By Relmor Demitrius
Yesterday CITI had a Global Entertainment and Media Conference, in which Mel Karmazin, CEO of Sirius XM Radio (NASDAQ:SIRI) and Greg Maffei, CEO of Liberty Media (NASDAQ:LINTA) spoke. There was no formal presentations by these gentleman but they were on board for answering some really good questions. This conference helped answer some important questions investors had about the company. Greg and Mel were very frank and offered valuable information investors can use to make better decisions about their investment with the company. First let us look at what Mel had to say. The first thing Mel offered was information on Q4 subscriber totals.
Mel stated that in Q4, Sirius XM added a net 540,000 additional subscribers. This beat yearly guidance by 100,000 subscribers. A decent beat but nothing to write home about. The great thing here is that Mel can once again be trusted, and when he upped subscriber guidance in 2011, it was to be accurate, and was surely no bullish pump. I know there were many media types that doubted the 1.6 million mark could be reached due to Japanese supply delays, production delays, and a higher churn base. However, these issues were overblown obviously and Sirius XM hit their mark and some. This is great news for investors and people looking for a reason to get in. Another issue with Mel not lying since the merger, is that he promised 2 radios for 2.0 in 2011 and delivered, by releasing the Lynx Hybrid Radio, for satellite use and internet, home or car.
This android based radio provides new features and functionalities, with an endless ability to upgrade its functionality and content. With new compressed bandwidth this radio opens up another avenue of content non 2.0 radios cannot receive. The biggest surprise on functionality came in another promise Mel made.
This news came during the CITI conference. Mel stated that “personalized radio”, like Pandora features, would be coming to their internet and smart phone services “probably this year”. He stated that it’s not a big deal for the company and wouldn’t be another business model, just another feature for retention. He stated if there are customers out there who would turn away from the product because they didn’t have this functionality, then Sirius XM was going to offer it to them. Basically Sirius XM can now evolve their radio experience to the demand of the consumer. The way he presented it was not like it was going to be a big revenue generator and basically implied it’s so easy to add, that the originality of the Pandora type service is easily reproduced. Pandora already has no uniqueness to begin with, as they compete with services like Slacker anyway. But I get what Mel is doing here. If this is an excuse by some, or even a perception that a service is demanded they cannot provide, then they will show you how easy it is to provide, and offer it at NO COST to exisitng subscribers. Free. Here you go subs. You wanted this cute random music generator tailored to your taste, here you go. Enjoy. Now Sirius XM 2.0 will have all the features everyone wanted and complained about. Let the new wave of bashing begin now. Maybe in a future article, since bears are running out of ideas, I can suggest some topics for them. Remember, on demand features have been mentioned and are coming as well. I expect some type of synergy down the road with Live Nation on this end. On Demand live concert events is one thought. Pay per listen. This would be yet another revenue stream. Maybe buying concert tickets from your radio too. Who knows.
Another topic broached was the new structure of the GM contract. The questioner wanted flavor on the details of the agreement. Mel stated he couldn’t say much, but he did offer some great insight we never knew before. He stated when they re-did the GM contract in 2009, there was an immediate impact. In fact, KOAT wrote an article at that time showing you from the filing directly how much was saved. So this is not new news to KOAT supporters. We have been gaining an advantage from the new structured GM deal since 2009. But as Mel explained it was 3 phase deal. More benefit comes to Sirius XM in 2013 and even more in the final phase in 2014. He stated the deal offers a “fairer return” that has “more appropriate value” for Sirius XM. He went over the philosophy of why the first GM deal was so advantageous for GM. Obviously to get your foot in the door it took some incentives. Now GM doesn’t want to be the only car maker without satellite radio in it. The new OEM deals will be, as Mel stated, “market value”. Meaning only one competing company now, based on real fundamentals that are mutually beneficial to both parties. XM never made $1 on the GM deal before the merger. All the benefit went to GM. Well in 2009 that changed, and in 2013 and 2014 coming it will become more like all the deals will be structured in the future. So synergies haven’t even barely begun on this aspect. Mel also mentioned another synergy investors can look forward too in the future.
