The Other Side Of The Street

October 31, 2006

Today Frank Curzio of TheStreet.com wrote a modified version of his piece titled “Sirius Reservations”. The new piece is titled “Sirius Shares May Fall Back To Earth”. Mr. Curzio claims that the new piece was penned to clarify and support his position. The first problem here is that readers have to pay to read a corrected article, although they will offer a free trial. Well, SSG readers can see OUR point/counterpoint dissection of the Curzio piece for free. We here at SSG do accept contributions through PayPal should people rather send money our way..... I wonder if we will generate more revenue than the latest Curzio piece

Curzio

“Over the past few months, Wall Street’s main concern has been focused on subscriber growth.”

SSG

This is not really the case. The focus shifted from subscriber growth to financial metrics and Cash Flow Break Even. The subscriber number focus gets attention, but the REAL FOCUS is on the numbers.

Curzio

“Last year, the company said it expected to have 6.3 million total subscribers by the end of 2006, but given its second- and third-quarter net new subscriber additions, we believe this number may be too optimistic. Shareholders seem to agree, as the stock is trading near its 52-week low.”

SSG

Actually the 6.3 million number did not come up until this year. Up until the Q1 conference call, the number was at 6.1 million. The second and third quarter subscriber numbers were 600,640 and 441,101 respectively, and both quarters came in above analyst expectations. For Q3 early expectations were a bit above 500,000, but were revised as the quarter drew to a close. Sirius getting 6.3 million subscribers by years end may look like a tall order, but Mel K. has delivered on all targets since he came on board.

Curzio

“Considering the average number of net additions in the previous two quarters, we believe it will be very difficult for Sirius to pull in as many as 1.2 million net new subscribers -- albeit during the holiday season -- in just three months.”

SSG

The average number of subscribers for Q2 and Q3 have little to do with Q4. There are many things that Mr. Curzio could have considered that would have carried much more weight than an average from the previous two quarters. There is brand awareness that is higher now than it was last year…..there is a Ford ramp-up that exists this year and was in its infancy last year……there is now Sirius internet Radio fresh off of a two day promotion that gave Sirius exposure to millions on a global basis and delivers CD quality music and Howard Stern over the net…..there is the transition of NASCAR from XM to Sirius. There is the fact that Sirius is more aggressively marketing the friends and family plan. These are ALL conditions that did not exist last year, and any one of them is more compelling reasoning than the “average of the past two quarters”. Perhaps it is a case of these situations not matching up with the agenda.

Curzio

“However, Sirius reiterated its guidance on its latest earnings conference call, leading us to believe that heavy discounts in the radio service could be just around the corner. This would increasingly hurt profit margins and could cause further losses down the road.”

SSG

Yes, Sirius did reiterated subscriber guidance at the last conference call. They also reiterated it in the press release where they announced Q3 subscribers just a few weeks ago. It is right there at the bottom of the press release if you read that far down in your research. You then state that you believe that heavy discounts in radio service are possible. The service is rarely discounted unless the subscriber pre-pays for several months in advance. If discounts are given they are usually done in the form of rebates. Some promotions may well happen, but “heavy discounts” are not very likely. Mel K. likes to keep revenue, and likes to keep as much as possible.

Curzio

“However, Sirius' operating expenses are roughly $1 billion annually, and it has not reported a single quarter of operating income or operating cash flow. Given that, investors must size up Sirius' growth prospects going forward -- and they don't look good.”

SSG

Take a few minutes to read some analyst reports and you will see that operating expenses are not $1 billion annually, and further are not projected to be in that range going forward. This equity is not really about the “here and now”, it is fast becoming about the prospects that are now just a couple of years down the road.

Curzio

The first hurdle is competition. XM Satellite, Sirius' chief rival, has more total subscriptions, as well as lower costs per subscriber because it uses smaller chips in its radio units.

SSG

Yes, XM has more subscribers than does Sirius. The number does not matter as much as the revenue generated from subscribers, and further, the amount of revenue that the services get to keep. Some subscribers carry with them a much larger revenue share than others. Additionally, Curzio fails to even mention who has been getting all of the Year Over Year growth in satellite radio. For all of 2006, EVERY bit of Year Over Year Growth has fallen to Sirius. This is a pretty telling statistic, but it must not have fit the agenda, and thus was not included. Now to address cost per subscriber. This metric can not be accurately compared between the two companies because of the structures of various deal, marketing payroll, and other items. Additionally, the size of the chip has little to do with the cost. Cost per subscriber or SAC is not a GAAP method, and thus the companies can report this cost however they see fit. The companies can also structure deals in such a way as to give the appearance of low SAC. This is why prudent investors NEVER take SAC on face value, and ALWAYS look at other metrics as well. PRUDENT investors also know fully well that the direct comparison of SAC of Sirius and XM is a fruitless exercise.. By example, a deal that brings a company the bulk of their subs, has high up front costs (non-SAC), low subsidy costs (SAC) and high revenue share (non-SAC) will do wonders for your SAC figures…….But you need to look at the impact that the other components are having in other areas of the financials.

