We already know how Sirius (SIRI) did in Q2: The company preannounced preliminary results last week. Subscriber growth is down, but costs are flat, revenue is up 25% to $283 million, and the company posted a 70% smaller adjusted loss from operations than in Q2 of last year.
So Sirius boss Mel Karmazin used his last standalone earnings call as a cheerleading session for what’s next — including the $400 million in synergies he’s expecting from the newly combined Sirius XM Radio. His rhetoric is pretty much the same as he used on CNBC last week: Sirius XM is now the fastest growing subscription company, second only to Comcast in number of subscribers; it’s second only to Clear Channel in radio revenues, and will blow past them soon; etc.
As far as consumers go, Karmazin says it will be about three years before car makers will be able to sell an interoperable radio that can access programming from both networks — that’s just how long it takes to get new stuff in cars. But Sirius promises a new retail radio that’ll be able to do that this fall. We’ll see whether that leads to an uptick in retail subscriber growth — if people have been indeed holding out until after the merger closes to figure out whether to buy satellite radio or not — or if the company will continue to rely on car sales (and convincing people to remain customers after a free trial) for long-term growth.
LIVE Conference call notes:
7:57 Hold music; operator says “admitting additional participants”
8:01 Call begins. Mel K, CFO will review standalone results, discuss some of questions.
8:01 Standard disclaimers.
8:02 Mel: Since merger approved, tons of positive feedback. Second largest pure-play radio company with fastest growth rates of all of subscription-based media. A significant “value creation opportunity.” Only group who shouldn’t be happy are shareholders. Take responsibility very seriously.
8:03 David takes over for highlights from standalone results from Q2 “as a way of illustrating” what’s possible from merged companies.
8:05 Record Q2 gross adds. (Not net, though.)
8:08 Mel: Best positioned radio company in the US. Only Clear Channel has higher revenue. Anticipate being the largest radio company in the US shortly. Working toward long term improvements for subscriber economics, increased advertising reach, oppty to further reduce churn and increase conversion rates.
8:10 18.5 million subs, second only to Comcast. 97% 5-year CAGR, faster than cellular, satellite TV, or even CD players experienced in first five years. Market oppty large for cars, wearable products. Roughly 90% of homes are paying for TV. Today, satellite radio serves less than 20%. Large market oppty ahead.
8:11 On combined company basis, XM and Sirius spend approx $2.5 billion on combined operating costs. $400 million in synergy represents 15% of annual costs; a very realistic goal.
8:12 Many have asked about liquidity position: SXM ended with $442 million cash, equivalents. 2009 3 maturities to look at: One converts in Feb, will look to refinance. XM $350 million bank debt due in May; banks have been very supportive of efforts to move companies. Credit profile of company to banks will improve dramatically. Believe banks will extend maturity. We will be effectively ready to deliver for Sirius notes. Like the odds of going into next fall with normalized ratios.
8:15 Financial markets unattractive, Sirius and XM successful in raising $700 million in new, high-yield debt, oversubscribed from $400 million looking for.
8:16 Regulatory approval took too long. Last thing we wanted was to not close; took best deal to get transaction closed despite difficult terms.
8:17 Not pleased with market reaction. Mel bought 2 million shares; was prevented from doing that before. Plan to deliver. No plans for a reverse split. Hard to see how that would add any value to company. Working on combined companies’ Q4 offerings at retail; the best of both companies. Satellite radio important to auto industry regardless of individual company issues. An important cool factor. Expect production penetration rate to continue to decline.
8:18 Assume 12 million cars, 50% satellite radio penetration, that’s 6 million cars. Assume conversion rate approximately 50%. Slightly higher than Sirius today, slightly lower than XM. That gets you 3 million new subscribers in a horrible auto reduction scenario. $120 per sub; $350 million in new revenue annually just using those very tough assumptions.
8:20 Going over senior execs appointed so far. Should be in position to identify next level of management soon. Will be very active in communication to shareholders.
8:21 In closing, while FCC approval took considerable time and attention, billions of net present value of synergies are very large, already in progress. Strong, full-year of combined company operations. I usually say “getting the deal done is the easy part, making it work is the tough part.” With this combination, “the tough part is over.” Now going to make it a profitable company.
8:23 Any opportunity to have lower revenue share with car companies? Agreements with all of auto makers are long term, believe they enable us to have a contribution margin of over 70%, believe those deals are very good deals for shareholders. Intent is to honour them, continue to work on opportunities that exist going forward. Did not have opportunity to review any XM deals before merger closed.
8:42 Lots of navel gazing: Will redo deal with GM, expects synergies, looking forward to delivering “a lot of free cash flow.”
8:43 Why Sirius conversaion rate lower Sirius has higher penetration rate, could be that? XM been doing it for longer? Idea is there may be a difference as to how a 12-month bundled sub converts vs. 3-month. We’re going to be able to see how XM has 53%. No difference we’re seeing based on some models. Big difference between how customer is engaged before they leave the showroom.
8:46 Having interoperability important to us. Assume that will be a number of months sooner than committed to FCC. For OEM, will be up to car company.
8:47 Assume it’ll take car companies 3 years to put an interoperable radio in.
8:48 Higher mix of integrated head units which means lower SAC.
8:52 At what point will be able to buy a la carte product? Will need a new radio. A la carte available this fall at retail. Have to wait to see details.
8:56 Will be in regular contact, working to achieve synergies.
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