With all of the turmoil in the financial sector, and the government selectively rolling up its sleeves to help some and not others, could Sirius XM Radio (NASDAQ:SIRI) use a hand?
I'm joking. Sort of.
The Fed has bailed out Freddie and Fannie, and provided a financial backstop to seal the deal on Bear Stearns. Its rationale, of course, is that implications of these financial institutions' collapse would be too dire to stomach. Sirius XM is no Bear Stearns, but it certainly does have plenty of outsiders depending on it -- namely, the automotive industry.
Beleaguered automakers like Ford (NYSE:F) rely on satellite radio as an upsell item on their cars, providing the car companies with a steady stream of royalties from existing subscribers. General Motors (NYSE:GM) goes one step further, as an actual creditor to the radio nascent platform. If Sirius XM somehow faded away, as unlikely as that may seem, the resulting pain would extend beyond its 18.6 million subscribers.
One can also argue that the government owes a little help to Sirius XM. The FCC inexplicably held up the two radio rivals' merger for a year and a half. Had this deal been completed last summer -- as it should have -- Sirius XM would have had two years of synergy-squeezing goodness before it bumped up against next year's three hefty debt refinancing hurdles. The company would have been cash flow-positive this year, instead of having to point to 2009 for the full-year milestone, and creditors would have been more receptive
So will the Fed bail out satellite radio? No. Will Sirius XM survive? That's the bigger question.
Mel battles back
With shares of Sirius XM in freefall, plunging more than 40% since the merger was completed in late July, CEO Mel Karmazin is out to soothe rattled investors. He spoke at an investor conference last week and was interviewed for this morning's Wall Street Journal.
The article provides interesting insights into the company's strategies. We all know about the "Best of Both" and discounted plans that will be offered next month, but did you know that the company is considering activating dormant receivers with select programming?
That's news to me, and I have to say I like it. Churn has held up surprisingly well, but there's clearly a growing number of ex-satellite radio subscribers out there. In XM's final quarterly report as a stand-alone company, it explained that 53% of its new car buyers keep paying for satellite radio after their free trials run out. That's nice, but what about the other 47% who now find themselves with a costly dashboard ornament?
Pumping a sliver of programming into these dormant receivers would be a huge promotional tool. As long as the content is worth tuning into, it may persuade more former users to sign back up. Rotating musical offerings or proprietary talk content may do the trick to hook consumers. Taking a page out of the premium-cable playbook, where movie channels like HBO and Showtime often have free preview weekends, maybe the better plan would be to free up all of the network's programming on the first weekend of every month. That would be a more thorough attack strategy than simply offering traffic-weather channels and a commercial-free music channel or two, which may not jibe with the tastes of the car owner.
No bailout for you
Sirius XM will look a lot better if it delivers on its 2009 goals. 21.5 million subs may not sound like heady growth, but it is growth. Delivering $2.7 billion in revenue, offset by just $2.4 billion in cash operating expenses, would make the company's model sustainable ... if it can clear its impending debt hurdles.
Karmazin also told the Journal that he would love to take the company private, though he admits that it would be a hard sell until the company turns its financials around. The rub for Karmazin is that if the company does prove viable, its share price will be a lot higher in the future. The stock is marked down because of its attendant uncertainty. Once a few clouds clear, Sirius XM shares should begin ticking higher.
Sirius XM is the real deal. Sure, the whopping 88% compounded annual growth rate in subscriber rolls that the combined company has amassed over the past five years will slow at this point. New receivers hitting retailers like Best Buy (NYSE:BBY) and Circuit City (NYSE:CC) next year, capable of playing all of XM and Sirius, will hopefully reinvigorate the company's retail business, but investors should still expect smaller growth figures. As the country's second largest media subscription-based service, after Comcast (NASDAQ:CMCSA), Sirius XM may actually be maturing.
The key to its survival lies in generating enough incremental revenue -- and keeping costs in check -- to really cash in on the strengths this merger promises to bring.
Why worry about a Fed bailout that will never come, when it's so much easier to bail oneself out? Sirius XM has the subscriber power and the product to do it. Now its balance sheet must live up to its part of the bargain.
Further programming notes on Sirius XM:
