In a piece published here yesterday, I politely, but firmly rebuffed an article written by TheStreet.com's Scott Moritz. The reason for my article was not to question the thought that Sirius XM could have troubles in a continued downturn of the economy, but rather the reasoning by which Mr. Moritz came to his conclusion. In my opinion Mr. Moritz's reasons lacked a solid foundation, and brought up several issues that carry little weight when compared to facts.
In fairness to Mr. Moritz, perhaps he has not taken the time to delve more deeply into the gears that make up the satellite radio machine. Whether we like it or not, some metrics of Sirius XM can be very confusing, and can make projections difficult to say the least. Understanding the workings of the company takes time, and for one reason or another, many (analysts included) take short cuts to arrive at what could be a very flawed conclusion. On the flip side, the conclusion could be right, but the method to arrive there is fraught with error.
Today Mr. Moritz decided to respond to many questions posed to him about the original article. Ironically, he did not deal with any of the REAL issues that were bringing all of the questions, but instead dealt with some selective emails on issues that seem to dodge the intent of the initial article altogether.
Let's break down the intent and reasoning of the initial piece. Moritz felt that Sirius XM would have problems surviving another economic downturn. To support his stance he offered up accumulated losses, annualized subscriber counts, the debt load held by Liberty. Those were his reasons plain and simple. When it was pointed out that the logic behind those reasons had flaws, he seems to have taken a left turn on the discussion, and now wants to focus on issues that are not related to the initial theory that the company would fall on hard times in an economic downturn.
The Latest From Moritz with my responses bolded
"Sirius, as the story pointed out, turned another corner this year by extending its losses not just in dollars, but now in hundreds of thousands of subscribers. The pay radio player is on track to lose 1.6 million customers as car sales slump in 2009. This doesn't bode well for the stock. Tech's hottest cash fire, we wrote, had finally reduced its stock to embers."
"Michele G. from Wisconsin wrote that we had failed as journalists. "Your role should be to provide information from all perspectives to allow the reader to come to their own conclusion. If you don't do this you have an ulterior motive and have violated ethical standards."
Michele's feedback is a somewhat high-minded version of the usual evil-intent accusations.
One might argue that creating the illusion of balance in a story listing stocks to avoid is somewhat similar to selling luxury services like pay radio during frugal times.
So to be fair, yes, Sirius could sidestep the collapsing auto industry, it could dodge the ad spending slowdown, it could stem some of its subscriber losses, and the company could even lower the flames in its cash furnace.
But the point is, Sirius has serious financial challenges that would be extraordinarily difficult to overcome if the economy continues to tank"
In my opinion, Mr. Moritz starts out by simply insulting Michelle, and writing her off as some conspiracy theorist. There are many things in the market that point to people with ulterior motives. That is a fact of life. However, Michelle was making a point in that Mr. Moritz was offering up some very one sided statements. Something like mentioning the debt to Liberty without mentioning Liberty's stake in the company is a fact that was very connected to the issue.
Mr. Moritz then goes on to say that balanced reporting would simply be an illusion. In many ways, this is true, but it is far better to have more facts to consider than to leave them out altogether, especially when some of these facts left out are very important if you are looking at whether or not a company can survive a prolonged downturn.
Mr. Moritz then attempts to placate Michelle by saying that the company could work around all of these issues. However, he follows it with, " Sirius has serious financial challenges that would be extraordinarily difficult to overcome if the economy continues to tank." Funny how Mr. Moritz can simply dump that statement out without anything to lay the foundation for it. Mr. Moritz, what are the serious issues? The company has already stated that they have the debt picture under control with the latest bond offering. They have debt that matures in December, and a bit more in 2010, but then the rest is 2011 and beyond. Are you saying that the economy will be in the crapper until 2012? Have you run an analysis to see cash flows, liquidity, and the debt picture? On small part of the recent refinancing did away with amortization payments that were draining $25 million per quarter. That is $100 million in improved liquidity during 2009 alone. Consider that one simple factor against the debt due this year, add the $150 million from Malone, and then tell me how you see the debt picture as some albatross that will deal a death blow to the company. The fact of the matter is that the debt picture is far more manageable now than it has been in quite some time. Your rebuttal to Michelle seems to reek of sarcasm, and carry little weight on facts or research.
"Another reader, John, location unknown, raises a fair question: How can you project a negative subscriber number for the whole year based on one quarter's numbers.
