Sirius XM Holdings Inc (SIRI)

[bepop12345]

Lazard Capital Encouraged About Sirius' Fundamentals
by: Satwaves April 01, 2010

by Demian Russian

In a research note issued Tuesday, Lazard Capital Markets’ senior media analyst Barton Crockett reports on a series of investor meetings hosted by Lazard with Sirius XM (NASDAQ:SIRI) CFO David Frear. Recapping the meetings, Crockett says, “We walked away encouraged about fundamentals…we saw arguments for Sirius XM, over time, topping our assumptions for revenue and subscriber growth, programming costs, SAC, and satellite network efficiencies.”

During the meetings, David Frear indicated that he believes churn will continue to improve along with the economy, as credit card defaults have been the main cause of self-pay churn. Frear sees churn improving this year and beyond, as the economy continues to stabilize. In his report, Barton Crockett noted that the channel consolidation and cost increases in 2008 and 2009 “were arguably hostile to subscribers”, but also notes that churn improved in 2H09 in spite of these changes. He sees any improvement in churn exceeding his model, which currently assumes steady churn.

Frear also spoke of big opportunity in used cars. “Frear sees an opportunity to convert more of these used cars into paying subs, potentially with a low-end, limited channel option, which could expand the market to more cost-conscious consumers, but not cannibalize subscriptions to the fuller channel lineups that new car buyers currently subscribe to”, Crockett reports. Frear sees SAC per gross addition declining over the long term; it should come down with more used car subscribers, because Sirius XM “essentially pays no SAC for used cars.”

Details of the new GM deal were discussed. Sirius XM renewed its contract with GM at the end of 2008, which the company has stated was much more favorable than the previous deal. Frear spoke of “a second leg of changes” to the GM deal that will take place in 2013. These changes will bring a “meaningful” boost to 2014 adjusted EBITDA, according to Frear. This new contract with GM goes out to 2020.

Frear spoke of programming cost reductions and specifically mentioned several contracts, including Howard Stern’s. “Overall, Frear sees downward pressure on signature content deals as they renew, citing a reduction in the yearly cost of the Oprah and Martha Stewart deals from a combined $25M/yr to $10M/yr, and steep cost cuts from NBA and Opie and Anthony renewals”, Crockett reports. He notes the huge benefits from Sirius and XM no longer being in competition with one another, combined with the weakness in “cash strapped” terrestrial radio.

According to Mr. Crockett, David Frear doubts that Howard Stern will leave Sirius to go back to terrestrial radio. He also doesn’t see Sirius paying more to renew Stern either. In the next two years, Sirius XM’s deals with the NFL, Fox (NWS), Disney (DIS) and NASCAR all come up for renewal. Frear expects “meaningful reductions” from these contract renegotiations. After 2015, Sirius XM is also projecting huge cost savings from much better deals with MLB and the NHL.

There is a potential opportunity to consolidate the currently separate Sirius and XM service platforms, according to Frear. Crockett reports that during the meetings Frear discussed a possibility of only the XM platform being installed in all new cars. The majority of new cars that have satellite radio installed have an XM radio, so this would make sense. Frear noted that some of this depends on talks with the automakers, but sees a scenario where the Sirius platform could be either used for new services, or sold.

In his report, Crockett states: “Sirius is fully prepared to reverse split, if needed, to avoid delisting. However, it resists this, and the Nasdaq has played along by suspending enforcement of the share price requirement.” Crockett doesn’t see the Nasdaq changing its rules, but goes on to say that, “We also believe that the Nasdaq could suspend enforcement indefinitely.” The analyst bases this on his belief that there is a risk to the Nasdaq of Sirius XM performing a reverse split and then moving to the NYSE.

While Sirius XM’s low share price may keep some institutions away, Frear defended the benefits of the company’s low share price during the meetings. Crockett reports that, “Frear argues that the low price could appeal to the core retail investors that are Sirius’ key holders. He does not believe, at the moment, that any potential benefit from appeasing institutional investors that balk over the penny stock status would justify the risk of losing core retail holders.”
http://seekingalpha.com/article/196612-lazard-capital-encouraged-about-sirius-fundamentals