Sirius XM has made huge strides over the past year. The company had taken a beating during a much to prolonged merger process only to find themselves with a merger approval in what amounts to the poorest of economic conditions. Banks were collapsing, and funding an expensive satellite radio business became problematic. The refinancing market was virtually closed, and the bad economic news seemed to go on forever. Liberty Media stepped in at the last moment to rescue the company, and on the heals of renewed strength, because of Liberty, the company was able to dig itself out of what had become a huge hole.
The next few quarters saw merger synergies taking effect, and the company was able to begin the process of cleaning up their balance sheet. Sirius XM was successful in getting better interest rates as well as a better spread in how the debt was maturing. Now they have even begun the process of paying down some of the $3.1 billion of debt they currently carry. However, merger synergies are now mostly complete from a balance sheet perspective. Yes, there are still synergies to be had, but the bulk of them are now behind us. Cost controls have also been quite effective.
Price increases were the next phase of growth. While a price freeze is still in effect, the company was able to get some price increases through:
BEST OF programming at an additional fee of about $4.00 is already showing some reward with over 1.1 million subscribers taking advantage of it. This adds about $13 million to revenue each quarter.
A price increase in Family Plan by $2.00 per month is another revenue driver. Historically, 25% of Sirius XM's subscriber base are family plan subscriptions. If we consider that there are 19 million subscribers, there are about 4.75 million of them paying about $2.00 per month more than they used to. That represents about $28.5 million in additional revenue each quarter.
Both the Sirius and XM platforms offer an Internet only subscription. There is likely growth here, but I do not see it as substantial. What is substantial is the number of regular subscribers that add the Internet capability to their existing account to enable online streaming over their computer, as well as through apps for smart phones such as Apple iPhone, Blackberry, and soon the Android platform. The fee for these subscribers is about $3.00 per month. The company does not give any metrics on exactly how many subscribers are paying this, but the number will grow over time as smart phones continue to gain market penetration. If we assume that 20% of the subscriber base is paying this fee, we arrive at some interesting numbers.That would give us 3.8 million paying an additional $3.00 per month, or about $11.4 million per quarter in additional revenue
The royalty fee was allowed by the FCC, and the company implemented a fee of about $2.00 per month for standard subscriptions, and about $1.00 per month for family plan subscriptions to offset previously paid royalty fees, as well as future fees. The company states that 100% of the fees collected will be used to offset payments from Sirius and XM to the music industry. Whether paid promotional trials pay the fee is somewhat unclear. I will get further detail, and if available add it to the comments section of this article. For the purposes of this exercise, I will assume that about 10 million subscribers pay the full $2.00, and 5 million pay the family plan rate of $1.00. This would represent $75 million in added revenue each quarter.
Given all of the "price increases", the company is bringing in nearly $128 million per quarter, or $511 million per year. That is substantial growth in the revenue line. Certainly some of this revenue does get paid out, but you can see why the company was able to show growth in their revenue.
So how does Sirius XM continue to show growth going forward? This should be a key question on the minds of anyone invested in Sirius XM. In my mind there are a few categories to watch over the next year, and a few metrics that can deliver a reasonable growth curve.
Sirius XM needs to gain subscribers. they can not show true growth with flat subscriptions any more. The time of getting more dollars out of the existing base to show growth are behind us now. At least for the time being. Thus the company needs to develop a strategy to grow the subscriber base. In order to do this, the company may need to discount services, which works against the grain of revenue growth. Essentially, they need to walk a fine line of keeping prices low enough to grow the subscriber base, while keeping the revenue high enough to justify growth. Simply stated, they gains in subscribers at the expense of ARPU need to show more revenue than they would have gotten if they kept the higher price point. It is the classic question of added volume vs. higher prices. The recovery of the auto channel will help the company accomplish this more organically going forward.
So how does the company gain more subscribers? Car sales. With 60% penetration in new cars, and a CPO program that is now putting meaningful numbers into the pipeline, we can see growth. However, success in this channel is beyond the control of Sirius XM. Car sales need to improve, and essentially, the company needs the OEM channel to succeed to show their own growth. The key here is keeping a tab on auto production and sales. The penetration rate in new cars is expected to remain flat this year. The only growth that is available in new car sales is in total control of the economy. The Certified Pre-Owned Channel and the used car market is something that the company can control.
Sirius XM has some Certified Pre-Owned programs in place, as well as some decent used car programs with Car Max, and a few others. This is where the company can be more efficient, and where they can control things a bit more closely. This is also the area where Sirius XM can get aggressive from time to time. If growth is slowing, the company can market to all of those cars out there that have satellite radio, but are not activated. That marketing could include free months, billboards that inform people that they can activate, etc.
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Long ago, Mel Karmazin indicated that he wanted ad revenue to make up about over 10% of revenue. This was an agressive goal, and given the economy, never came to fruition. The fact of the matter is that the ad dollars Sirius XM bring in have been a real challenge. The subscriber base loves commercial free music, and also appreciates the fact that Sirius XM has fewer commercials per hour on non-music channels than terrestrial radio. Thus, growth here by adding more ad volume is unlikely, as it would upset the subscriber base. Therefor, growth needs to happen in what the company is able to charge per ad. The ad market is very poor right now, so hope that this will be a big contributor going forward is unfounded. Yes, as the economy improves ad revenue will improve as well, but not really by enough to be a major driver. The key is simply to monitor this, but not to look for it to be a major contributor.
While this may not be a popular one for subscribers, it would be celebrated by investors. In the spring of 2011, the price freeze restriction from the merger will be lifted. This will allow the company to increase prices. Rather than a flat out increase, I see the company accomplishing this in a manner similar to what they had previously done, with possible nominal increases in some packages. For example, increasing the family plan by $0.50 would be a substantial boost to the bottom line without getting such a negative reaction that people cancel. The benefit to the company would outweigh the risk.
Another form of price increase could come with new deals. Without getting into details of when certain deals are done, it is quite possible that the sports programming will come at a fee rather than as part of the base package. Want NFL programming? I see NFL Radio remaining on the basic tier, while games would be sold as an additional package. the same possibility holds true for MLB, NHL, and the NBA. Even Howard Stern could become a premium tier. Will this happen? A lot depends on whether or not the company is able to show continued growth, and at what rate. At this point I would venture to say that come Spring 2011, price adjustments are being considered strongly by Sirius XM.
In a nutshell, there are many things for investors to watch going forward that will indicate growth. Pay attention to subscriber growth and how the company is accomplishing it. Pay attention to ad revenue. Pay attention to cost efficiencies. Pay attention to debt load, and how much it costs. Pay attention to balance sheet improvements. If you are invested in this company you owe it to yourself to get informed about the things that matter. Sensationalized news does not help you. Understanding the important things does.
As an investor you have your whole life to make another trade and make more money. What you can not do is get back time. Spend your time wisely by controlling the information flow you pay attention to.
Position - Long Sirius XM Radio