The simple, snarky answer is multiply by four. But to John's point, right or wrong, a quarter's numbers can help project a yearly run rate. The key assumption is whether the conditions in the first quarter will continue to the next quarters. With more than half of Sirius' new subscribers coming from car sales and new cars delivered to dealer lots, it's not easy to believe customer growth is all that healthy. Sirius lost 404,422 customers in the first quarter as the auto industry shrank. In the second quarter, when GM followed Chrysler into bankruptcy, it's conceivable that Sirius did even worse on the subscriber front.
Sirius argues that fewer car customers mean lower subscriber acquisition costs, but that's sort of like saying you are saving money on your commuting costs after you lost your job."
I almost do not know where to begin on this one. The subscribers from one quarter can help determine the annual run rate? Did he actually say that? Where has Mr. Moritz been over the past several years? Has he not seen a seasonality to the satellite radio business? There is seasonality to subscribers, cash flow, churn, ARPU, SAC, and revenue. If you are going to write about an equity, you should at least comprehend whether or not there is a seasonality to the business. Let's be real here. Did Moritz even bother to look at last year? Did he look at any year over year subscriber metrics? The answer is no. If you are going to annualize something does it not make sense to understand last years data? Instead he decided on the short cut of looking at one quarter. Did he consider that churn is traditionally higher in Q1 than other quarters? I don't think the thought ever entered his mind. That would require a bit more research. Why is Q1 churn higher? Because most annual plans expire in December and are up for renewal. The company gives a thirty day grace period while they try to contact subscribers to resign them. That would fall into Q1 of the next quarter. Churn was at 2.2% in Q1, and most likely that will be the high water mark for the year. If Moritz understood this, he would have accounted for it and understood that being snarky and multiplying by 4 is not a reasonable methodology, nor a sound assumption.
Yes, the auto industry shrank in Q2. However, the churn rate likely did as well for the reason listed above. To say that it is conceivable that Sirius XM's will loose more subscribers in Q2 than in Q1 demonstrates a lack of understanding of the metrics of the company. Will there be subscriber losses in Q2? YES. Will it be worse than Q1? Not likely. The numbers and metrics simply do not match the conclusions arrived at by Mr. Moritz. The fact of the matter is that it appears that Mr. Moritz does not understand the subscriber picture and how it is made up. There are promotional subscribers, self paying subscribers, deacvtivations, and self paying churn. I am beginning to wonder whether Mr. Moritz even realized these metrics existed, because clearly he has not run a REAL subscriber model. Instead, the elementary "multiply by 4" method was used to arrive at his conclusion.
Moritz then takes a shot at Sirius XM by comparing saving Subscriber acquisition costs because of lower auto sales to saving money on your commute because you lost your job. Mr. Moritz, do you understand residual income? The company HAS a subscriber base that provides revenue on an ongoing basis. These subscription payments come in month after month after month. Sirius XM did not lose their job. Bad analogy. A better example would have been to say that they are telecommuting 3 times a week and saving money. The OEM channel is a growth vehicle, but it is also an expensive path to subscribers. The OEM channel is front loaded with costs, and the return for the company can take a year to bear fruit. The OEM channel is not gone, it is simply slowed. The dynamic at play is that the company is investing less money into the channel because fewer cars are being produced. They have not slowed penetration, but rather slowed production. Money that is not being spent can be used elsewhere. This is where an understanding of self pay subscribers vs. promotional subscribers becomes very important. The company lost 1% of their self pay subscribers in Q1. While that is not a good thing, it is a far cry from imminent doom and gloom. The fact of the matter is that if you want to model subscribers, I would suggest a spreadsheet with historical data, and realistic assumptions. Calling for failure based on a formula a third grader would use does not cut it.
"And finally, getting his two-cents in, Mike F wrote that we had already reported the tough year ahead for Sirius' subscriber losses in June when the stock was at 35 cents. The stock, he points out, is now at 43 cents.
Obviously there's still some heat in those embers, just try not to get burned."
Sound advise here. Many people can get burned. Especially when they do not have all of the facts to work with.
What I would like to see is Mr. Moritz back up his original article with sound and researched reasoning. Like I stated, his statement that Sirius XM could face hard times if the economy does not improve is a realistic concern. After all, the perception by many is that satellite radio is not a necessity. A reasonable conclusion could well be that subscriber roles may suffer. However, deeper understanding of metrics, dynamics, cash flow and liquidity are needed to support that conclusion, and that is what I would like to see Mr. Moritz lay out. If the company is able to get a better ARPU, offset costs, make debt manageable, and improve financial metrics, then much of the concerns Moritz has may be for naught. I can tell you this, accumulated deficit is meaningless as far as the theory of Mr. Moritz's original piece. The lack of understanding of Liberty's role is also telling.
Position - Long Sirius XM