Time For Sirius XM To Trade On Fundamentals

| About: Sirius XM (SIRI)

Sirius XM Radio (NASDAQ:SIRI) has had many clouds of uncertainty overhanging the company's future for the past year. During the past few months most of these have been cleared up. Whether it was a question about:

  • the impact of the price increase on subscriber cancellations,
  • when - or even if - Liberty Media (NASDAQ:LMCA) would be permitted by the FCC to buy the company,
  • would former CEO Mel Karmazin remain,
  • would the royalty payments increase, and if so, by how much, or,
  • success of the used car initiative,

investors have received many answers.

Churn and Conversions

Sirius XM uses free trials to promote the use of its service. At the end of the free trial that comes with two-thirds of new OEM vehicles, there has been an expectation that approximately 45% of the recipients of the trial would convert to self-pay subscribers. Sirius XM expects to lose about 2% of its self-pay subscribers each month - a figure that it calls "self-pay monthly churn". When Sirius XM instituted a price increase on January 1, 2012, it expected to see an increase in churn, and that the subscriber net adds would fall sharply from the prior year. Its original guidance was for 1.3 million net adds, down from 1.7 million in 2011. As the year progressed, the full year churn remained below the expected 2% level, and the company steadily increased its guidance for subscriber growth.

The company has been able to accomplish stronger than expected subscriber growth through a combination of increased retention discounting, an aggressive used car program and growth in light vehicle sales. It has also benefited from a small improvement in the penetration rate in the dashboard of new OEM vehicles.

Liberty Media and the FCC

Liberty began its move to acquire Sirius XM nearly 4 years ago, when it made the infamous 15% interest loans and received preferred shares representing 40% of the company for $12,500. Certain standstill restrictions prevented Liberty from making a partial takeover offer or a unilateral move prior to the third anniversary of the investment agreement. By the time the restrictions had expired, Liberty had already entered into a forward contract to purchase more than 300 million shares of Sirius XM and was preparing to petition the FCC for permission to take de facto control of Sirius XM.

The application was contested vigorously by Sirius XM, and was eventually rejected by the FCC on procedural grounds. Liberty withdrew the application and submitted an application for de jure control, all the while continuing to purchase shares of Sirius XM. Last week, the FCC approved Liberty's application, and Liberty will now be purchasing additional shares to go to majority control of Sirius XM no later than early March.

Former CEO Mel Karmazin

Karmazin, and Liberty's CEO Greg Maffei, and Liberty's Chairman John Malone made headlines at various times throughout the year. As Liberty's takeover plans became firm, Karmazin made statements that he would not make a good number two and that he was probably too expensive for Liberty. Malone and Maffei made statements that they were happy with Karmazin, although Malone stated:

I would prefer not to lose Mel, but he's gone public and said he won't work for me, so what am I supposed to do?


There are plenty of good managers, including inside the company.

On an interim basis, Sirius XM has named one of those good managers from inside the company to be the interim CEO - Jim Meyer. While a permanent replacement has not yet been named, the clash of the personalities that made headlines for much of the year won't be an issue.

Music Royalty Costs

The largest operating expense for Sirius XM is "Revenue share and royalty." And, although the exact split between the revenue share and the royalty components are not known, the previous five year agreement saw the royalty percentage jump from 2.35% to 6% for the first year of the agreement and increase gradually to 8% for 2012. SoundExchange was requesting a new rate beginning at 13% and increasing to 20% over the life of the agreement. Sirius XM was looking for a rate reduction to the 5%-7% range, and has been challenging SoundExchange in the courts.

The CRB chose to go with an immediate increase to 9% for the first year, increasing 0.5% per year for the remainder of the agreement. While the rates are far more than Sirius XM was proposing, they were also far less than those proposed by SoundExchange. They were also apparently less than the market expected, as the shares rose nicely following the decision.

Used Car Initiative

Sirius XM has been offering free trials for quite some time on used cars. Initially these efforts were concentrated on Certified Pre-Owned vehicles. More recently, the program has been rolled out more broadly, applying to all vehicles with an OEM installed satellite radio. The program has expanded rapidly, growing from 3,734 dealers at the end of 2011 to 7,075 dealers at the end of the third quarter. The number of dealers is expected to grow even further, and is expected to eventually include 10,000-11,000 dealers.

The used car program was largely an unknown factor at the start of the year. Investors now know that it is expected to generate one million trials, trials that should eventually generate about 0.4 million self pay subscribers. As the number of dealers in the program continues to increase, and the installed base of factory equipped vehicles on the road continues to grow, the success of the program should continue to grow.


Investors have had much of the uncertainty surrounding Sirius XM removed. And, although some investors would have preferred to see Karmazin remain, most of the uncertainty has been resolved in a manner very favorable to Sirius XM.

Looking forward, a new permanent CEO - if Meyer is not the choice - may move the stock, as could unexpected Q4 2012 results or 2013 guidance. Also looking forward, does this mean that the company will begin trading more on fundamentals than story lines? And, equally important, how much of the good news is baked into the current share price and where will it head in 2013?

Investors may have the opportunity to learn more later tonight when Maffei speaks at the Citi Global Internet, Media and Telecommunications Conference or tomorrow when Sirius XM's CFO David Frear speaks. If not, we are only one month away from the earnings conference calls.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.