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SIRI AT A GLANCE

P/E ► -0.529   EV/EBITDA ► -1.35   ROA ► -117.1% VERY LOW Debt to Equity ► 51.2 VERY HIGH Current Ratio ► 0.445 LOW Interest Coverage Ratio ► -18.6 LOW

 

 

 

 

 

 

Sirius XM Radio (NYSE: SIRI) has 18.4 million subscribers and is the only satellite provider in the United States as of June 2009.^[1] The company claims that the combination of Sirius and XM will cut costs by about $400M as a result of the merger - a must after Sirius and XM lost a combined $900M in 2008.^[2] The high costs associated with satellite radio programming (15% of revenue in 2008)^[3] and subscriber acquisition cost (the price of recruiting new subscribers) are the real culprits of Sirius XM's negative margins.

Sirius XM is dependent on the automotive market because some auto makers include satellite radio units in their cars, which adds to Sirius XM subscription revenues; in 2008, automobile manufacturers (called "original equipment manufacturers" or "OEMS") provided the only net gain in subscribers^[4] - both retail and rental units lost subscribers on the whole.^[4] SIRI has partnerships with notable car companies such as Ford, GM, and Toyota. The company's heavy ties to the automotive market gives it big exposure to the health and cyclicality of the automobile industry.^[5]

Sirius XM's major competition comes not from other satellite radio providers but from other producers of mobile entertainment devices: MP3 players, the iPod and iPhone, internet radio stations, and traditional AM/FM radio are all challengers to satellite radio. Sirius XM relies partially on major celebrity endorsements (Howard Stern for $500M, Oprah, Martha Stewart)^[6] and also on sports broadcasting, including MLB and the NFL to distinguish itself from many of its competitors.

• Note: Statistics prior to 2008 is Sirius data unless it is specified as specifically XM data or it is specified that it is a combined statistic of the two companies past results.

Company Overview

Sirius and XM merged in July 2008 to form the only satellite radio provider in the United States. The new company offers about 300 channels^[7] and has deals with Howard Stern, Oprah, Martha Stewart, the MLB, the NFL, among other major partners. Sirius XM radios are distributed by original equipment manufacturers (OEMs) as well as retail channels. Sirius's primary source of revenue is subscription fees (63% of all revenues in 2008),^[8] therefore the company focuses on constantly increasing the number of subscribers as well as lowering the churn rate (turnover rate). Lowering the churn rate is significant because there is cost associated with acquiring subscribers (the cost of advertising, for example), thus, if a person subscribes but quickly unsubscribes, SIRI loses revenues.

Business Segments

• Internet Radio Sirius offers subscribers the ability to listen to music channels and select non-music channels over the Internet as part of the base subscription price.
• Commercial Accounts SIRIUS Music for Business, is a music service for commercial establishments, and is available through Applied Media Corporation, Dynamic Media, Turn Key Media and Info Hold Inc. Subscribers to commercial accounts are included in subscriber counts.
• SIRIUS Backseat TV In 2007, Sirius introduced SIRIUS Backseat TV, a television service offering content designed primarily for children from Nickelodeon, Disney Channel and Cartoon Network in the backseat of vehicles. Chrysler was the only automaker to offer SIRIUS Backseat TV in its 2008 model-year vehicle lineup.^[9] Aftermarket units capable of this service were introduced in the Fall of 2007 through Directed Electronics. Subscribers to SIRIUS Backseat TV are not included in subscriber counts.
• Travel Link In 2008, Sirius launched SIRIUS Travel Link, a suite of data services that includes real-time traffic, tabular and graphical weather, fuel prices, sports schedules and scores, and movie listings. SIRIUS Travel Link is expected to be standard on Ford’s next-generation navigation system and has been implemented in Ford's 2009 Escape and Mercury Mariner.^[10] Subscribers to SIRIUS Travel Link are not included in subscriber counts.
• Traffic and Weather Sirius offers a service that provides graphic information as to road closings, traffic flow and incident data to consumers with in-vehicle navigation systems.

