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A Sirius Financial Turnaround

By | July 14, 2003

      By Jimmy Schaeffler

      Earlier this year, the technology sector was battered, the national economy was weak, and the only two U.S. satellite radio companies – XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI] – looked to be on the skids. In early January, XM’s stock traded at below $3 a share, while Sirius’ stock traded well below $1 a share. Indeed, it was not unheard of for articles from Bloomberg and Reuters to mention the “B word” – bankruptcy – when talking about the financial future of Sirius.

      Today, Sirius’ stock price has risen to around $1.80 a share. Most financial observers today no longer are putting Sirius on their short lists of companies facing dire financial futures.

      Rival XM’s stock price has risen to around $12.50 a share amid rumors that strong second-quarter subscriber additions soon will be announced. XM did not disappoint its followers when company officials confirmed July 1 that roughly 209,000 new subscribers had been amassed during the second quarter. How did the companies lift their prospects, especially New York-based Sirius?

      Shared Credit

      Sirius President and CEO Joe Clayton credits Sirius employees for the turnaround. Another factor has been new business deals, including the recent renegotiations of original equipment manufacturer (OEM) agreements to spur subscriber growth.

      In addition, a new generation of products and programming has aided Sirius. The new Sirius portable “boom-box,” expected out later this summer, is an example. The reward for Sirius should be new subscribers and new revenues. In a fledgling business, such as satellite radio, more time and effort often goes into decision-making than would be the case with established businesses, such as manufacturing, agriculture, and forestry. The reason is that cutting-edge startups have heightened potential payoffs, as well as risks.

      Sirius also was helped by a $1.2 billion recapitalization in March that was accompanied by $200 million in new investments from Apollo, Oppenheimer and Blackstone. Wall Street investment banks UBS Warburg and Morgan Stanley Dean Witter also played useful roles.

      UBS Warburg helped with Sirius’ recapitalization, while Morgan Stanley aided in separate stock and convertible note offerings.

      Clayton and former CFO John Scelfo championed Sirius’ cause during analyst conference calls and investment road shows. The executives also fielded due diligence requests from potential investors. Other Sirius executives who aided in the company’s improved financial picture include Controller Ed Weber, Treasurer Ed Rabinow, CFO David Frear, and Executive Vice President and Chief Legal Officer Patrick Donnelly.

      Last, but far from least, the current turnaround in the technology sector — particularly for subscription services such as satellite TV – has contributed to Sirius success.

      Financial Features

      Before its recapitalization earlier this year, Sirius’s stock price had sunk below $1 a share and stayed there long enough to be considered by Nasdaq for de-listing. In addition, the company’s debt load was what many would call “crushing.”

      Today, Sirius has in the neighborhood of $550 million in new cash on hand and a much lower debt load of approximately $60 million. This has caught the interest of numerous hedge funds, as noted by Vijay Jayant, Lehman Brothers’ new cable and satellite analyst.

      Sirius also recently gained close to $175 million through an offering of 3.5 percent convertible notes. Most importantly, Sirius officials now project that the company has sufficient cash to fund its operations until revenues can begin to cover expenses. Sirius executives are estimating that the company will reach cash flow breakeven with two million subscribers in 2005.

      When all is said and done, Sirius’ much improved financial position is aiding not only its stock price but also its new alliances with receptive partners.

      What Worked?

      One of the best decisions Sirius made was the hiring 18 months ago of Clayton, a well-respected and experienced former satellite TV executive. The choice of Clayton to lead Sirius was “like the Dodgers getting Barry Bonds,” in the words of one Wall Street insider. Clayton was instrumental in building the team, taking the risks and achieving much of the success at Thomson Consumer Electronics during the rollout of the DirecTV satellite TV service in the mid-1990s.

      Clayton moved quickly upon his arrival at Sirius to assemble a savvy leadership team of satellite TV veterans to assist him. The leadership cadre includes Mary Pat Ryan, formerly of U.S. Satellite Broadcasting; Larry Rebich, once with Showtime; and Stanley Kozlowski, who worked with Clayton at Thomson.

      Blue Skies Ahead?

      The growth and ultimate success of the satellite TV industry offers a road map for satellite radio. Short- to medium-term, subscriber growth will be the key measure of Sirius’ future success. If subscriber growth shows a healthy year-over-year gain over the next two years, Sirius will be well on its way to success. To date, Sirius lists slightly more than 100,000 subscribers. Rival XM — with a national launch date roughly nine months earlier than Sirius – fell just short of hitting the 700,000-subscriber mark for the second quarter of 2003.

      Sirius’ prospects are buoyed by the vision of its people. Jim Collins, vice president of corporate communications, and Cheryl Cramer, director of investor relations, are attempting to refashion Sirius’ image into an “entertainment and information” company. The company is exploring the idea of offering data delivery (e.g., customized stock and sports score listings), video (e.g., back seat screen services), and individualized service options.

      At its most basic level, Sirius’ financial fortunes hinge on the quality and quantity of its most vital asset, its content. This includes additions to both in-house and acquired programming, as well as live talk and music. Pay-per-listen (PPL) service is likely to become a common part of the subscription services vernacular once Sirius and XM have time to tap that opportunity.

      Sirius’ financial improvement gives it time to scoop up new subscribers and draft behind market leader XM. And both companies need to focus on competing with the thousands of terrestrial radio broadcasters currently operating in the United States.

      Jimmy Schaeffler is a subscription services analyst at The Carmel Group, a consultancy that specializes in telecommunications, computers and the media. He can be reached by e- mail,, or by telephone, 831/643-2222.

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