Investor News

We often hear passionate satellite radio investors and fans clamoring for 100% auto installation penetration. On it’s face it may seem like a great idea, but the reality of the OEM picture is different, and Sirius XM demonstrated that today at their annual meeting.

Sirius XM demonstrated the dynamics of smart growth in the OEM channel, and it is a strategy that the company is focused on. A vehicle such as the Cadillac Escalade enjoys a 70% take rate. This means that 70% of those vehicles equipped with SDARS become self paying subscribers. By contrast, economy cars carry a 30% take rate. A substantial difference.

It is not only the take rate that matter though. The length of time to see a return on the money invested is also a major consideration. Vehicles that have a 70% take rate become a “break-even” proposition after only 12 months, while the 30% take rate vehicles take 29 months to become a “break-even”.

The length of time it takes to get a return on their investment needs to be a major consideration of Sirius XM. While a subscriber acquisition cost of $61 may not seem like a big number, it becomes substantial when you multiply it by a million. In simple terms, would you rather get back an investment of $61 million in 12 months, or 29?

Right now it is smart growth that Sirius XM need more than a bigger penetration rate. Expanding penetration is great when a company is making money, and that day will come. Understanding the dynamics of the OEM picture becomes important because it is such an integral part of the Sirius XM business model.

Long Sirius XM Radio, No Position OEM’s

As Sirius XM gets ready for their annual meeting of shareholders, their biggest OEM partner, GM, could well be getting ready to file for bankruptcy. For the overall sentiment of the economy, the GM news is hardly good. Consumer confidence has been on a virtual see-saw, and a GM bankruptcy has wide reaching implications. The question for Sirius XM shareholders is what impact a GM bankruptcy will have.

Sirius XM has already absorbed the news that Chrysler’s woes will carry a dramatic impact on the Q2 numbers. With their bankruptcy, Chrysler halted production of vehicles, and by extension, satellite radio installations.

General Motors bondholders have rejected a debt for equity swap that would have staved off bankruptcy and facilitate an additional cash infusion into the company. The automaker has until Monday to complete government-ordered restructuring of debt, labor costs, and production plant closures. The UAW had agreed to take a 20% stake in the company, but it is the $27 billion in debt held by bondholders that is the stumbling block. Those bondholders were offered a 10% stake.

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Today is the day that Liberty Media’s Greg Maffei will be presenting at the JP Morgan Global Technology, Media and Telecom Conference. The event is being held live in Boston at the Westin, and will also be webcast. Investors in satellite radio should consider listening to this conference because Liberty Media has a substantial stake in the company.

Additional details on the conference and applicable links can be found on the Liberty Media website.

Sirius XM Radio closed  at 36 cents on Friday, and from a technical trading standpoint, it sits right in the middle of “no-man’s-land.” With the stock dipping into the 30’s and the next support at 29 cents, technical traders are in the middle of a quandary, and the direction of the stock will determine how those traders react.

At this point the technical signs are a mixed bag. There are bullish signs, as well as bearish signs, and this is exactly the point in time where many technical traders employ a “WAIT” strategy. Options week always brings interesting behaviors in any stock, and this last week was no exception.

Current support levels are 29 cents and 23 cents. Resistance currently sits at about 39 cents and 54 cents. In the short term, most technical indicators are bearish, while longer term strategies are more bullish. Ironically, this sentiment is how many traders across the board feel about the prospects of Sirius XM Radio. Short term challenges, and sunnier days long term.

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SiriusBuzz Radio is live once again tonight at 9:00 PM eastern. Catch all of the latest news and participate by calling 347-945-7995. From the lasted in registered shares, to the potential of the iPhone application, to the activities of Chrysler and GM, we will cover the spectrum.

SiriusBuzz Radio Show #42

Position - Long Sirius XM Radio

Sirius XM Radio announced today that they are registering 148 million shares for use in stock incentive plans. Offerings such as this have happened each year. Until registered, these shares are not in the outstanding share count used in the calculation of market cap or the companies quarterly and annual reports. Once registered they do become part of that count. For clarity, it should be understood that reserved shares such as these are and were counted in the “fully diluted” share count.

In addition to the registration, Sirius XM announced that CEO Mel Karmazin has, in effect, donated his rights on options to 30 million shares. The options carried an exercise price of $4.72 per share. Of the 30 million shares, 24 million had been vested. Over the years, these options have been used in error many times in determining the take home pay of Mr. Karmazin. While some may look at this as a meaningless gesture given the current stock price, the move does have the effect of cleaning up the books of the reserve established, and does make the dilution of the employee incentive plans less than it would have been otherwise. In point of fact, the move shows a commitment to the employees of Sirius XM Radio.

From The Filing:

“Mr. Karmazin’s choice to forfeit these options will allow us to more efficiently use the shares authorized under the Plan to meet the Plan’s purpose to attract, motivate and retain key employees.”

“Mr. Karmazin did not receive any consideration in exchange for the forfeiture of these stock options.”

As a result of these filings, the fully diluted share count was raised by 148 million shares, then lowered by 30 million shares. The NET impact was an addition of 118 million shares.

Position: Long Sirius XM Radio

For satellite radio investors, the status of Chrysler is big news. The auto manufacturer has already announced a halt in production that could virtually wipe out any contributions the Chrysler brands to the subscriber roles, and the fact that they are in bankruptcy could have consumers a bit nervous when it comes to buying a new car. Compounding that issue was that there was no Chrysler sponsored financing available. This meant consumers who wanted to buy a Chrysler brand had to come up with their own financing.

At least one worry was eased today as a Judge Arthur Gonzales ruled that GMAC Financial Services can become Chrysler’s preferred lender. Under the agreement, the exact details of which were sealed by the court, GMAC will be allowed to provide showroom financing to Chrysler dealers and have the right to exclusively offer certain discounted financing rates to Chrysler customers. Thus, it lends a helping hand to both dealers and consumers.

Because Chrysler is shutting down production for a substantial part of the quarter, subscriber numbers will be impacted. The big news for satellite radio investors in this new financing agreement is that Chrysler cars that are already in inventory are now easier to sell. Because of this, the “parking lot subscribers” will become revenue generating subscribers as they are sold. The impact will be a decrease to deferred revenue (a liability) and an increase to revenue. This will also improve the Average Revenue Per User (ARPU) metric because the number of vehicles that are not generating any revenue (”parking lot subscribers) will decrease.

Simply stated, the impact of Chrysler’s situation is:

1. Decrease in subscribers.
2. Decrease in deferred revenue
3. Decrease in Subscriber Acquisition Costs (SAC)
4. Increase in revenue
5. Increase in Average Revenue Per User
6. More cash on hand because of no installs.

This is the reason understanding OEM deals and the differences in them is important.

Position: Long Sirius XM Radio

Ford (F) and GM (GM) have been synonymous with rivalry for decades. Ford vs. Chevy in Nascar, Monster Trucks, and even with window decals decorating the back windows of trucks. “Ford Tough” seems to have won out recent as Chevy’s “Like a Rock” has been crumbling.

Ford has stood tall in a time when nearly every manufacturer is seeking bailouts. Even Toyota had at one point sought aid from the government of Japan. Of the big three US auto makers, Ford has been the only company that has not accepted government bailout money.

Now, as GM teeters on bankruptcy and with six top GM executives selling out their shares, Ford is announcing a new plan issue up to 345m in common shares at a yet to be determined price. The move could potentially bring $2 billion into the coffers of Ford. Even in this bad economy, Fords shares have appreciated substantially delivering a four bagger to anyone who invested in February.

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