Sirius Annual Report 2008^[11]

Business & Financial Metrics

In 2008 and 2007, subscriber revenue was $1.5 billion and $854.9 million, respectively, showing an increase of 81% or $689.0 million The XM-Sirius merger accounted for $467,489 of the increase with the remainder primarily attributable to subscriber growth. Higher operating expenses in these years were also primarily due to the merger; operating costs increased in every area, such as programming and content, which increased by $76,130.^[14]

In 2007 and 2006, subscriber revenue was $854.9 million and $575.4 million, respectively, an increase of 49% or $279.5 million. The increase was primarily attributable to the 38% growth of subscribers to their service. This was coupled with moderately lower operating costs in several categories.^[14]

In 2008, Sirius's revenue grew by 18%, or $378.1 million. This revenue growth was driven by a 17% growth in average subscribers. This increase, combined with lower fixed costs, particularly in the fourth quarter, resulted in improved adjusted loss from operations of $136.2 million in 2008 versus $565.5 million in 2007, as increases in the company's variable costs were outweighed by decreases in other operating expenses.^[3]A graph of Sirius' revenue vs. operating costs since 2006 is below:

In its 2nd 2009 quarter, Sirius’s revenue increased 108% to $590.8 million compared to its 2nd 2008 quarter results; this is due primarily to its non-guarantor subsidiaries which are comprised by XM Holdings and its subsidiaries which produced no revenue in 2008 and produced $307 million in 2nd 2009 quarter. However, operating costs remained greater than operating income resulting in a $157.3 million loss, which is less than half of the 1st 2009 quarter $393.9 million loss.^[1]

Sirius Annual Report 2008^[3]

Sirius Annual Report 2008^[3]

Trends and Forces

Auto Maker/OEM Contracts

Sirius generates 94% of its revenue through subscriptions(numbers from FY09-1Q), mostly through deals with automobile manufacturers which install Sirius radios pre-sold in cars.^[15] In 2008, approximately 53% of Sirius's subscribers were from OEM automobile sales.^[11] Sirius has contracts with many major automobile manufacturers to include Sirius radios either as a standard feature or option, some including limited or lifetime subscriptions. The company shares a portion of subscription revenue with the automobile companies.^[5]

Sirius data only^[11]

• General Motors: Sirius has a deal with GM extending until September 2013 to install XM radios in GM vehicles. About 2.5M vehicles will have XM Radio installed for the 2008 model year.^[16] and offers XM in over 50 2008 models.

• DaimlerChrysler (DCX): Sirius has a contract with DaimlerChrysler to offer Sirius service as a factory-installed option with its automobiles. This feature was included in approximately 40% of DaimlerChrysler's 2007 vehicles.^[17] In 2008 production penetration through Chrysler is expected to be 70%.^[17] The exclusive deal with Chrysler is good through 2017. Chrysler was the first OEM to launch Siris Backseat TV in 2007. The Chrysler deal covers the Chrysler, Dodge and Jeep brands.

• Mercedes Benz: Mercedes Benz has agreed to include Sirius radios and service as a standard feature in many of its 2007 models, including its upscale SL and CL class sedans. Mercedes includes Sirius in 90% of their production.^[17] The contract runs through September of 2012.

• Ford (F): Sirius has an exclusive deal with the Ford Motor Company and its brands, including Ford, Lincoln, Mercury, Volvo, Land Rover, Mazda, Aston Martin, Jaguar, and Mazda, until the fall of 2016. As of the end of 2006, Sirius radios were offered as a factory-installed option in 19 vehicles from Ford, Lincoln and Mercury. In 2007 Sirius became standard in the Lincoln line. For production penetration is expected to reach 70% for the 2009 model year.^[17] In the 2009 model year, Ford will be the first manufacturer to introduce Sirius' data services suite called Travel Link.

Other Partners:^[5]

• Toyota including Lexus and Scion.
• Kia
• Bentley
• BMW
• Volkswagen, including Audi.
• Mitsubishi
• Hyundai
• Nissan
• Hertz, Avis, Alamo, and National car rental.

Trucks: Freightliner, Sterling, Peterbilt, Kenworth, Volvo and International offer SIRIUS radios as a factory-installed option on the trucks they manufacture.

Boats: Various recreational boat builders, including Sea Ray, Four Winns, Chaparral, Larson, Glastron, Ranger and Formula, offer SIRIUS radios and a prepaid subscription to their service as a standard or optional feature on their boats.

