"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.
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.
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