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Sirius stock report shows things not as rosy as they want you to believe


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#1 of 4 OFFLINE   Devin U

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Posted August 01 2006 - 05:26 PM

http://articles.mone....ngAProfit.aspx

Sirius trouble turning a profit
Despite some encouraging signs, Sirius Satellite Radio still continues to excel at two things: adding new subscribers and losing money.

By Robert Walberg

Sirius Satellite Radio (SIRI, news, msgs) continues to excel at two things: adding new subscribers and losing money. Management also played its usual games with the earnings announcement Tuesday, burying the lack of profits six paragraphs into the press release.

Before telling us that the company actually lost more in the most-recent quarter ($237.8 million) than it did a year ago ($177.6 million), management showered investors with encouraging developments:

Revenue surged 187% to $150.1 million.

Addition of 600,460 net subscribers, a jump of 64% from last year.

A 57% share for the second quarter, with a 61% share in June.

Third-straight quarter leading industry in net subscriber additions.

Subscriber acquisition costs fell 18% to $131 from $160.

Upped revenue and subscriber guidance for full-year 2006.

If you stopped reading the press release there, as management probably hoped, it’s easy to understand why you might get excited about investing in Sirius’ stock. The company’s marketing efforts, radio personalities, and strong relationships within the automobile industry have given it a leg up on its larger rival XM Satellite Radio Holdings (XMSR, news, msgs) when it comes to adding subscribers. Adding new relationships with KIA and Mitsubishi, as well as taking over the broadcasting rights to NASCAR from its rival in 2007, should keep the momentum going.

Trend in Sirius' favor
Sirius now expects to end the year with about 6.3 million subscribers, up from its previous estimate of 6.2 million. That will still leave it a couple million behind XM, but the trend over the last year is working in Sirius’ favor. In a couple of years, Sirius may actually achieve its goal of becoming number one.

Unfortunately, the price of that goal is so high that the company continues to bleed red. For those of us who persisted to the meat of the earnings report, we learned that the company’s net loss grew by 34%, despite posting more revenue and subscribers than expected.

The company also tried to diffuse the growth in expenses by not listing the percentage change, as if we were too stupid or too lazy to do the math. Whereas management was more than happy to point out the 64% jump in subscribers and the 187% rise in sales, it didn’t want you to see that sales and marketing expenses jumped 65%, or that satellite and transmission expenses rose 164%. More alarming, programming and content expenses surged 235%. Overpaying for personalities and content actually does have an impact on the bottom line, even if you try to bury it in your report.

Not a viable business
Until management figures out a way to get subscribers without having to pay exorbitant sums to people like Howard Stern or to organizations like the NFL, Sirius will continue to deliver mixed results at earnings time. You simply can’t have average monthly subscriber revenues coming in at about the same figure as subscriber acquisition costs and still have a profitable, viable long-term business.

On the plus side, subscriber costs are coming down and average revenue per user is rising. Management needs to focus on widening the spread considerably if it hopes to meet its stated long-term goals of $3 billion in revenue and $1 billion in free cash flow by 2010. It needs to end the costly programming/personalities race with XM. Otherwise, there’s no way the company will hit its cash flow targets.

Shares see sharp drop
Just look at the company’s guidance for fiscal 2006, in which it now expects to be cash flow negative to the tune of $500 million, worse than an earlier projection of $480 million. Promising to be cash flow positive is one thing, delivering the goods is quite another.

Since I wrote my first report on Sirius in which I questioned management’s integrity, the sustainability of the company’s business model and the insane valuation of the stock, Sirius shares have declined sharply -- from just north of $7 per share to under $4. The stock has bounced back a bit in recent weeks, and at today’s price is reasonably valued considering its long-term promise and extremely devoted fan/investor base.

Speculators might want to nibble in hopes of a renewed rally ahead of the NASCAR buzz, but until the company gains control of expenses and until the average subscription costs falls below $100, most investors should continue to take a pass. At 18x trailing sales the stock is still richly valued, and with over $1 billion in debt the balance sheet is still too leveraged.

#2 of 4 OFFLINE   dailW

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Posted August 01 2006 - 06:08 PM

this is the reason i hate the stock market.you have people who have no idea what their talking about.i doubt that hes ever listened to xm or sirius he looks at numbers numbers can only take you so far.you have a good product out there people will listen and then profits grow then everyones happy.

i do get upset when they feel that sirius over paid to get richard simmons.

#3 of 4 OFFLINE   Chris

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Posted August 02 2006 - 03:36 AM

Fundamentally, I'm unsure of how this analysis would differ in any meaningful way from a current analysis of XM.

In other words, while the analysis is valid, I think the analysis could be used to doubt both formats of satellite radio and look at them as terrible values (which, in fact, as a stock they are by typical book).

Quote:
The company’s marketing efforts, radio personalities, and strong relationships within the automobile industry have given it a leg up on its larger rival XM Satellite Radio Holdings (XMSR, news, msgs) when it comes to adding subscribers. Adding new relationships with KIA and Mitsubishi, as well as taking over the broadcasting rights to NASCAR from its rival in 2007, should keep the momentum going.

