404,422 Reasons for Sirius XM to Worry

"Satellite radio is now a cash flow growth story," Sirius XM Radio (Nasdaq: SIRI  ) CEO Mel Karmazin said in a press release about this morning's first-quarter report.

It may as well be. It's no longer a subscriber growth story. The company lost 404,422 net subscribers during the quarter, the first quarter-to-quarter decline in the short history of satellite radio.

I probably wasn't the only one who saw this coming.

"Unless the company had a decent chunk of holiday buyers belatedly activate their receivers in January, this may be the first quarter in the company's history in which it actually sheds subscribers sequentially," I wrote last week.

The easy way out would be to blame the moribund automotive industry. If showrooms are ghost towns, folks aren't buying new cars with factory-installed Sirius or XM receivers. The news out of Sirius XM partners like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) has been grim. Unfortunately, it runs deeper than that. Just 37,604 of the net defections during the first three months of 2009 came from the automaker side of the demand chain. So 368,301 of the net subscribers lost came from the retail front, which until last year accounted for most of satellite radio's listener base. (There was a small increase in another subscriber category.)

This is problematic because retail subscribers are typically the more passionate audience. They're the ones who decide between Sirius and XM receivers, making a long-term commitment by paying up for what is sometimes a portable receiver to follow them wherever their ears go. It's about more than just the convenience of having a system already installed in a new car. At a time when Sirius XM wants to grow its retail audience with the release of an official Apple (Nasdaq: AAPL  ) App Store application in a few weeks, its existing base is shrinking.

Yes, the economy stinks, but similarly priced subscriber entertainment services like Netflix (Nasdaq: NFLX  ) actually posted sharp sequential gains during the quarter.

The rest of Sirius XM's report is better, with revenue climbing 5% to $605.5 million. The company posted a loss of $0.01 a share during the quarter, considerably better than the $0.07-a-share loss it reported a year ago. The company continues to dramatically shave operating costs, ending the quarter with $108.8 million in pro forma adjusted operating income.

This doesn't mean that the lower subscriber number is the only downer. Churn is up. Average revenue per subscriber is down. That last point is a surprise, given the "best of" premium package that rolled out last fall and at least a sliver of the price hike on secondary accounts that went into effect in mid-March.

Thankfully, the adjusted operating improvement is here to stay. Sirius XM is now projecting $350 million in adjusted income for the year. Most of that will be consumed by the company's interest expense on its debt, but it's still a step in the right direction.

Yes, Sirius XM is a cash-flow-growth story, but eventually it will require an increase in subscribers if it truly wants a happy ending.

More news than static on Sirius XM:

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Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (12)

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  • Report this Comment On May 07, 2009, at 4:13 PM, longsiri wrote:

    Your parity between Netflix ans Sirius is way off base. People generally watch movies and rental volume increases in tough economies because consumers would rather spend less to watch the movie at home and not go out.

    Siri is a discretionary product play and is very much leavered to the economy. I don't generalize siri the same way I do netflix and would not compare them.

    Churn is up but remember, discretionary. As they expand the delivery chanels and Direct TV/Siri do this right many more synergies could be down the road.

    Long SiriusXM

  • Report this Comment On May 07, 2009, at 4:25 PM, TMFBreakerRick wrote:

    Longsiri, but consumers ARE going out to the movies more. This year's box office is ahead of last year.

    If you don't like Netflix being compared to Sirius as a subscriber service, then how about DirecTV or RIM's BlackBerry -- they all gained subs this past quarter.

    If anything one would argue that Netflix is easier to kill during a soft economy because there is no initial investment to justify (like buying a receiver) and no long-term subscriptions offered (just monthly).

  • Report this Comment On May 07, 2009, at 5:52 PM, longsiri wrote:

    Interesting points. That move on the movies is due to the content( pun intended) Lots of great movies this year and the consumer has eased up....RIMM, not even close. Who doesnt have a smartphone these days? Many carries offer the device for free with a specified contract, and the majority of the folks(consumers) upgrade their phones when their contracts are up so it is feasible to have RIMM be an outlier...I upgraded to the BB a few months back.

    DirectTV is likely the best comparison but not the same because people don't cut off the TV in a bad economy, maybe just eliminate the HBO and also many cable companies are/have increased prices.(like mine which is why I moved to DirectTV) Sirius will make investors money hand over fist if they have the stomach for the ride.

  • Report this Comment On May 07, 2009, at 9:04 PM, splintar wrote:

    First off Rick, the big sub loss is a bit of a one time hit because of the defections from channel convertions and elimination. There were many passionate subscribers who flew the coop when their ONE prized station was axed or combined.

    They were just the sort of subscribers who would have bought the product at retail. I do not expect to see another hit like that and, the economy certainly didn't help.

    With good fundamentals, a growing new and used car base, and still, a very sticky product, I would look for upside surprises over the rest of the year.

    They are in the Liberty nest now and can actually concentrate on making it a profitable business.

    Oh yeh, comparing Sat Rad to Net flix is a huge stretch. You need to compare something like Net flix to i-tunes. It's a service where people decide EXACTLY what they want and then pay for it.

    SAT RAD is still spontaneous radio with a lot better content. It's way different. You should get that.

    By ther way, I love your middle name, it is just soooo unique and cute. I think you should use it all the time. OK. What are you a cage fighter?

    It's the kind of stuff kids get beat up in the school yard for making too much of. Lose it.

  • Report this Comment On May 07, 2009, at 9:37 PM, BigVincent wrote:

    Misconstrued info from Rick Munarriz once again folks.

    Many people canceled because of the consolidation and loss of channels, these were in fact the hard core based subscribers that either mis the punk channel, or a loss of a channel for another that was swapped out (as also mentioned by splintar) Sirius has also suffered the loss of a few talk show programs such as bubbu the love spunge. Mel Karmazine pointed out in the early 4th quarter of 2008 that this would happen.

    If you look at the SEC filing 8K for the 2009 Q1 though this is the first significant quarter where the company has achieved huge savings in operating and expense losses. Also effectively made changes to the family plan for $8.99 price tag rather than the $6.99 price tag. This would account for a dismal loss as well. 2nd quarter will be good with the addition of the pay internet service, and late slated release of the Iphone app.

    All I can say i sthat 50% of those customer deactivations will be customs that are back in the 2nd or 3rd quarter of 09. After all people will get tired of the commercials on terrestrial radio.

  • Report this Comment On May 08, 2009, at 10:45 AM, phalkor wrote:

    siriusly?

  • Report this Comment On May 08, 2009, at 7:50 PM, longsiri wrote:

    Well put on the channels, i totally forgot about that one...You know what I love about siri? They did make changes to a lot of programming and I think they jumped the gun initially but when they took backspin(old school hip hop) station down... people freaked and guess what?? It is back on... I found it by mistake because i had an old channel guide and was suprised.

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