It's difficult to follow the stock market without bumping into Sirius XM (NASDAQ:SIRI). Not only does it receive as much coverage as any stock outside of Apple (NASDAQ:AAPL), it has entire websites devoted to following it. By and large, that coverage is sound.
For example, on a regular basis, fellow Seeking Alpha contributor Spencer Obsborne breaks down auto sales numbers as they relate to Sirius XM subscriber growth. Spencer's monthly review provides one of the financial media's best examples of crunching numbers. And, speaking of Crunching Numbers (I love being cheesy with words), he frequently graces Seeking Alpha with important questions like What will Sirius XM do with this pile of cash?
Indeed, Crunching believes "Sirius will reiterate 2012 FCF guidance of $700 million, which would give it more than $1.5 billion by the end of the year." Combined with Spencer's focus on the auto market, this prompts me to ask a question. Is Sirius XM A Growth Company?
If it is, it sure does not look like it. And, if not, why in the world aren't they trying to be one?
Sirius XM bulls and bears can often agree on one thing. The company does not spend enough money on marketing its product and aggressively expanding its reach. But that's a somewhat qualitative assessment. Let's consider a few companies who run in the broad media space, in some way, shape or form, that I at least think Sirius XM does, or at least should, run in.
|Company (Ticker)||Qrtrly Rev Growth (Yr. Over Yr.)||% Of Revenues On S/M (Most Recent Qtr.)|
**Used subscriber acquisition cost line item, not sales and marketing.
***Zynga numbers for year ended, December 31, 2010. Revenue measured on full-year basis (2009 v. 2010 growth %). S/M % is for all of 2010.
That chart merely reinforces what we already know. Sirius XM is a slow growth company. Maybe that's the only explanation needed as to why it spends so little, relative to its peers, on sales and marketing. Of course, bulls can cast this off with any number of talking points - they spend it on content, they don't have to market the service because it's so good, Mel Karmazin is a shrewd business man. I chalk it up to a company hyper-focused on the automobile, which, to a certain extent is a good thing. That's the bread and butter. That drives the business today, but it cannot come at the expense of the future of content consumption, content delivery and, most importantly, zippier growth.
Sirius XM spends a considerable amount of money ($107,279,000 for the quarter ended 09/30/2011 or 14.1% of revenues) on subscriber acquisition costs. Unlike DirecTV, Sirius XM does not include sales and marketing in that mix. Here's how the satellite radio provider defines SAC:
Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as incentives to purchase, install and activate satellite radios; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of satellite radios and revenue share payments to automakers and retailers of satellite radios.
And here's how it defines sales and marketing:
Sales and Marketing includes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf.
Clearly, Sirius XM runs an expensive business. Lots of overhead. Lots of costs to penetrate the motor vehicle effectively. Sirius XM executes a business model that's almost the exact opposite of Pandora's, for instance. Not only does Sirius XM generate most of its revenue from subscriptions (Pandora does via advertising), but it pays automakers to get into their lineup, whereas Pandora does not.
Ever since the company's near-death experience, this model has worked out well. Sirius XM is profitable. Its subscriber base continues to grow. And, as Crunching Numbers noted, it's about to have over a billion bucks on the books that it does not feel obligated to put toward servicing its mountain of debt. Yet nobody can seem to figure out what the company will do with all of this money.
Many SIRI longs, as well as the company's CEO, discuss the possibility of returning capital to shareholders via a dividend or, much more likely, a stock buyback. Some shareholders believe that buying back stock will give the stock price a boost by lowering the number of outstanding shares, which presently stands at roughly 3.75 billion. On paper, I guess that makes sense. But, we all know that if what happened on paper mattered, Apple would be worth something north of $500 and Research in Motion (RIMM) might miraculously become a $30 stock or thereabouts. All that should matter to investors is not some X plus Y equals Z assigned value or how's the business doing today, but what will you do for me tomorrow?
Does Mel Karmazin intend to continue to pour his company's resources into that definition of SAC and scant sales and marketing, relative to Sirius XM's peers? One look at the 6.3% number in the revenue growth column should slap Mel upside the head like a Nils Lofgren guitar solo during Youngstown.
He's running a slow-growth company in a rapidly-growing industry that gets disrupted by somebody or something every time you turn around. Yet, he's sitting on hundreds of millions of dollars in cash (and even more debt) and taking forever to decide what to do with it. At the top of the list - we'll become a "blue chip" (chuckle) and return capital to shareholders as effectively as possible. That's patently absurd.
If you're long this company and care about its future, you really need to get on management's case. We know what Sirius XM is today, but the more important question is what will it be in five years? I cannot give a meaningful look at going long, with any sort of long-term time horizon, until Sirius XM executives show investors that they want to step up revenue growth, reinvest in an evolving business and take advantage of the massive opportunities nearly every one of the company's direct and indirect competitors aggressively attempt to maximize.
Additional disclosure: I am long NFLX June $40 put options.