQ:LINTA) investing in the company.  No cash transfer, no balance sheet help, no deals with sister companies, just a guy taking advantage of a cash cow while times were hard.  Mel’s plans to make Malone pay a premium to add to their Sirius XM ownership levels appears still his game plan and I felt by his comments that Malone’s end goal isn’t even clear to him.  Here he answers a question about his comments on how he would make it as expensive as possible for Malone to add control.  He has mentioned this concept in the past a few times.

Question: …..I know you expressed the idea before that if liberty took over they would have to pay some control premium.  Is buying you’re stock back in conflict with that idea.

Answer:   No.   I think the idea is that one of the sensitivities that we would have to deal with….. and we haven’t gotten this far with our board.. Our board .. you know the decision to do a buyback or a dividend or not do anything would be made at the board level. But we have no plans to ever thinking about shrinking our load so that Liberty would be able to get have more control than they do today and 40% is where Liberty is today. The idea wouldn’t be that we would buy back shares, and then therefore liberty would get an accretive therefore have a higher percentage of the company. This is something we would “balance” if the decision were made to do that.

This potentially solves the debate on a buyback increasing Liberty’s stake.  The answer to the question was no and Mel has no plans to shrink their load and they plan on doing a buyback.  It’s called logic.  You do the math.  Hard to argue with facts.  If they want to do a buyback, plan on doing a buyback, but have no plans to increase Liberty’s percentage of ownership…. Sounds like they have it covered to me.  Non-issue now at this point.  I feel confident that Mel will do what is in Sirius XM stockholders best interest with this issue.  I appreciate him answering this topic directly.  Do I still fully 100% understand exactly how a buyback would work in regards to Liberty?  No, but Mel seems to be consistent that a buyback is beneficial to stockholders and if Liberty’s percentage increased with a buyback, there would be no benefit other than a lower P/E ratio and a lower share count.  A buybacks intention is to increase shareholder value.   Remember, the question always asked to Mel is how does Sirius XM plan to return value to stockholders.  A buyback that increased Liberty’s percentage of ownership has NO VALUE to a Sirius XM Stockholder, hence it must not be the case.   Now let’s take a look at the guidance for 2012 and what it means.

Sirius XM guided revenue at 3.3 billion, an increase of $300 million or about 10% over 2011.  10% revenue growth is a nice increase for any company during a recession, especially if you are a 100% discretionary income company.  No one needs satellite radio to live.  Yet subscribers are still growing by the millions a year.  Some analysts were suggesting 3.37 was the expected amount.  Yet these are the same analysts who fail to even get close yearly earnings totals.  Interesting isn’t it.  They are low on earnings, but high on revenue.  Sounds to me they are either lying or incompetent, with no clue on how the model works or how to estimate margins or costs.  You decide.  Either way is pretty bad.  Sounds to me like you can ignore their “revenue miss” as full of crap.  If you can’t even estimate free cash flow at all, earnings for 2012 correctly, or EBITDA at all, then don’t bother with revenue.   That’s like saying the New York Knicks will score 110 points tonight, but you don’t know what the other team will score.  Not very useful in betting on the outcome is it?  Easy to guess high on revenue to make a company miss it.  What is hard is to show your estimates on FCF, earnings and EBITDA accurately if you have no clue how too in regards to this company.

Is 3.3 billion high enough revenue?   Most definitely because costs for 2012 are dropping from 2011 as well.  Satellite capital expenditures alone will drop around 120 million this year from 2011, 210 million from 2010, and 190 million from 2009.  That is almost 2 cents diluted earnings higher than 2011 right there from one line item on the cost side alone.  Add another 300 million in revenue and that is another  3 cents a share right there higher than 2011.  So just on these 2 things alone, right now Sirius XM investors can expect 5 cents diluted earnings HIGHER than what 2011 will bring.  Right now Sirius XM has 5 cents of earnings for 2011 already.  Remember, before the year started, estimates were around 3 to 5 cents total consensus.  We have already matched yearly estimates from a year ago on earnings.  See what I mean?  Low on earnings but high always on revenue….  Very confusing.  So like I said before, either analysts are incompetent or lying.  I hope they are incompetent for their sakes.  Right now analysts are expecting 3.37 billion in revenue, but only 5 cents of earnings.  What!!!  Someone is crazy or incompetent or lying to me.  How can revenue increase 300 million, costs drop at least 120 million, and get only a 140 million dollar increase out of it?  Not to mention the original model already is set to provide 5 cents in earnings to date in half a year in 2011?  Baffling?  Not really if you have been covering this stock for a while.  Actually very typical of this stocks coverage.

