Sirius Achieves Strong Q1 Amid Dispute With Liberty Media Over De Facto Control

Of 13 Sirius board members, five represent Liberty, Karmazin said. “Liberty’s 40 percent is significant influence, but not control.” Sirius filed comments March 30 in response to Liberty’s petition seeking FCC permission to potentially obtain de facto control of the satellite-radio service (http://xrl.us/bm5wqz). Karmazin said Sirius filed its opposition to Liberty Media’s request, “not to be combative with Liberty” but because “we felt we had a responsibility to file those comments with the FCC."

While Liberty Media is a significant minority stockholder, “it lacks the ability to direct the company’s management or operations,” Sirius said in its petition to deny. The expiration of the investment agreement between the companies removes certain barriers to Liberty’s ability to take additional steps to acquire control of Sirius, it said. Nothing in the agreement “evidences any plans by Liberty Media to take the actions necessary to acquire control of Sirius XM,” Sirius said. To determine whether a minority stockholder acquired de facto control, the FCC “is very careful to distinguish between influence and control,” it said: The commission “previously noted that Sirius XM is controlled by its board."

Sirius’s claim that Liberty’s inability to meet the agency’s filing standards is a clear indication it isn’t in de facto control is a true statement, Liberty Media said. However, that statement is irrelevant, Liberty said: The issue is whether Liberty, “now free of the limitations contained in the investment agreement, can take actions that could ultimately result in a transfer of control.” FCC precedent “demonstrates that the 40 percent shareholder of a publicly traded company, unconstrained by statutory or contractual limitations, is able to exert de facto control over that company when the remainder of its stock is widely held,” Liberty said.

Q1 saw strong subscriber growth for Sirius and reduced churn since the company increased its fee, Karmazin said. The company is pleased with its subscribership figures since increasing a charge, he said: “We have now billed 35 percent of the self-pay subscriber base at the new rate.” Sirius also grew its net subscribers by more than 400,000, which is an 8 percent increase from last year’s Q1, he said. Self-pay net additions of 299,000 grew by 148 percent, he said. The growth is due in part to rising U.S. auto sales and the improved economy, Karmazin said. Sirius also achieved a lower churn rate, which improved year-over-year from 2.0 percent to 1.9 percent and the new vehicle conversion rate held at 45 percent, he added.

Since rolling out the new pricing, ad sales were up 12.8 percent, allowing Sirius to continue outperforming the radio industry, said David Frear, chief financial officer. Average revenue per user growth will improve throughout the year “as we continue rolling out our new pricing and as the effect of the music royalty fee rate reduction in December 2010 subsides in the second half of the year,” he said. The launch of the Sirius 6 satellite was delayed, but scheduled for relaunch in Q2 2013, Frear said: The company’s existing in-orbit satellite “can provide full service to all of our subscribers for several years.” Later this year, Sirius plans to start new services to broaden the distribution of content online and offer more exclusive content, including sports, Karmazin said.

Sirius ended the quarter with $747 million cash, “which was below our $849 million estimate,” said Miller Tabak analyst David Joyce. That’s due in part “to the company buying back $57 million of its debt,” he wrote investors. The company faces competition for consumer media usage time versus other forms of entertainment and news, he said: It has a “significant debt load that requires continued growth in free cash flow in order to manage its balance sheet.” Sirius ended with a very strong quarter and solid financial results, said analysts from Evercore Partners.