Today is an important anniversary for Sirius XM Radio
The dark days
Two years ago, the company faced three debt repayment milestones later in 2009, without the financial means to pay them. CEO Mel Karmazin at one point even braced investors -- and warned creditors -- for the possibility of filing for bankruptcy.
The recession was also taking its toll. We didn't know it at the time, but the service was hip deep in the first of back-to-back quarters of net subscriber losses.
It was a grim time for the company, but also a bright time for risk-takers. Liberty Capital's
There were less than 4 billion shares outstanding at the time, so Sirius XM commanded a market cap of $200 million. Tack on the company's then-burdensome debt, and enterprise value popped to $3 billion.
On the comeback trail
Malone ultimately beat Ergen in the race to save Sirius XM from Chapter 11. Thanks to Liberty's cash infusion, near-term debt repayment hurdles cleared. Subscriber growth resumed by the third quarter, as "cash for clunkers" jumpstarted the auto industry. Quarterly losses turned into profits.
Since that low point two years ago, shares of Sirius XM have been a 35-bagger. Now saddled with 6.4 billion shares outstanding, the media giant commands a market cap of more than $11 billion, and an enterprise value just north of $14 billion.
Against this backdrop, one of the market's best performers over the past two years will step up to announce fourth-quarter results next week. On this glorious day for longs -- and painful day for shorts -- let's go over some of the burning questions that the company will hopefully answer come Tuesday morning.
1. How are subscribers holding up?
This isn't typically a mystery for Sirius XM. The satellite radio star let investors know in mid-January of last year that it had tacked on 257,000 net subscribers during the fourth quarter of 2009, weeks before its scheduled quarterly report.
Sirius XM has been tightlipped this time around, triggering two schools of thought.
- The number is low, and Sirius XM doesn't want to disrupt the stock's favorable momentum by raining on the shareholder parade early.
- The number is high, and the company is saving it as a juicy surprise for next week's report. The stock tumbled in the days following last year's fourth quarter, largely because investors already knew about its healthy subscriber growth.
Let me disband both conspiracy camps. I suggest that Sirius XM hasn't bothered to show its hand because it already told investors that it hit 20 million subscribers by the end of November, passing the midpoint of the 200,000-ish net subscribers its earlier guidance promised to add. Wasn't that enough to let investors know that it was well on its way to the "approximately 20.1 million" tally it was targeting for year's end?
Will it be 20.1 million? 20.2 million? 20.3 million? Will guidance be revised, ideally higher? We'll know more next week.
2. Are streaming accounts finally moving the needle?
Sirius XM released its official streaming application in Apple's
Steep pricing for those without active receiver-based subscriptions, and the inability to access Howard Stern and select sports programming, made it a bad deal. Smartphone owners also have access to a wide array of free ear candy instead.
Things are changing, though. Howard Stern's new five-year deal with Sirius made his show available in streaming form last month. This may still be a hard sell at $12.95 a month, but beefed up app content now makes the $2.99 a month add-on for existing subscribers easier to swallow.
It also helps that some of the web-radio freebies are clamming up. CBS'
Average revenue per user has inched higher over the past year, as the result of music royalty fees and a hike on secondary receivers that were instituted in 2009. Now that those are already in the system, streaming will be Sirius XM's best bet to move per-user revenue higher until it's able to increase rates.
Stern's streams kicked in last month, so the fourth quarter won't be as telling as the current quarter on that front. Hopefully, Karmazin will provide some guidance there on what should be a very favorable trend.
If Stern can't get folks paying a premium to stream, nothing will.
3. How's the model holding up?
The past few quarters have been encouraging. Subscriber acquisition costs are falling. Churn is holding steady at about 2% a month -- an encouraging sign, in light of falling costs per gross addition. Year-over-year programming costs actually fell 5% during the third quarter, since Sirius XM remains stingy with its talent. Net advertising revenue per subscriber is also turning higher.
As a scalable model, the already profitable Sirius XM should be making even more money on widening margins as it grows. The merger also makes Sirius XM the only game in town when it comes to satellite radio, making it easier to have the upper hand in negotiations with both on-air talent and automaker partners.
There's plenty to like in Sirius XM at this point, and the fundamentals can grow into the company's significant valuation. However, it needs to keep the positive momentum going. It can't let margins slip. It can't let subscriber growth wane.
Most of the answers come Tuesday should be encouraging, but has the stock run up too high in anticipation of another blowout quarter? We'll find out soon enough.
What are you looking forward to the most in Tuesday's report? Share your thoughts in the comment box below.
