Sirius XM Doesn't Sell Itself Cheap

An upcoming rate increase appears to be Sirius XM Radio's (Nasdaq: SIRI  ) cure for a ho-hum quarter.

CEO Mel Karmazin indicated that the satellite radio giant is likely to inch its subscription plan prices higher after the summer expiration of its three-year freeze on primary accounts -- and not by some token inflation-adjusted amount.

It's a good thing Karmazin gave investors a reason to be hopeful about the future, because its latest quarter was a bit of a dud.

Revenue grew 9% to $724 million, matching the 9% year-over-year growth in subscribers. Analysts were hoping for $736.3 million on the top line. It's been awhile since Sirius XM's top line simply matched account growth, but that's because it spent most of the past year and change baking in three different rate adjustments that were instituted through 2009. A little more than half of the company's 14% top-line gain last year was the result of the additional music royalty fees that many subscribers began paying toward the latter half of 2009.

After several quarters of impressive year-over-year gains in average revenue per user (ARPU), it was only a mere 0.3% uptick this time around, to a monthly rate of $11.52. This is disappointing. Howard Stern finally became available through smartphone apps in January. There should have been a wave of Sirius subscribers willing to pay $2.99 a month more to stream Stern online. With Stern locked up for five more years, there should have been a wave of XM accounts willing to pay $4.04 more a month to access Stern and the best of Sirius. 

The $0.04 gain in year-over-year ARPU -- and a sharp sequential drop from the $11.80 average during last year's fourth quarter -- is troublesome. Even Sirius XM's decision to cut its monthly music royalty fee from $1.98 to $1.40 back in December can't fully explain the sequential shortfall, especially since only about half of its subs are paying it and far fewer than that on a monthly basis.

Trial conversions also inched problematically lower. Churn held its own, but dipped sequentially. Why did nearly 1.7 million kiss off satellite radio during the first three months of the year?

Earnings of $0.01 a share matched Wall Street expectations, but the lack of lifting revenue or subscriber targets threatened to rain on Sirius XM's bullish parade after the stock had hit the magical $2 mark in four of the past five trading days.

Then Karmazin played the rate card.

It's easy to get excited about the premise of an increase, especially for a company that hasn't instituted a hike in years. Shares of Netflix (Nasdaq: NFLX  ) took off last November after introducing its first increase in ages.

We don't know how big the Sirius XM increase will be, though Karmazin did indicate that it won't simply be a move to keep pace with inflation. Sirius XM has paid top dollar for marquee talent over the years. A cynic will point out that programming costs have actually fallen by 3% over the past year given Sirius XM's penny-pinching ways, but the company has years of lost time to make up for when it does come through with an increase.

It can't be by much. If churn is pesky and conversions are slipping now, getting too greedy will jam the phone lines with cancellations. However, if it coincides with the rollout of Sirius XM 2.0 hardware later this year, the increased functionality and 25% more content, then it just might justify a meatier tab.

We'll see how Sirius XM plays it from here. The one aspect of its guidance that it did boost was free cash flow, and the company has done a masterful job of cleaning up its balance sheet with every passing quarter.

The first quarter wasn't special, but if Karmazin's able to pull off a needle-moving increase either later this year or early 2012, without shaking off too many listeners, the stock will keep heading higher.

What did you think about this morning's results? Share your thoughts in the comment box below.

Netflix is a Motley Fool Stock Advisor pick. Alpha Newsletter Account, LLC has bought puts on Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a subscriber to Sirius since 2004. He does not own shares in any of the stocks in this article, except for Netflix. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (4)

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  • Report this Comment On May 03, 2011, at 12:02 PM, David369 wrote:

    Yeah I don't understand why increasing fees is such a boost to stock prices. It's like a tight rope walker. Raise them too much and they lose subscribers with a net loss. Too little and they will end up creeping up the fee on a regular basis and people will notice and claim that they keep raising costs so they get out. Every business move comes with a risk especially when it comes to what the customer is being charged. At least they should be able to bundle the increase with the "new" features so some added value is there.

  • Report this Comment On May 03, 2011, at 12:14 PM, bottomfisherman wrote:

    I like what he said comparing SIRI to the competition:

    "SiriusXM currently has 9% of all listening and 15% of the total U.S. radio revenue. Thousands of stations dividing up 79%, hundreds dividing up 12% and one company with 9%.

    Further, we are the only company in this space operating on a full subscription basis. We like our position in this market. I also believe very strongly that business model matters, and here, we really like our position. Clear Channel radio says in its 10-K that they reached 213 million listeners each week, and their revenue for 2010 was $2.9 billion. This means that Clear Channel generates $13.61 per year from each listener.

    Pandora, which is the leading company in the very crowded Internet streaming sector, in its S-1, reports $138 million in 2010 revenue and 80 million registered users and 30 million regular users. They are able to generate either $1.68 per year from their registered users or $4.59 per year from their active listeners.

    SiriusXM, last year, reported revenue of just over $2.8 billion and had approximately 20.2 million subscribers. We generated $141 in the year for each subscriber. $141 a year for us, $13.61 for the leader in terrestrial radio and $4.59 per year for the leading streaming radio company. I think this helps to demonstrate why we like our subscription business model as compared to anything else that exists today or anything we are aware of for the future. We will continue to invest in content and work closely with our OEMs to ensure that our position will even be better in the years to come."

    Wow they crush Clear Channel and Pandora is just an afterthought!!!

  • Report this Comment On May 03, 2011, at 12:54 PM, Brent2223 wrote:

    I would think SIRI's pricing would be pretty inelastic - free options still exist, so people subscribing to SIRI already see the value in the product. Would increasing the price a couple of dollars a month really push people back to free or cheaper products? I'd argue that increasing fees will ultimately make a more attractive audience for advertisers - ie people will to pay for value, get rid of all the nickel and dimers. As an advertiser, would I really want to target Pandora listeners, who balk at even a $1 a month fee?

  • Report this Comment On May 03, 2011, at 5:14 PM, David369 wrote:

    Brent2223

    Good point. Didn't think of it that way. 1-2 bucks is nothing considering the price of coffee, more than that might get some attention. Heck, if you can still afford Siri this late into the economic downturn, a little more probably doesn't matter.

  • Report this Comment On May 03, 2011, at 8:41 PM, draland wrote:

    Rick, I heard the Satwavespro this AM,,,,,and I can only think as a long term little investor that, THE GOOD guys GOT it Wrong !

    This company has alot going FOR THE LONG term. And small dips in "fundamentals" should not deter the LONG term investor.

    Imagine if the Apple investors would have bailed out 10 or 15 years ago at the sight of a speed bump !? BM is great at what he does, and his 'surprise' guest as well, but had I not had my trusty 'foolish' guiding beacon on, or WERE I one of your other readers, I may have just 'Pulled the trigger' on my shares this morning. I think that's exactly what Jimbo @ TSCM and the likes of GS et al, WANT......:@

  • Report this Comment On May 03, 2011, at 9:46 PM, jimmy4040 wrote:

    "There should have been a wave of Sirius subscribers willing to pay $2.99 a month more to stream Stern online. With Stern locked up for five more years, there should have been a wave of XM accounts willing to pay $4.04 more a month to access Stern and the best of Sirius"

    Unlikely. Give Stern his props for the impact he had on Sirius, but his market is not expanding. Everybody who wants him already has plenty of opportuniy.

    The appettite for a nearly 60 year old man asking grade C celebrities about anal sex is not infinite and has been sated.

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