Recreational Vehicles: Several leading manufacturers of recreational vehicles, including Fleetwood, Monaco, Winnebago, Coachmen, Tiffin and Alfa Leisure, offer SIRIUS radios as a factory-installed option.

Subscriber Acquisition Costs vs. Revenue Per Subscriber

Since its inception, Sirius and XM have operated with significant losses; the merged company has losses of $5.3 million for FY08 with a loss of $50,411 for the 1st Quarter of FY09.^[2][18] Sirius has seen decreasing net losses over the last three years as subscriber acquisition cost (SAC) has fallen.^[11] SAC is mostly composed of subsidies and commissions paid to its manufacturers, distributors, and partners in the automobile manufacturing industry for the sale and installation of Sirius radios. SAC also includes other costs such as those related to product warranty, but does not include other costs such as pure production costs or marketing expenses.^[19]

Sirius's SAC in 2008 was $74 for every gross additional subscriber, compared to total revenue per subscriber of $119 (these costs don't account for other hefty costs such as marketing and programming costs).^[11] The merger with XM helps profitability as the two companies combine their subscriber base and lower redundant operating costs.

Sirius data only^[20]

Low customer retention rates

Lowering SAC must be done in conjunction with maintaining a customer retention rate high enough to move the company to positive operating margins. When customers deactivate early, Sirius loses money. As seen in the table below, the number of customers deactivating their service grew as a percentage of new customers signing up from 2004 to 2007, but has since decreased as a result of the merger.

Sirius Churn Rates^[12] (1000s of Subscribers)

Sirius calculates churn by taking the number of deactivated subscribers divided by the average quarterly subscribers. This gives Sirius a average monthly churn calculation. By this method, the average monthly churn for 2007 was 2.2% per month.^[8] This figure is termed as "Fully Loaded Churn" because it includes deactivations of subscribers coming off of OEM trial periods that elect not to continue the service. Sirius discloses their "Self Paying" churn as 1.7%. Self Paying churn includes only those subscribers that deactivate that are paying for the service themselves. The self paying churn has been consistent over the years, while the "Fully Loaded" churn has increased. The increase in Fully loaded churn is attributable to a larger amount of subscribers coming from the OEM channel and getting a trial subscription that they do not have to pay for.

Conditions of the merger

Sirius XM had to agree to certain conditions so the merger would be approved. The most notable conditions include:^[21]

1. a cap on subscription prices for 3 years post transaction
2. both XM and Sirius compatible receivers within the first 9 months
3. no exclusivity for equipment manufacturers
4. new programming packages including a la carte and family friendly options.

The cap on prices presents the largest potential danger as Sirius XM will lose pricing flexibility and limit its ability to respond to market conditions.

Programming content quality

A crucial facet of Sirius's satellite radio service is the programming content with which it provides its subscribers. Sirius has a wide range of audio content - including sports broadcasts, Howard Stern, and Oprah - that attracts consumers to its service. In 2008, Sirius spent $447 million (15% of revenue) on programming and content for their service.^[22] The quality and diversity of its programming is integral to Sirius in its quest to gain new subscribers and keep its current subscribers from ending their service. Content additions such as the NFL and Howard Stern correlated with a significant number of incremental subscriptions.

Sports coverage

• NFL: Sirius broadcasts play-by-play commentary for all pre-season, regular season, and post-season NFL games as the official satellite radio partner of the NFL. The NFL is one of the most popular sports in America, drawing over 120 million viewers for televised games throughout the season and with over 140 million viewers tuning in for the most recent NFL Championship Super Bowl game.^[8]
• MLB: Through 2012, Sirius has rights to both the regular season and post season of Major League Baseball. This also includes the World Series.^[23]
• NBA: Sirius broadcasts play-by-play commentary for over 1,000 NBA games and is the official satellite radio partner of the national Basketball Association. Sirius' NBA coverage also includes all playoff and the championship games.^[24]
• NHL: Through the 2014-2015 season, Sirius has rights to the regular season, post season, and Stanley Cup of the National Hockey League.^[8]
• NASCAR: In 2007, Sirius became the official satellite radio partner of NASCAR and now provides coverage of all NASCAR Nextel Cup Series, Busch Series, and Craftsman Truck Series races. NASCAR has been growing quickly in popularity across the US in recent years, with its most-popular race, the Nextel Cup Daytona 500, drawing over 12 million viewers for the television broadcast.^[25]
• Soccer: Sirius is the exclusive partner to Barclay's English Premier League soccer. The relationship gives sirius the ability to broadcast matches from the top 20 teams including Manchester United. Additionally, Sirius broadcasts Chelsea Football Club Premier matches, the UEFA Championship League, and the Celtic games from the Scottish Premier League.^[8]
• NCAA: Sirius broadcasts many NCAA football,basketball and other sports from schools in 18 Division I Conferences. Sirius is the exclusive provider of the NCAA March Madness College Basketball Championships through 2009.^[8]

