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Technology Stocks : Sirius Satellite Radio (SIRI) -- Ignore unavailable to you. Want to Upgrade?

To: rrufff who wrote (960)	10/10/2004 10:47:10 AM
From: i-node	Read Replies (1) \| Respond to of 8420

In my mind, the Stern factor will eliminate the chapter 11 threat and bring 100's of millions of revenue in to the company. And they just added a half billion in financial commitments, regardless of Stern's performance. Just run the numbers, it's pretty easy analysis and I've seen analysts who get paid a ton already do less sophisticated number running than those I've read on message boards. You must be referring to Kit Spring at Stifel. He has been wrong before. His recent downgrade to XM is idiotic -- somehow concluding that Sirius signing Stern HURTS XM (as though millions of would-be XM subscribers are now going to subscribe to Sirius because of Stern). It is laughable. He has had to eat his words before, and will have to again. A much more reasoned analysis came from Legg Mason: Investment Summary While we believe the Howard Stern deal represents a seachange in the radio industry, we are not convinced that it has a positive NPV due to the very high cost of $500+ million. We believe Mr. Stern will need to bring in 2.7M subscribers (vs. management guidance of 1M) over and above the 1.6M of his listeners that we think would have signed up for Sirius service anyway during the period, for a total of 4.3M. To achieve management guidance of 1M subscriber breakeven (excluding the 1.6M), we have to make the following assumptions: all one million subscribers sign up in the first year, ARPU is $16.39, contribution margin of 70% in the first year, SAC is $100 in the first year and drops 25% per year, and there are no incremental sales or marketing costs. Importantly, our analysis assumes that Mr. Stern retires from radio at the end of five years. If he switches to XM at that time instead, we believe the breakeven subscriber number increases to 3.7M (plus the 1.6M equals 5.3M total) due to the likelihood that his subscribers would churn very quickly. In the event that Mr. Stern renews his contract, we believe it could be at a materially higher rate and therefore think the economics to Sirius would be similar to the current deal. Regardless of whether the Howard Stern deal by itself generates value, to justify Sirius' $1.1B increase in market cap in the last two days, we believe he would have to bring in 11M subscribers (plus 1.6M equals 12.6M). Reiterate Hold rating on the shares: while the Howard Stern deal could generate positive NPV, we believe it is highly unlikely that he will draw enough subscribers to justify the $1.1B increase in Sirius' market cap since the deal was announced. The Deal Earlier this week, Sirius announced a groundbreaking deal in which Howard Stern will be exclusively available for 5 years beginning January 1, 2006 for no extra charge. With 12 million listeners, Mr. Stern is one of the most popular personalities in all of media and we believe will be a clear differentiator for young men in choosing Sirius service, particularly in the retail channel. The company will pay Mr. Stern a minimum of $500 million over the life of the contract: $80M per year in cash and $100M in stock, which we believe is front-end loaded. Mr. Stern will also receive additional equity compensation under two scenarios: 1) he produces subscribers that are verifiably tracked by Sirius through its website or other special programs; or 2) Sirius exceeds the current 2010 consensus subscriber forecast of about 13 million. Scenario 1: Howard Retires in 2010 Contrary to management guidance of 1M Howard Stern subs to breakeven, we believe the figure is 4.3M, which equates to 2.7M subscribers needed to produce a positive NPV plus the 1.6M Howard Stern listeners that we think would have signed up for Sirius radio anyway during the five year period. In calculating the 1.6M figure, we do the following: 1) take the 13M subscribers that we think Sirius would have generated without Mr. Stern during the 5-year period, 2) divide it into the 285M people in the U.S. to get an incremental penetration rate of 4.5%, 3) triple this rate to 13.5% to account for the fact that Howard Stern listeners are three times more likely to subscribe to satellite radio, and 4) multiply this rate by Mr. Stern's 12M listeners. Legg Mason Estimates In calculating the 2.7M figure, which reflects the number of total gross adds (not the total sub base in 2010), we include the following assumptions: • Churn: 0.5% per month while Mr. Stern is on the air and 1.5% after he retires • ARPU: $10.83, which is Sirius' current rate excluding Hertz • Contribution margin: 55% increasing to 65% in three years • SAC: $130 declining 25% a year to $55 and then rising at inflation • Average months of upfront payments: 12 • Ad revenue per listener: current rate