My 2012 earnings estimate based on facts and information Mel has provided is for 12 cents a share in 2012.  My revenue estimates are actually around 3.4 billion, slightly higher than analysts are expecting, just my earnings are a 7 cents or 490 million dollar difference.  How can they be so wrong?  Call them and ask them individually.  I would.  Now on to free cash flow and EBITDA.

Mel stated that free cash flow for 2012 would come in around $700 million.  This is a 75% growth year to year on this metric.  This is a decent gauge of actually how much cash on hand Sirius XM could grow in 2012.  In actuality, in a lot of times, cash will exceed this figure.  This is a metric that accounts for other balance sheet asset/liability situations, and is not an exact measure of incoming cash.  It could be more like 800 million in cash added in actuality.  This is extremely encouraging news because at this point Sirius XM is in their self-stated “cash hoarding mode” to pay off the 2013 bonds coming due.  This 770 million dollar 13% bond (the companies highest interest payment on the books) was especially damaging at the time in 2008 due to its perceived high interest rate.  This was indicative of the bond market at the time and since then Sirius XM has been able to renegotiate other bonds for around 7.5%.  This is a huge difference in only 1 years’ time.  It reflects the company’s growing fiscal position and their perception of value to those who matter most, the people who determine what your corporate bond rate will be, not some hack author or analyst who doesn’t even know the service or metrics.

What does this mean?  Well obviously this means that with 1 billion in cash on hand at the end of 2012(low ball), as stated by Mel as well, and 700 million in free cash flow, you can now consider the 2013 bonds paid in full.  They have basically guided out their 2013 payment as done.  Next.  2014 bonds are a convert at the $1.87 strike.  They will be removed with already factored in dilution of shares and 100% already factored into the stock price as a guaranteed conversion (with lent shares out as well in this deal, was one of the reasons the stock tanked to under $1 in the first place.)  So now Mel as basically guided away the “toxic debt” that the company took on in 2008 which caused the stock to tank in the first place.  Remember, this was way before Malone came in in February 2009.  This was an immediate tanking upon the news.  We’re talking minutes upon its release.  Exciting stuff for sure.  If the market is forward thinking and trusts Mel’s guidance (missed low for 2 years now so no reason to think you can’t) the stock should recover back to pre-merger levels now, in logic.   But you say not true, 40% of the value is gone.  I disagree.  Way more than that 40% has been added back in synergies, improved revenue, and subscriber growth since 2008.  So I would disagree with that.

Mel guidanced EBITDA for 2012 at 860 million, a 20% increase from 2011.  If you recall, Mel promised 20% EBITDA growth and has now delivered for 2 years in a row.  This is why I can safely and logically use a multiple of 20 when obtaining an EBITDA evaluation of their stock price.  A typical media company’s stock is valued as a multiple of EBITDA.  So take 860 million and multiply that by 20.  Now you would divide by their fully diluted share count (about 6.8 billion).  This gives you an EBITDA/EV value of $2.35 a share.  That is a 23% increase from current levels.  This accounts for none of the stated price increase, which I will discuss later, or any growth to other line items or reductions in costs.  Mel did not account for the price increase in his guidance.  I had these estimates myself, actually higher, as Mel is being conservative, before the price increase.

Based on guidance we can now calculate as well their forward 1 year p/e ratio of 15.  That means Sirius XM right now is not only a growth stock (20 multiple), it is a value stock with a low forward p/e ratio as well.  Not surprising that institutions have been steadily adding shares since its low percentage of 18% in 2009.  The percentage as of Q2 2011 is now 41%.  That is a 23% increase in only 2 years’ time.  Sounds to me like institutional money managers don’t read or factor in too many analysts opinions or journalists who claim the stock is a slow growth company.  If this company is slow growth, I’ll take slow growth any day.  My numbers are actually more realistic as our members have discovered than guidance.  I think 1 billion in EBITDA is reachable in 2012, giving my EV value much higher at actually $2.94.  This once again accounts from zero speculation and zero value to the price increase.  ARPU will rise all year now, maturing sometime in 2013 for full value to the revenue side.  Not only does locking in rates before the price increase drop churn and raise ARPU immediately before 2012, it will have an ongoing trickle effect all year as new subscribers begin paying the higher rates.  Mel stated in January of 2012 the basic rate will increase from $12.95 to $14.49.  I was expecting between a $1 and $2 increase to the basic package and it was dead on in the middle of that.  I am actually glad they sided a bit with caution here given the economic landscape.  Easier to go up again than back down.  Good move.  They will also have a tiered pricing service that will include best of and internet that will give consumers even more value at the high end than they are currently receiving.  So some customers might actually have a small drop in price.

