Sirius XM disputes negative interpretation of its CEO's comments

by Ed Oswald

Following a BetaNews article indicating that Sirius XM CEO Mel Karmazin suggested the company's finances were in bad shape, the company shot back that it was not the case.

A spokesperson for the satellite radio provider contacted BetaNews late Tuesday refuting the original article's premise that Karmazin had admitted that Sirius XM's finances were not healthy.

"There was certainly no place where Mel 'admits' to the company in bad financial shape. Simply not true nor said," Sirius SVP for Communications Patrick Reilly told BetaNews.

Sirius XM did not deny that the company's CEO did say that the terms of the debt refinancing accepted by Karmazin were unfavorable to the company. In order to complete the transaction, over a half-billion dollars was refinanced at the last minute to complete the $2.76 billion transaction.

In his note to BetaNews, Reilly pointed to the fact that Sirius was able to increase revenues in the most recent quarter, as well as growing its total subscriber base by 25 percent. Two weeks ago, Sirius posted revenues of $283 million on 8.9 million subscribers.

He also argued that Sirius' position in the industry is strong, and it is among the fastest growing subscription media businesses. Additionally, the company's costs to acquire customers decreased, and it was able to keep its cash expenses essentially flat.

But Reilly's major point of contention was not so much with the body of our story as with the headline, "CEO Mel Karmazin admits Sirius XM is in bad financial shape." "We would like your headline to more accurately portray what [the] Bloomberg story said and the reality of our recent publicly announced results," he wrote.

While a further review of the original story, along with the Bloomberg News story that triggered it, may indicate that in this particular case Karmazin did not explicitly admit to problems with the company's finances, other recently uncovered comments -- including some on Bloomberg's television network -- and further research suggest otherwise.

For example, take a look at both merger partners' balance sheets. XM's final independent quarterly report is here, while Sirius' most recent report for its fiscal Q3 is here. On July 22, XM -- which was responsible for the additional debt that Sirius may have not initially seen, according to Karmazin -- explained that its debts were primarily a factor of subscriber acquisition costs (SAC).

Simply put, subscriber acquisition costs are the subsidies a satellite broadcaster pays for the marketing and production of its radios. These fees include subsidies to automakers and CE manufacturers, as well as incentives related to marketing these devices and the like. It could be argued that XM was just spending too much money to sign on new customers.

Essentially, during its due diligence, XM may have forgotten to compound the total deficits that came with attempting to grow its total customer base, ending up with over a billion dollars more in debt than it initially indicated it had.

Sirius is suffering from the same problem. By taking on XM's SAC-related debt, it has only compounded the issue.

CEO Karmazin is obviously not ignorant to this. In fact, in the portion of his interview that appeared on Bloomberg TV, when asked about the company's financial situation, Karmazin does admit there are issues. In a segment cited by BloggingStocks, the CEO said, "We need to get the revenue up beyond the cost of operating our business."

That's been the problem with satellite radio all along. In its most recent quarter, Sirius posted a net loss of $83.9 million, while XM posted a net loss of $120 million for its final Q2. While both have cut losses significantly over a year ago -- in the case of Sirius, by some 37% -- they are still considerable by any means.

Lending weight to the case against Sirius XM's claims of purely positive financial health, is its current stock price. Now trading under Sirius' old ticker symbol SIRI, its stock value is down 50% since the beginning of the year, and over 60% from its 52-week high in late November 2007.

What these various factors add up to is a much weaker financial picture for the combined company, as opposed to when XM and Sirius first announced their merger plans over a year and a half ago.

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