Mr. Stern generates for Viacom divided by three to account for a reduction in commercial minutes per hour • Ad revenue share to Mr. Stern: 25% • Sales and marketing costs related to promoting Mr. Stern: $5 million per year • Minimum payments to Mr. Stern: $80M cash per year and $100M stock front-end loaded • Incentive payments to Mr. Stern: $25 for each subscriber he generates above the 1M management guidance breakeven • WACC: 17.5% Sirius Management Estimates In its own analysis supporting the 1M breakeven subscribers figure, Sirius management used the following assumptions. • Churn: not disclosed • ARPU: $12, which is 10% higher than the company's current ARPU • Contribution margin: 70% in all years of deal even though management maintains it won't achieve this level for several years • SAC: below $100 in 2006 and beyond implied from comments that the first year of cash flow per subscriber of $100 would cover the SAC (we believe it will be difficult for them to reduce the current SAC of $234 by 57% between now and 2006, particularly given that it declined only 9% year-over-year for the first six months of 2004) • Average months of upfront payments: not disclosed • Ad revenue per listener: not disclosed • Ad revenue share to Mr. Stern: not disclosed • Sales and marketing costs related to promoting Howard: $0 • Minimum payments to Mr. Stern: $80M cash per year and $100M stock • Incentive payments to Mr. Stern: retail-like commission for each subscriber generated above the current 2010 consensus estimate for the entire company of about 13M • WACC: not disclosed 1M Breakeven Subs To achieve management guidance of 1M breakeven subscribers (excluding the 1.6M Mr. Stern listeners that we think would have signed up for Sirius anyway), we believe the following assumptions would have to be made. • Churn: 0.5% per month while Mr. Stern is on the air and 1.5% after he retires • ARPU: $16.32, which is about $5.50 (or 50%) above the current rate • Contribution margin: 70% in all years • SAC: $100 declining 25% a year to $42 and then rising at inflation • Average months of upfront payments: 12 • Ad revenue per listener: current rate Mr. Stern generates for Viacom divided by three to account for a reduction in commercial minutes per hour • Ad revenue share to Howard: 25% • Sales and marketing costs related to promoting Mr. Stern: $0 • Minimum payments to Mr. Stern: $80M cash per year and $100M stock front-end loaded • Incentive payments to Mr. Stern: $25 for each subscriber he generates above the 1M management guidance breakeven • WACC: 17.5% Scenario 2: Howard Stern Switches to XM In the somewhat unlikely scenario of Howard Stern switching XM Radio in 2011, we believe the breakeven subscriber number increases to 3.6M (plus the 1.6M equals 5.2M total) due to the likelihood that his subscribers would churn very quickly. Scenario 3: Howard Stern Renews His Contract in 2010 In the event that Mr. Stern renews his contract, we believe it could be at a materially higher rate and therefore think the economics to Sirius would be similar to Scenario 1 or 2 depending on what he does at the end of the extension. Valuation Regardless of whether Mr. Stern stern generates 4.3M subscribers and creates value for Sirius, we do not think the deal justifies the $1.1B increase in Sirius' market cap over the last two days. To put this in perspective, we believe Howard Stern would have to produce 11M subscribers plus the 1.6M who would have signed up anyway to generate $1.1B in NPV. This 12.6M total exceeds his current listenership. Now, the Howard Stern deal does have some intangible benefits such as significantly raising the company's profile and improving its relationship with the auto manufacturers. However, we find it challenging to believe that this value is over a billion dollars just from this deal. We also acknowledge that there is a chance Sirius could acquire Howard Stern earlier that January 1, 2006, but think it would cost them a material amount of money to do so. On the flip side, we believe major future content and distribution partners will want deals similar to Mr. Stern's, in which case Sirius could end up paying multiple incentives on the same subscribers above the current 2010 consensus. In sum, we believe the sizeable cost of the deal creates a very high hurdle for the company to overcome and would have been more bullish on it had Sirius charged a premium for Howard Stern. We do not believe there is any elasticity of demand for Howard Stern below $5 per month and think that Sirius should have shared more of the risk with him rather than taking nearly all of it themselves. Despite our concern about this deal and the increase in market cap, we do acknowledge that the company's stock trades primarily on subscriber growth at this point with little regard to value per subscriber. Accordingly, we are not downgrading the company's shares and maintain our Hold rating.