I expect ARPU to rise to $12 minimum by the end of 2012.  By the end of 2013 it could hit $13.  This is a huge financial difference to overall revenue.  Just a $1.50 increase in the basic rate would generate approximately 375 million in additional revenue per year, or almost another 6 cents in earnings.  The price increase is one of the major synergies touted in 2008 and one that is just now going to begin paying dividends to stockholders.

As you can see by the guidance Mel has given that there is reason to be excited about what the company can now accomplish in the future.  Investors can now be armed with facts when a bear suggests that the company has debt issues.  Not true.  At one time they did, but at one time terrestrial radio was making a profit too.  Some things just change.  Best not to be stuck in old thought patterns when facts are hitting you on the head like a hammer.  There is an old saying in life that applies to investing as well..” You either change or die”.  Same is true with companies.  Sirius XM has been changing their model since 2008 when the merger was allowed.  They have added countless value to their service, expanded their internet service and content, and is now obtainable on most smart phones.  With the addition of 2.0 coming in December of 2011, Sirius XM customers have an even better product to look forward too.

Disclosure:  Long SIRI

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Liberty Starz Battle with Netflix Could Have Larger Ramifications to the Future of Media

By
king1
– September 8, 2011
Is Netflix(NASDAQ:NFLX) now officially “dying”? The first mortal wound on a paper tiger has been struck. And look at who is in the center of it all. John Malone, Founder of Liberty Media (NASDAQ:LINTA). Since 40% of Sirius XM is owned by Liberty Capital (NASDAQ:LCAPA), Sirius XM (NASDAQ:SIRI) investors always try to listen to what Liberty Media is saying about their company and Liberty’s future plans. Well one of those plans became painfully obvious to those here at KOAT, even before Malone offered a bare bones explanation. Starz Media has declined to be part of Netflix going forward, as of right now, in any form. Money was no option. Netflix offered 10 TIMES the old contract price and still Starz said no thank you. You’re no longer going to compete with our services by allowing us to give you our exclusive content at wholesale rates. Your nothing but a monster that was created by one instant in times collective greed by content providers. Did they envision what Netflix would become? I seriously doubt it, or these media companies never would have signed the original agreements. No existing content provider creates a Netflix on purpose. They would have said, why didn’t we just do that? Dahh!! Ya, exactly idiots, why didn’t you? Well someone has finally taken a stand and said no more. You offer NOTHING we can’t offer people at some point in the future. Hence bye bye.

By Relmor Demitrius -

Is Netflix(NASDAQ:NFLX) now officially “dying”?  The first mortal wound on a paper tiger may have been struck.  And look at who is in the center of it all.  John Malone, Founder of Liberty Media  (NASDAQ:LINTA).  Since 40% of Sirius XM is owned by Liberty Capital (NASDAQ:LCAPA), Sirius XM (NASDAQ:SIRI) investors always try to listen to what Liberty Media is saying about their company and Liberty’s future plans.  Well one of those plans became painfully obvious to those here at KOAT, even before Malone offered a bare bones explanation.   Starz Media has declined to be part of Netflix going forward, as of right now, in any form.  Money was no option.  Netflix offered 10 TIMES the old contract price and still Starz said no thank you.  You’re no longer going to compete with our services by allowing us to give you our exclusive content at wholesale rates.  Your nothing but a monster that was created by one instant in times collective greed by content providers.  Did they envision what Netflix would become?  I seriously doubt it, or these media companies never would have signed the original agreements.  No existing content provider creates a Netflix on purpose.  They would have said, why didn’t we just do that?  Dahh!!  Ya, exactly idiots, why didn’t you?  Well someone has finally taken a stand and said no more.  You offer NOTHING we can’t offer people at some point in the future.  Hence bye bye.

