XM Merger Talk ‘Hypothetical,’ Sirius’ Karmazin Says
“A good amount of value” would be created in a Sirius merger with XM, but “I really don’t have very much to say about a hypothetical combination that could or could not” happen, Sirius CEO Mel Karmazin told analysts Wed. in a Q3 earnings call. “You can assume we will be looking to kick their ass in the 4th quarter, and they'll be looking to do the same to us,” Karmazin said of XM in Q&A.
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Sirius and XM are “competitors,” and “our business plan does not require us to do anything different than we are doing,” Karmazin said when asked about media speculation of a possible merger. “We have enough cash on our balance sheet” to reach positive cash flow by 2007, perhaps this quarter, Karmazin said: “We feel very good about our company in a stand-alone mode.” But if “the opportunity ever came to create more shareholder value,” a merger is “something that obviously we would be interested in,” he said. Karmazin urged an analyst questioner not to read anything into his declining to say more.
In a “blowout” Q3 Sirius “delivered on all the commitments we made” early in the year, Karmazin said. For the 4th straight quarter, Sirius led XM in share of net subscriber additions. Its Q3 share was 61% vs. 37% in Q3 a year ago, he said. Its share of retail aftermarket unit sales was 57% in Sept. and Q3, and 58% year-to-date, he said, citing NPD data.
Sirius added 3 million subscribers the past 12 months, finishing Q3 with 5,119,308 vs. 2,173,920 a year earlier, Karmazin said. Its 441,101 net subscriber additions in Q3 helped drive a 150% revenue jump to $167.1 million from $66.8 million a year earlier. Sirius is sticking with year-end projections of 6.3 million subscribers and $615 million total revenue, the company said. Karmazin said that would put Sirius on track to hit $1 billion in 2007 revenue, $3 billion in 3 years.
Revenue figures show that Sirius is “the fastest-growing radio company in the U.S.,” Karmazin said. Only 2 terrestrial radio firms -- Clear Channel and CBS Radio -- have higher revenue, he said. But both are seeing “little or no growth,” while Sirius growth is soaring, he said. And Sirius has accomplished its revenue feats only 4 years after signing its first subscriber, he said. Clear Channel scored its first listeners 35 years ago; CBS Radio’s KDKA, Pittsburgh, 80 years ago, he said.
Though waxing confident about Q4, Karmazin and Jim Meyer, pres.-operations & sales, sought to temper holiday sales expectations. The last 10 days of 2005, Sirius added 500,000 subscribers -- perhaps a tough number to beat in 2006, Karmazin said. And Sirius in Q3 added only 206,000 subscribers through its retail channel vs. 236,500 from automotive OEMs. That’s a sign of a “soft” overall CE retail market, and especially “soft demand” for satellite radio, Meyer said. “Limited” or “spotty” product availability at retail after the FCC power-emissions probe crimped Q3 aftermarket growth, Meyer said.
Meyer acknowledged “concern” at Sirius about Q4 retail sales. Still, Sirius sees “significant holiday uplift” pushed by a strong product line, “ample” product availability and a “focused” ad message, Meyer said. Less than $100 for a 3-month subscription, satellite radio makes a “great holiday gift,” Meyer said. Today’s Sirius product and content offering is “the most compelling value proposition in the history of satellite radio,” he said.
All Sirius products have been “recertified” as FCC- compliant, Meyer said. Sirius picked an “effective” solution to the FM modulator problem that’s very “straightforward,” using passive radiation and a directional antenna, Meyer said. Meyer is “very comfortable” with the fix and has no fear of product returns or spiking churn rates, he said in Q&A. “It’s never desirable to add another wire, but we've added another wire,” he said: “It’s very easy to route it and to install it, but not all consumers will need to do that.” The Sirius site now links to www.FMFind.info, where a zip code search can find the best FM channel to use with a plug & play satellite radio or MP3 player with an FM modulator.
Sirius has worked “very closely with our friends at XM” on a reasonable response to RIAA at the Copyright Royalty Board, Karmazin said. The Sirius-XM counterproposal is “a very genuine significant proposal that would give the recording industry a significant amount of money at just under 1%,” he said. By comparison, RIAA’s proposal was “bizarre,” he said: “They're making a proposal just based upon the fact that the music industry is having trouble and is looking for satellite radio to fix their problems. But we don’t think our role in life is to fix their problems. Our role should be to pay a fair price for their material.”