So, SIRI has used it's expenditures to build marketplace momentum.

Quote:
it didn’t want you to see that sales and marketing expenses jumped 65%, or that satellite and transmission expenses rose 164%. More alarming, programming and content expenses surged 235%. Overpaying for personalities and content actually does have an impact on the bottom line, even if you try to bury it in your report.

Part of the inherent problem of running a satellite business is that you have to launch satellites now and again. SIRI has put up investment into a satellite to go up in 08, and that will raise it's transmission projected costs as they figure those expenses in until launch.

XM is in no better boat on this, in fact worse. XM has already had to plan repalcement of satellites XM-1 and XM-2, and XM-4 launches next month. And XM, due to a design flaw with XM-3 is already preparing to replace it, beginning work on XM-5. The problem with the satellite business is.. satellites. Neither company overcomes this problem. So, the analysis in regards to payment in relation to transmission expenses is neutral.

As to the rise in expense of talent, the sheer reality is that SIRI was virtually required to overpay. I'll give a different example. The Kansas City Royals want to acquire A-Rod (Ha! Ha!). A-Rod would gladly stay in NY, a team with a chance to win and a commanding lead, rather then go to a trailing team who is clearly a second tier team? SIRI was that second tier team. Up until last year, there were rumors floating on this board and others that SIRI might as well fold up it's doors because it struggled to get 500,000 subscribers, and was "late" to the game.

Because of that, SIRI overpayed to talent. Did they overpay "too much"? I think that's debatable. While their talent expense rose 235%, it rose 235% from what? It rose 235% from a rather "eh" ammount paid before, in large part due to a multi-million contract acquired for NASCAR as well as Stern, of course, which has the author notes did generate them both press and market momentum.

Sometimes, a business has to pay the price in order to stay relevent and continue to exist. I think it's hard to deny that if SIRI had done nothing, signed no major talent, that they would even be in the game. I'll make the argument that if SIRI had ended last year under 1,000,000 subscribers, which was their pre-stern/nfl projection, they would be out of business. You pay what you have to pay to get the positive press and mindshare. More people identify SIRI = Satellite Radio then ever before. And that is it's own advantage.

Quote:
Until management figures out a way to get subscribers without having to pay exorbitant sums to people like Howard Stern or to organizations like the NFL, Sirius will continue to deliver mixed results at earnings time. You simply can’t have average monthly subscriber revenues coming in at about the same figure as subscriber acquisition costs and still have a profitable, viable long-term business.

On the plus side, subscriber costs are coming down and average revenue per user is rising. Management needs to focus on widening the spread considerably if it hopes to meet its stated long-term goals of $3 billion in revenue and $1 billion in free cash flow by 2010. It needs to end the costly programming/personalities race with XM. Otherwise, there’s no way the company will hit its cash flow targets.

Hmm. See, this is where I wonder. He's basically saying the cost per subscriber is too high. I would agree. But XMSR's cost for subscriber is going UP while SIRI's is going DOWN. That also doesn't take much math. So, what's good for the goose.. if SIRI is a bad deal base on this, then I eagerly await his assessment of XMSR Posted Image

I do love his "I think the management is corrupt" paragraph Posted Image I'm waiting for his "they cook the books" paragraph to come in their somewhere. Posted Image

In general, here's where I think SIRI is much closer to being a good bet then he thinks. XMSR is getting a good deal (IMHO) through cross-promotion of O&A, but it has made their advertising rates for O&A stagnant and split with CBS, which is a mixed bag. We'll wait and see how that plays out. Could be a good deal, could be a bad deal for XM. Only time will tell.

SIRI's marketing (advertisement) engine is really doing some great business through it's sell of spots on Stern, pre-sell for NASCAR and NFL season this fall. SIRI is getting significantly more per spot and has more spots to offer.

SIRI sees a magic number: 6.5M. There is a belief that if SIRI can hit 6.5M, increase in advertising revenue value would be fairly significant. Is this a reachable target this year? Who knows.

I know we talk about "Commercial Free" radio and how keeping music commercial free works. But advertisements on talk programming as well as special interest programming (like Sports, etc.) helps to pay the bills. And one thing that Mel has brought to SIRI is the ability to really ramp up their value in advertising dollars. And that's a revenue stream which the author completely dismisses. Part of the reason why you overpay is because you hope to not only get subscribers, but to get add on revenue streams. Right now, Stern's ads are a big "sell" for the network, and account for a large cut of their advertising revenue (not expense, revenue) so you buy some, you get some.

Right now, I think the big race is to 10M. Who gets there first? Both satellite companies have a lot of growth to undergo and some serious concenrs with both. But if I were to chastise management right now, I'm not sure how I could feasibly consider SIRI management in any way inferior to the disaster in PR and promotion that XMSR has had over the last year.
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#4 of 4 OFFLINE   KevinJ

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Posted August 02 2006 - 11:53 AM

Both satrad companies need to realize to survive in the longterm they must cut expenses to 1/2-3/4 of revenue....if it means dropping channels etc so be it.





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