Other Coverage:

• Indy Racing League
• PGA Tour
• US Open Tennis
• ESPN

Howard Stern

In October of 2004 Sirius signed popular radio talk show host Howard Stern to a five-year $500 million exclusive contract to host a show four days a week on Sirius satellite radio starting in January 2006.^[26] Stern is one of the most popular media figures in modern history, with his terrestrial radio show being ranked #1 in many major cities throughout the country before he switched to Sirius in 2006. A large, albeit incalculable, portion of the 3.7 million subscribers Sirius added in 2006 came from fans of Stern signing up to listen to his show.

Martha Stewart

In April of 2005 Sirius satellite Radio signed a 4 year $30 million exclusive contract with Martha Stewart. The deal created Martha Stewart Living Radio. The channel is dedicated to all things Martha and features shows hosted by Martha herself, Alexis and Jennifer, Dr. Marty Goldstein, Tracie Hotchner, Greg Kleva, Dr. Shawn Messonnier, and Sandy Gluck.^[27]

Oprah

On the Oprah &Friends channel, Oprah Winfrey hosts her "Soul Series" program. The channel features highlights from the Oprah Winfrey Show and includes regular guests, Gayle King, Dr. Maya Angelou, and Dr. Robin Smith.^[27]

Competition

The only satellite radio providers in the United Staters are Sirius and XM Satellite Radio (XMSR). Sirius bought XM for $4.6B in July 2008.^[28]

Terrestrial AM/FM Radio

Terrestrial AM/FM radio has had a well established market for its services for many years and offers free broadcast reception paid for by commercial advertising rather than by a subscription fee. Many radio stations offer local programming, such as local news and sports, which Sirius does not offer as effectively. On average every U.S. household has five AM/FM radios, and radio comes as a standard feature in every vehicle manufactured without an additional cost to the consumer.^[29]

HD Radio

While most traditional AM/FM radio stations broadcast by analog signals, the radio industry has made significant strides in rolling out advanced digital transmission technology. Digital broadcasting offers higher sound quality than traditional analog signals and has multicast of as many as five stations per frequency. Digital radio broadcast services have been expanding, and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in the process of converting to digital broadcasting. Over 1,500 radio stations in the United States currently broadcast digitally.^[30] Digital radio is generally offered to subscribers without a service charge. BMW offers factory-installed HD radio receivers as an option across all of its 2008 model year vehicles, Ford offers HD Radio as a dealer installed option for the Ford, Mercury and Lincoln brands and recently announced the availability of factory installed HD Radio technology as a standard or optional feature on Ford, Mercury and Lincoln vehicles beginning in calendar year 2009, and retail HD radios are available nationwide at many large retailers. A number of leading radio broadcasters have joined together to form the HD Digital Radio Alliance to accelerate the successful rollout of digital radio.

Digital Music Devices such as iPod and MP3 Players

Sirius faces stiff competition from various digital music devices and their associated services. The Apple iPod ® , a portable digital music player, allows users to convert music on compact discs to digital files and to download and purchase music and video through Apple's iTunes ® Music Store. iPods ® are compatible with many car stereos and home speaker systems. Apple has reached agreement with automobile manufacturers to pre-install equipment in vehicles which allows users to play music from their iPod through the automobile sound system. Many MP3 players can be connected to online music subscription services, such as Real Network’s Rhapsody and Napster 2.0. Slacker, a recently launched private company, has introduced a device and music service that continually updates the device based on a user’s preferences, serving algorithmically determined playlists that are direct substitutes for radio programming.