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300 million dollars a year wasn’t enough to convince Starz to come aboard.  They were paying 30 million a year.  Malone had this to say about the situation with Netflix.

“The way this cuts varies depending on whether you’re a premium service as Starz, where ultimately the whole concept of sequential distribution of movie product or of originals has to go through various organisms in order to optimize valuation.  Taking it all and dumping it in at wholesale on a random access basis really undermines long term perceived value.  That’s the biggest problem conceptually that we have with the Netflix approach toward distribution as a content investor or owner.”

Basically were game to give you our content, but not anywhere near the old deals structure.  If at all.  I still doubt they ever reach an agreement.  If 300 million dollars doesn’t convince them, not sure what would.  We will follow this story closely from this point forward.  This is big news in the content distribution space and the future of what Dish/DirecTV may look like down the road.  Why not create their own Netflix?  What does Netflix offer than anyone else can’t?  Exactly.  Call a few movie studios, get them better rates, and there you go, you have a competing service with few capital requirements to start up.  You ALREADY OWN ALL THE CONTENT!!  Cable companies and satellite radio companies hate Netflix with a passion.  Every $1 spent on Netflix is $1 they can’t access directly to their revenue streams.  Eliminate the middle man and media companies should start their own service.

Malone also comments that Liberty Media has almost 10 billion in cash ready to invest.  That could be something that Sirius XM stockholders might find interesting, as Liberty already owns 40% of their company for free.  Malone stole 40% of the company from stockholders without a legal vote in February of 2009.  He is currently being sued for this as a person on the board and I’m hoping that lawsuit is won by the owners of Sirius XM.  It would remove any financial compensation Malone received by Sirius XM.  Nothing else that shattering, but I like the message it sends.  The DOJ has fined Malone at least on one occasion, once for violating pre-merger requirements in its Discover dealings.  So Malone is a guy who doesn’t care about the law to get what he wants.  These are the sharks that Netflix is now dealing with.  Malone is now showing Netflix some teeth.   I fully expect more and more content providers to seek alternative revenue streams outside of Netflix to promote their content and access more money directly.  This is just the first of many companies that will more than likely flee Netflix.

When Liberty spends that 10 billion dollars we will know pretty much what their intentions for the future are, in media and with Sirius XM.  With Mel Karmazin (CEO of Sirius XM) beginning a stock buyback program in 2012, Liberty’s time to take a piss or get off the pot is here finally, in regards to their future plans with the company.

As Malone stated, now that the Liberty spin off of Starz and LCAPA are complete, the company can now move forward and begin exercising some long term plans.  Final approval on that is approaching in mid September.

Disclosure:  Long SIRI

 

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Sirius XM Shifting Gears on Subscriber Metrics

By
king1
– August 22, 2011
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By Relmor Demitrius

Sirius XM Shifting Gears     Sirius XM Radio (NASDAQ:SIRI) is the king of the dashboard.  No other company has a greater presence there.  Ford Sync and other automaker gadgets that allow easier access to the internet isn’t really designed to benefit any one company.  AM/FM radio in the car benefits a large multi company conglomerate of terrestrial radio stations, but no one company.  Sirius XM has much of their success tied directly to the automobile dashboard and the “drive time” consumer.  Sirius XM is in over 60% of every vehicle sold in the USA and has deals with every major car manufacturer.  This is all great and good for the new car market, but what about all those used cars on the road and on lots with radios in them that are not activated.   Can Sirius XM create a “second net” to catch even more subscribers than simply from a new car purchase?  Can we start to see proof of success in the Q2 filings?

A few years ago Sirius XM began directed their efforts to what is called Certified Used Car Programs, or CPO’s.  These are usually from new car dealers themselves.  CarMax and other larger companies are also easily targeted, as they are national companies that deal with a large volume of yearly sales.  It is a lot easier than attempting to contact individual used car lots and deal with the Ringo and Butch Used Car lot.

