5 Bearish Things Sirius XM Bulls Should Know

Jul.19.11 | About: Sirius XM (SIRI)

In my previous article, "Sirius XM: 5 Bullish Things Bears Should Know," I outlined five Bullish aspects about Sirius XM (NASDAQ:SIRI) Permabears should know about Sirius XM Satellite Radio. As with any equity, there are always both bullish and bearish attributes to consider. It is always best to be even keeled, and understand the other side of the coin. If you are passionate about being bullish on Sirius XM, you understand that there are people that are just as passionate about the bearish side of the equation. Rarely are there two passionate possitions without at least some of that stances of each having some valididity.

My personal opinion is that there is more to be bullish about regarding Sirius XM than to be bearish about. This opinion does not mean that I do not understand the bearish argument, and the fact of the matter is that some bearish aspects about Sirius XM have validitiy, and further, active traders will make money on the uncertainty presented by the bearish side of Sirius XM. So what bearish aspects of this equity should folks be aware of?

Slow Self Paying Subscriber Growth

Last quarter Sirius XM last reported almost 375,000 net subscriber additions. On its face, this may seem like a decent number. It would allow for growth of the company moving forward, and even allows the company to generate higher revenue as each quarter passes.

The company does receive revenue for all of these subscribers, but a key category for Sirius XM is Self Paying subscribers. A Self Paying Subscriber is a consumer that elects to pay for satellite radio themselves rather than receiving it through a promotion that comes with the purchase of a car.

Last quarter, while the net subscriber additions came in at 375,000, the net Self Paying Subscriber additions came in at only 120,000. This means that the company is adding self paying subscribers at a pace that makes continued growth less sensational.

Yes, the OEM channel delivers a lot for Sirius XM, and the company does get revenue for many promotional subscriptions. The issue is that the company is successful in converting 45% of the promotional subscriptions into self paying subscriptions. This take rate is fine, but the real test of consumer acceptance of satellite radio is borne out in self paying subscribers. If the company is adding a small number of self paying subscribers, there could be legitimate questions as to exactly how much more, and how quickly the company can grow longer term, revenue generating subscribers.

Dropping ARPU

Beginning in 2009 sirius XM had seen decent revenue growth through the implementation of a music royalty fee, and some adjustments to their pricing structire which allowed the company to boost some averages. In December of 2010 Sirius XM lowered the royalty fee by about $0.50 per subscription, and this will continue the trend of lower averages.

  • In Q1 of 2010 Sirius XM had an ARPU of $11.39
  • In Q2 of 2010 Sirius XM had an ARPU of $11.81
  • In Q3 of 2010 Sirius XM had an ARPU of $11.81
  • In Q4 of 2010 Sirius XM reported ARPU for the year at 11.73
  • In Q1 of 2011 Sirius XM reported ARPU of $11.52

Sirius XM is already falling from their peak at $11.81 and the lower royalty rate is just beginning to take effect. As the company continues to offer promotions to keep consumers on board, the ARPU line will take the hit. In addition, a recovery by auto manufacturers that pre-pay a promotional subscription [Ford (NYSE:F) and Chrysler] will hit the ARPU line. This happens because Sirius Xm has received payment for a subscription but can not book it as revenue until they deliver the sercice. If a Chrysler vehicle sits on a dealer lot for 3 months before selling, those three contribute $0 per month to the averages, thereby bringing them down.

Look for ARPU to trend down through the balance of 2011 prior to a potential price increase in 2012. The question here is how much room for price increases does Sirius XM have with the likes of Pandora (NYSE:P), Slacker, MOG, Spotify, and iHeartRadio all picking up substantial exposure and gaining listeners of their own.

A Changing Competitive Landscape

Let's face it. If you are listening to one service you cannot be listening to another. Sirius Xm has more viable competitors now than they had just a few years ago. If you are listening to Pandora, chances are that you are not simultaneously listening to Sirius XM.

Yes, Internet radio has been around for years and has not really threatened Sirius XM. The problem is that Internt radio has now become smartphone radio, and smartphones are now being integrated into cars. This development is just now starting, and investors need to consider the ramifications.

If you liked Pandora on your computer, what is to stop you from liking it in your car now that it is available there? Two years ago listening to Pandora in the car was not really possible. Today the company has already struck deals with the likes of Ford, and Toyota to have their app included seamlessly in the dashboard.

These competing service are not going to kill off sirius XM, but they will make the satellite radio business more challenging as all of these services compete for your ears and your attention.

Even if a stand-alone Pandora is not considered a threat by the permabulls, what about a combination of Pandora and iHeartRadio? Investors need to consider all of this closely.

Cost Savings and Merger Synergies Baked in

Another driver for Sirius XM over the past two years has been merger synergies and cost cutting measures. At this point the company has cut costs about as far as they can, and the bulk of the merger synergies have been realized. Continued improvement to the balance sheet from these items will be minimal.

Consider that in Q1 Sirius XM spent $9.22 per subscriber in costs, and add to that a dropping ARPU, and limitations start to come into play. Simply stated, the delta between a $9.22 cost per subscriber and a dropping ARPU which is currently at $11.52, and you can see that $2.30 that is getting to the bottom line getting smaller. This condition will last until the company can raise prices, or they develop new ways to generate more revenue.

Satellite Radio 2.0

It is ironic that I list satellite Radio 2.0 in both the bull case and the bear case. The reason is simple. If it lives up to the expectations it will be a bullish event for the company. If it falls short, it will be bearish.

So what could make it fall short? If the features are not competitive with what Pandora, Slacker, and other companies are doing, or if the company wants to charge too much for the upgrade.

Satellite radio 2.0 is like an unturned river card in poker. It can either make or break your hand. If satellite Radio 2.0 is viewed as a failure, the company will have to go into scramble mode to catch up.

The bootom line is that there are realistic reasons to have some bearish attitudes for Sirius XM. The company is doing fine, but there are still enough uncertainties with the company as well as the economy to trade the bear side of this equity.

Disclosure: I am long SIRI.