Internet Radio

Consumers are increasingly turning to Internet radio. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the world. Improvements from higher bandwidths, faster modems, wider programming selections, and industry consolidation have made Internet radio a more significant competitor for listening in the home and office. Technologies like WiMAX will also make Internet radio more pervasive. In addition to the many free Internet streams offered by radio companies like Clear Channel, CBS Radio or other smaller companies, subscription Internet music services, such as Rhapsody and Pandora, offer unlimited and fully-customizable play lists for a small fixed fee per month. These services may be used for listening at PCs or home media centers.

Wireless Phones

Several of the largest wireless providers currently offer music to mobile phones. Additionally, many phones now contain FM radios. Sprint Nextel currently offers streaming music from a variety of providers plus a music store for purchase. Verizon Wireless offers the VCast music service that can be played directly on a phone. AT&T offers a variety of streaming content and has also partnered with Apple to offer the iPhone. Several subscription music services, including Rhapsody and Pandora, are offered over mobile phones.

References

1. ↑ ^{1.0 1.1} SIRI 2009 10-Q2 pg.40 (August 6, 2009).
2. ↑ ^{2.0 2.1} SIRI 2008 10-K pg. 32  
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13 3.14 3.15} SIRI 2008 10-K pg. 35  
4. ↑ ^{4.0 4.1} SIRI 2008 10-K pg. 41  
5. ↑ ^{5.0 5.1 5.2} SIRI 2008 10-K pg. 6  
6. ↑ Lorne Manly (2/10/2006). For Oprah Winfrey, Satellite Radio Is the Newest Frontier. Retrieved on 4/18/2009.
7. ↑ Sirius, XM merger completed, creating US satellite radio giant (7/29/08). Retrieved on 4/18/09.
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5} SIRI 2008 Annual Report pg. 43  
9. ↑ John Neff (3/28/07). Chrysler first to offer Sirius Backseat TV in 2008 models. Retrieved on 4/18/09.
10. ↑ Ford Unveils 2009 Ford Escape, Mercury Mariner and Fuel Saving Vehicles Cincinnati OH (1/22/08). Retrieved on 4/18/09.
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} SIRI 2008 Annual Report pg. 34  
12. ↑ ^{12.0 12.1 12.2 12.3} SIRI 2008 10-K pg. 39  
13. ↑ ^{13.0 13.1 13.2} SIRI 2008 10-K pg. 37  
14. ↑ ^{14.0 14.1} SIRI 2008 Annual Report pg. 44  
15. ↑ SIRI 2009 10Q-1 pg. 1  
16. ↑ 2007 Annual Report pg. 4  
17. ↑ ^{17.0 17.1 17.2 17.3} SIRI 2007 pg. 7  
18. ↑ SIRI 2009 10-Q1 pg. 4  
19. ↑ SIRI 2009 Annual Report pg. F14  
20. ↑ 2007 Annual Report pg. 29  
21. ↑ Matthew Lasar (2008-07-28). Sirius/XM merger approved with new conditions (updated). Retrieved on 04-27-2009.
22. ↑ Sirius Radio, 2009 10-K, pg.34
23. ↑ Sports programming and Satellite Radio – now it’s going to get “Sirius” accessdate=4/18/09 (2/21/07).
24. ↑ NBA gets officially official on XM (and Sirius) (10/28/08). Retrieved on 4/18/09.
25. ↑ NASCAR SELECTS SIRIUS AS NEW HOME ON SATELLITE RADIO (2/22/2005). Retrieved on 4/18/09.
26. ↑ Sirius Satellite Radio and Howard Stern Go Ear to Ear with XM (3/3/06). Retrieved on 4/18/08.
27. ↑ ^{27.0 27.1} Lorne Manly (2/10/2006). For Oprah Winfrey, Satellite Radio Is the Newest Frontier. Retrieved on 4/18/2009.
28. ↑ Sirius to buy XM in $4.6 billion stock deal (2/19/07). Retrieved on 4/23/09.
29. ↑ Radio in the United States. Retrieved on 4/21/09.
30. ↑ NPR, Harris Corporation & Towson University Launch Global Effort To Make Radio Accessible To Hearing & Sight Impaired (1/8/08). Retrieved on 4/18/08.