Sirius Satellite Radio (SIRI)

Sirius's subscriber addition costs are very high, especially since its operating expenses have been growing since in recent years as Sirius tries to sign premium content to its channels and heavily market its service in order to acquire new subscribers.

Sirius Satellite Radio - Reducing Estimates at Both Retail and OEM Channels 2008E Revenue From $1.31 bn to $1.22 bn 2008 OEM Net Adds From 1.43 mm to 1.37 mm

Plus due to continued retail weakness and slowing domestic auto market, the subscriber growth outlook has also been pared down by various analysts. ^[1]

SIRI reported mixed 4Q07 results marked by weaker than anticipated ARPU and pre-marketing EBITDA margins, but in-line churn. The increased impact of subscriber mail-in rebates in the quarter led to fully loaded ARPU of $10.05 coming in $0.49 below our estimate. Pre-marketing EBITDA of $52.8 mm came in below our $79.1 mm estimate, implying a 21% margin compared to our 30% expectation for the quarter.

However, roughly $15 mm of the pre-marketing EBITDA shortfall came from catch-up payments related to the increased performance rights royalty license. Excluding the incremental CRB payments, the 4Q07 pre-marketing EBITDA would have been approximately $68 mm.

4Q07 revenue and adjusted EBITDA loss came in at $249.8 mm and $107.2 mm compared to our $263.7 mm and $100.8 mm, respectively. Reported churn of 2.3% came in in-line with our estimate, while 4Q SAC of $90 came in $2 below our estimate, or down 13% from 4Q06. Lower SAC was likely attributed to fewer retail subsidies and commissions due to a higher OEM sub mix in the quarter. SIRI pre-reported 4Q07 subscriber results which showed weak retail growth leading to YE07 subscribers coming in short of our 8.41 mm by roughly 90K. Retail gross additions declined approximately 42% YoY compared to -25% in 4Q06.

Auto sales are down. This has been the month after month news item for most auto manufacturers. With the exception of a few bright spots, the entire auto industry is in a slump. With high gas prices, many companies are offering clearance prices on what are now considered gas guzzling trucks and SUVs. Four cylinder cars are now the hot commodity, and even many of these simply are not selling at the needed pace.

For satellite radio sector watchers, the slumping sales in the OEM channel is an undertone that, coupled with the lack of a merger decision, makes many investors have pause in the sector. In an environment where good news seems to always be followed with a pause and then bad news, it is hard for the satellite radio equities to see any momentum.

Many analysts started off 2008 seeing the OEM channel as a driver for satellite radio subscriptions. Most used some base assumptions, projecting subscriber numbers based on a certain level of car sales happening combined with a bigger ramp-up in the rate at which SDARS receivers are installed. Now with half of 2008 gone, and car sales still slumping, there could well be some adjustments in the models that analysts use.

Sirius Satellite Radio traded for quite some time on the potential that satellite radio would be a success. Investors were more apt to accept high costs of establishing the business in hopes for a future reward. Sirius is now transitioning into an equity that investors want to see the results from. This shift in investor perception is a difficult time in any company. not yet profitable, and with the hype dissipated, investors will treat the equity in a more conservative fashion, and demand tangible results to see Sirius as a "value" investment. During this phase in the company, it is not surprising that money waits on the sidelines.

The popularity of Apple's iPod and its increasing compatibility within car audio system will prevent Sirius from acquiring new customers looking for digital quality music to play in their automobiles.

The federal government may deny the proposed merger between Sirius and XM, which will re-ignite intense competition between Sirius and XM for subscribers and programming content.