Satellite Radio Playground

By Demian Russian

On the heels of Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin’s presentation at the Bank of America/Merrill Lynch Media Communications and Entertainment Conference on Wednesday, during which he offered 2012 guidance and announced the company’s plans to raise its prices beginning January 1st, 2012, Wunderlich Securities Media Analyst Matthew Harrigan issues a new research report weighing in on the company’s new 2012 guidance and reiterating his previous HOLD rating and $2.00 price target.

Harrigan viewed Sirius XM’s release of 2012 guidance on Wednesday, ahead of management’s previously expected release date of the Q3 conference call, as “encouragingly a little early.” While he viewed this move by the company as surprising and displaying “confidence in its business model,” he notes that “the $3.3 billion 2012 revenue guidance was shy of $3.38 billion consensus, and the $860mm EBITDA bogey actually imbedded ‘only’ 48% marginal sales contribution to EBITDA — with the latter albeit affected by SAC outlays.” While modeling his 2012 numbers to management’s new 2012 guidance, including $700 million in FCF (Free Cash Flow), Harrigan sees “upside possible” due to his having to crimp the conversion rate to 42.8% and increase churn to 2.3% as a result of the announced price hike.

Sirius XM is increasingly the main conduit for branded audio content and content costs as a percentage of sales are actually contracting with certain expensive five-year deals rolling over. The highly desirable NASCAR deal expires at year-end and the expensive MLB (Major League Baseball) deal is another mid term prospect for cost savings. This branded content along with SatRad 2.0 are pivotal in fending off competition from streamed music services such as Pandora (NYSE:P) and Spotify. 

– Matthew Harrigan, Wunderlich Securities

While Harrigan notes that Sirius XM management did not offer “explicit sub and ARPU growth guidance,” he says that ”realized 2012 ARPU (estimated at +4.2%) is affected by contract roll-off timing, the lower ARPU on paid promo subs relative to self-pay, and the compelling aspect of more extended OEM promo periods – even if at lower price points.” Harrigan is modeling a 2012 auto sales SAAR assumption of 12.3 million, below the 12.5-13.0 million SAAR estimates suggested by Sirius XM’s OEM partners, and notes that guidance could prove to be conservative if the economy can avoid a double dip. Read More