Sirius XM has most CPO programs up and running now, recently adding a very important GM one that allows all GM dealers in the country who sell used cars access to this trial offer.  There is motivation from the dealer to promote our product.  It helps sell a used car versus another guy who isn’t offering 3 month free satellite radio. Almost everyone likes satellite radio versus terrestrial radio; the difference is those willing to pay for it.  I think we can all agree if it where free, no one would turn it off.  So getting people exposed and addicted to it is vital.  In this “second net” situation, Sirius XM has another way to generate new subscribers were in the past the only real way was over the counter radio purchasers or the smart phone (which is also relatively new and expanding with recently adding Howard Stern and the NFL to is lineups).  Also, this line item does include all internet only subscribers and smart phone only subscribers as well.  However, we can assume any strength here is directly tied to the area Mel Karmazin, CEO of Sirius XM Radio, discusses the most.  One can also use logic considering how many potential used car promotional trials could be in play right now.  A point to consider is the GM deal would not have any benefit on self-pay numbers as of yet.  So we can look forward to Q3 and Q4 for maybe even further signs of improvement.

As the used car industry becomes more and more consolidated, Sirius XM gains a big advantage in communicating their product again to those who may have turned it down before, or the consumer who never buys a new car.  These dealers will now give a promotional trial with the used car purchase and can activate the radio at the end of this trial.  Since this is not a new car situation, there is no initial cost to turn this radio promo on and possibly no revenue sharing that would be required.  Some radios have life-long contractually revenue sharing obligations if that radio were to become a self-pay subscriber (permanent month to month paying customers not on a promotional offer).  These CPO subs wouldn’t be counted as a promotional subscriber at any point in the process.

CPO subs, in past filings, would have been counted in the “retail” side of the subscriber totals, which has been a negative on subscriber growth for at least as long as 2008.  Basically if Sirius wasn’t adding subscribers from new car sales, they weren’t adding them.  After their latest filing this may soon no longer be the case.  When I say they aren’t adding them, I mean they are adding retail subscribers, yes, but not as fast as they were losing them.  The “net additions” on the retail side was negative.  Only OEM additions were consistently positive.  Now to focus on this trend to this date, what we have to do is add back information that Sirius XM removed.  They stopped us from noting the trend continuing to improve or not.   Here is a chart of the missing data and the trend I was following closely.  That’s ok.  I will fill in the blanks for Q2 2011 and see if retail line item is still causing the company to lose subscribers or not.

Q2 2011 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009
Gross Sub Additions 2,179,348 1,952,054 2,020,507 1,720,848 1,882,590 1,606,446 1,380,125
Deactivated Subs -1,727,201 -1,617,327 -1,437,258 1,549,407 -1,625,922 -1,504,151 -1,566,124
Net Additions 452,147 334,727 583,249 171,441 257,028 102,295 -185,999
Retail Ads ? -188,884 -142,757 -305,547 -200,154 -309,972 -301,295
OEM Adds ? 529,798 709,226 460,487 442,422 407,131 123,165
Net Additions 452,147 334,727 583,249 171,441 257,028 102,295 -185,999
Self Pay Ads 362,663 258,105 304,043 69,739 247,182 35,405 -14,996
Paid Promo Ads 89,484 76,622 279,206 101,702 9,846 66,890 -171,003
Net Additions 452,147 334,727 583,249 171,441 257,028 102,295 -185,999
Monthly Self Churn 1.9 1.90% 2 2 2 2 2
Penetration Rate 65 62 60 60 60 58 55
Vehicles Sold in Q 3259046

As you can see by this chart it was trending down anyway, much before this quarter.  I had noted in the past that it would be a game changer for their metrics if they could ever add significant subscribers through the now removed retail subscriber line item.  Was Q2 the first Q this went positive?

Using subscriber OEM deactivations of 1.65 million based on lagging 3 to 6 month average vehicle sales (here is where you use the take rate), I determined that OEM additions for Q2 were around 468,379.  This is using 64% penetration rate and 3.25 million cars sold.  So if total additions were 452,147, then we know total retail additions were (16,232).  Very close and very exciting to see this metric is still improving.  This is a guess actually of course.  It could have actually gone positive by a few subs.  As you can see it is no longer hindering subscriber growth.  The trend more than likely is improving and I have attempted to prove that here.

Now with the coming of Sirius XM 2.0 later this year, retail subscriber growth may accelerate before the new radios even have a chance to be added to the OEM dashboard lineup, which will begin being sold in cars in 2013.  With 2.0 adding personalization features, on demand ability, pause, rewind, and replay functions, as well as WI fi and increased channel capabilities, there is now an actual reason for retail customers to update their radios.  This should further improve the retail subscriber numbers.  Heck, we might even be able to get some OEM radios out that are paying revenue sharing and replace them with 100% revenue sharing free radios.  That would help ARPU.