Curzio

“Also, consider that Apple has stepped into the satellite radio auto market by signing deals with automakers to put iPods into cars. This could further cut into Sirius' subscriber growth going forward.”

SSG

The first phase of the Apple program boils down to an AUX-IN jack. Works with I-Pod, Zen, Zune, as well as satellite radio. Additionally, you need to hear music at some point prior to deciding to pay 99 cents to buy the song. You then have the downloading process, etc. Satellite radio is more user frienly.

Curzio

“In addition, Howard Stern's five-year, $500 million deal -- which enkindled so much buzz for Sirius -- no longer looks like the kind of success story that the radio satellite company needs. Stern's ad sales are down, and his celebrity guest bookings are almost nonexistent, and traffic on his Web site is down as well.”

SSG

Stern has done very well for Sirius. This is evidenced in the subscriber numbers and market share numbers that have been all in favor of Sirius for the past 13 months. Of course, if you want to argue that Stern is a non-factor, then you should cite what it is about Sirius that is causing them to have such a distinct advantage in the satellite radio sector in terms of retail sales. Sterns ad rates have been reported to be down from his days on content challenged radio. This was not unexpected. Mel K. has stated that ad sales will be about 10% of revenue. It looks like that is yet another Mel K. target that is being met or exceeded. Additionally, as the subacriber base grows the ad rates will improve.

The guest bookings of Stern have been fine. From Trump, to Sam Simon, to Shatner, to Rivers and the many bands, the guests have been great. Perhaps you could cite the guests you wanted to see.

Sterns web traffic is a story that came out from a site in the middle of summer. Stern himself has refuted the data. If you take a moment to look at web hits for the most recent promotion, you will clearly see that there is still a healthy demand for Stern.

Curzio

“There have also been rumors in the media that Stern will return to FM radio (while continuing to work on satellite radio), which could cause some Sirius subscribers to defect back to traditional radio.”

SSG

Perhaps you were out of the country, and even though you claim to be a fan of Stern’s, you may have missed it, but Stern himself has refuted these rumors several times, and further, Sirius even issued a Press release refuting this rumor. This is the rumor that already had one writer canned from his job. The rumor was just that, a rumor. Prudent investors may speculate on rumor, but it often does not pan out. If you are hoping to see $3 on this equity, the Stern to content challenged radio one wont work.

Curzio

“On average, approximately nine analysts cover each stock in the communications industry vs. 33 analysts for Sirius, according to Thomson First Call. However, we found only one firm with a sell rating on Sirius. This is surprising, especially considering the stock lost 50% of its value in just eight months and is trading at its 52-week low. And if the company fails to meet year-end subscriber estimates, this may open up the door for some downgrades.”

SSG

The stock is at a 52 week low, but the company is on the cusp of reaching Cash Flow break Even, and maintaining it. Most analysts, and prudent investors realize that CFBE carries more weight than the subscriber numbers. Should Sirius reach CFBE and show that they can maintain it, do you think analysts would downgrade on a subscriber miss? A few will, sure, but there are also those out there that think Howard is returning to content challenged radio. Further, there have been several upgrades this year, and look what that has done for the stock price. The bet is on the financials…..not the subscribers.

Curzio

“One wild card, however, would play in Sirius' favor. Last year, rumors of a possible merger between Sirius and XM surfaced but were quickly squashed by both chief executives, Mel Karmazin at Sirius and Hugh Panero at XM. Even if the two CEOs were in agreement, regulatory issues would have also been a factor, as these companies were the two largest players in the field. But now that Apple has entered the mix, we believe a merger between the pair makes sense. The synergies of the combined company would save money in the long run, which has been a major problem for both Sirius and XM.”
SSG
AHHHHHH…..we get down to the merger talk. This is the mantra of Jim Cramer. This article would not be complete without the merger talk. I agree, as does anyone that looks at the issue that a merger would be very positive. I also agree that the entertainment delivery arena has many new players involved and Apple is among them. So you went through all of this to get to the point that Crammer has been screaming about for months…..merger.

There are indeed many who are applying downward pressure on Sirius as well as XM. There are also millions who joined the ranks of satellite radio this year, and they are a passionate bunch. They have experienced the service, and see the value in it. The subscriber base grows every day, and the costs come down every day.

You had mentioned 33 analysts that followed this equity. My question for you is whether or not you read anyones reports but Jacoby's?

10/31/2006 10:20:00 PM

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