Mel stated that cars have around a 10 to 14 year cycle. So when Sirius XM installed legacy radios that only can receive one signal, they are obligated to support that radio till it the car’s life is over. So if you begin installing 2.0 in 2013, you can guess the time frame it will take to phase out these old radios. Non 2.0 radios will never be sold again, at least not for Sirius’s signal. Sirius will not put out a new radio just for Sirius again, in my opinion. Although I don’t think that observation is a stretch. We know Sirius XM is trying to go to one platform and now we have Mel’s confirmation of that. He said by around 2020 you can expect the phasing to be near complete into all radios that can receive both signals. At that point the Sirius platform would be suspended and no new satellites will be launched that only send Sirius’s signal. That frees up half their bandwidth. Mel stated they can use it for different business model, more channels, or whatever they want. This is a huge synergy and one of the reasons the merger was so valueable. Now we have a time frame on all of this. What intrigued me the most as an investor is when he said “use it for a different business model”. That is another future revenue stream not priced into the stock one bit.
Mel also talked about how their margins are growing wider than first anticipated. They had modelled 30 to 35%, but now Mel is promising a 40% margin company in the near future. That is an amazing model for any business. I doubt oil companies even enjoy a margin like that. So basically if they earn 10 billion in revenue, there cash intake would be 4 billion dollars. That’s not earnings, its cash.
Earlier in the article Mel stated that subscribers grew by 540,000. He stated that at this time, the used car market is now adding “significant numbers” to the totals. This is the first time Mel has used the word significant here and judging by the Q4 adds, it is apparent it is finally making a difference. With recently adding the Auto Nation deal and already having the Car Max and all used cars sold by GM dealers in play, their base to catch the used car market is rapidly expanding. Since they convert these subs at a 35% or higher clip and these subs go directly to the self pay subscriber totals never being a paid promo, this will help grow their subscriber base substantially now into the future. Now let’s go over briefly what Greg Maffei had to say at the conference.
He stated that it was a very bad idea to “add the last shares” to gain control. This is not something they are necessarily looking to do. Gaining control of Sirius XM is not on the table apparently. He also stated anything they did in adding or whatever, would be something the board (Basically both sides) would agree too. There will be no hostile takeover or tender directly to shareholders basically. If the board agrees to something, they will explore that avenue. This is good news to investors. This means that both sides are finding some common ground and a common plan to benefit both sides, as I expected would be the case. Once again Maffei reiterated that the March date has little meaning to them.
Maffei also crushed the irresponsible and wrong argument perpetuated by the media rhetorics that the NOL’s are an attractive and motivational reason to acquire a controlling interest. He stated this answer once again, and appears bothered by the same dumb questions, that Sirius XM will use their own NOL’s. This has been a clear and consistant issue at KOAT since 2009. The only confusion on this issue has come from ignorant media types that take one bad piece of information and try to fabricate a story out of it. Sorry folks, no story here on that issue. Liberty is not sitting in a room plotting ways to destroy Sirius XM and their value. Hate to rain on your parade but the two sides appear lining up to agree on something here in 2012. It will be either how a return of preferred to Sirius XM would work, a buyback, or some type of mutually beneficial agreement to both sides. Of course the most logical thing is Liberty does nothing, holds at 40% and as stated by Liberty, “rides the growth path of Sirius XM”. So Liberty is not going to throw good money after free to gain control simply to do it. There would have to be a reason too. Maffei said it is too expensive to gain control at this point. Well when your first 40% is free, I can see their thinking on that.
He did state that if Liberty did take control, they WOULD NOT TENDER FOR THE COMPANY. They are NOT INTERESTED IN TOTAL 100% OWNERSHIP. There. Done, next. I am personally tired of this rumor myself. This one had made the very least sense. Basically if Liberty added it would be to around 50 to 60% and only if they felt the direction of the company was in danger. Of course this agreement to go to these levels could come as a concession on a number of issues, including how a buyback would work, restrictions on the preferred shares, or other give and takes. I also wouldn’t be surprised to learn that the fraud lawsuit currently going against Malone and the Sirius XM Board has taken some of the greed and bite out of Malone’s stances on working with Sirius XM on a mutually beneficial future plan. 2012 board decisions should be interesting so stay tuned.
As you can see by this conference that the company is strong and improving the cost and revenue side of the business. Mel has delivered a new radio that can evolve with demand and Liberty is set to ride the growth of Sirius XM Radio. 2012 should be full of new developments.
Disclosure: Long SIRI