Another factor in retail subs possibly reversing is the decreasing number of retail subscribers turning into OEM subscribers.  This was happening a lot from customers who had traditionally used a retail radio, but preferred keeping the OEM installed radio instead with the free trial attached.  When the promotional period is ending, a lot of retail subs are simply converting to the OEM side.  This is going to start phasing out now as people become twice exposed to the product and simply are converting now one OEM sub for another.  New customers exposed only through the OEM side will now stress the original retail subscriber’s numbers who didn’t have the option of an OEM entry to the product.

The major reason and why I think going forward subscriber totals can even accelerate their current growth, is the CPO channel.  With GM dealers across the country and most other makers offering used car programs as well, Sirius XM has found another way to reach a consumer base that is drive time oriented.

Disclosure:  Long SIRI

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Sirius XM 2nd Quarter Conference Call Proves Synergies Still Strong and Growing

By
king1
– August 8, 2011
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By Relmor Demitrius

Sirius XM 2nd Quarter Conference Call Proves Synergies     Recently I was struck aghast by a journalist commenting that Sirius XM (NASDAQ:SIRI) synergies were “baked in” and mostly over.   I responded with an article noting expected synergies from the company and what time frame they were expected in.  That article was written a few weeks ago and can be found here, http://www.kingofalltrades.com/2011/07/24/sirius-xm-major-synergies-finally-being-realized/.  On August 2nd, during Sirius XM’s conference call and subsequent 10Q filing, I was able to also find newer support that they are indeed still growing and being realized every quarter.

During the conference call Mel Karmazin, CEO of Sirius XM, stated that cost saving synergies are still “growing.”  This is good to hear if not expected, and a nice reiteration of what was known from 2008 and 2009.  In 2009 Mel Karmazin, David Frear, and Greg Maffei (CEO of Liberty Capital (NASDAQ:LCAPA)) all stated that Sirius XM’s major synergies were still down the road and growing.  All were excited about the coming cost savings from content contracts, OEM deal reworks, satellite network savings, and combining to one platform.  Now from the latest filing we find this synergy language when analyzing certain cost line items.  This is directly from the current 10 Q report.

“Three Months: For the three months ended June 30, 2011 and 2010, programming and content expenses were $67,399 and $72,019, respectively, a decrease of 6%, or $4,620, and decreased as a percentage of total revenue. The decrease was primarily due to savings in content agreements, production costs and general operating costs, partially offset by increases in personnel costs and a $1,915 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts.”

For purposes of this article, the bolded comment is what is relevant.  Sirius XM usually, if not always, list the first reason as the biggest factor.  So right there in the official language of the document filed by law.  Sirius XM is crediting merger synergies with why costs on programming and content are still dropping.

“Three Months : For the three months ended June 30, 2011 and 2010, satellite and transmission expenses were $18,998 and $19,982, respectively, a decrease of 5%, or $984, and decreased as a percentage of total revenue. The decrease was primarily due to savings in repeater expenses and personnel costs.”

One of the expected savings was in capital expenditures to upkeep and improve the repeater network.  Here is proof of that still being realized.

“Three Months : For the three months ended June 30, 2011 and 2010, subscriber acquisition costs were $105,162 and $110,383, respectively, a decrease of 5%, or $5,221, and decreased as a percentage of total revenue. The decrease was primarily a result of improved OEM subsidy rates per vehicle and a $1,510 increase in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger, partially offset by the 8% increase in gross subscriber additions.”

More OEM subsidy savings noted here on subscriber acquisition costs.  This is one of the company’s largest cost line items as well.

“Three Months : For the three months ended June 30, 2011 and 2010, SAC, per gross subscriber addition was $54 and $59, respectively. The decrease was primarily due to an 8% increase in gross subscribers and lower per radio subsidy rates for certain OEMs.”

This is once again noting the SAC dropping due to more efficient cost saving measures in OEM deals.

As you can see, the company is still experiencing strong synergy savings to this day and will realize it even more “down the road.”  It’s not until 2017 that the major satellite construction synergies being saving the company 1 billion dollars in expected launch costs saved by merging the satellite technologies.

Disclosure:  Long SIRI

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