When: Tonight, Thursday, March 8, 2012
Where: CNBC’s “Mad Money w/Jim Cramer”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Sirius XM Radio CEO Mel Karmazin tonight, Thursday, March 8th on CNBC’s “Mad Money w/Jim Cramer” (6 & 11PM ET). All references must be sourced to CNBC.
Video: Cramer Tunes into Sirius XM CEO
JIM CRAMER: Has Sirius XM, the one and only satellite radio company in America, finally got its groove back? This $2 and change stock has run up 35% in the last few months. Now it seems to have more catalysts than you can count. I was skeptical of Sirius when the federal government made them wait eons before approving the merger with XM, closed on July of 2008. As a result of the extended wait the combined company did have a near death experience in late 2008. For only being saved by an infusion of capital from Liberty Media, which purchased a 40% stake in the satellite radio company. More on that in a moment.
But a lot has changed in the last few years. Auto sales are now on fire. That's a huge market for Sirius. They've also moved into the used auto market, which is gigantic for them. In the most recent quarter the company added 540,000 new subscribers. The total count is now 21.9 million.
In fact Sirius XM has become so successful that many worry its savior, Liberty Media, could buy the whole company on the cheap, something that I regard as a high quality problem. That's why I'm thrilled to have Mel Karmazin, the fabulous CEO of Sirius XM radio, and before that unbelievably successful work at radio and TV, who is celebrating the 10th anniversary of Sirius XM in an amazing fashion, what is sure to be a legendary Bruce Springsteen concert at the Apollo Theatre in Harlem for Sirius XM subscribers only.
We just happened to see a ticket going for $10,000 on eBay, by the way, this afternoon. He's with us tonight to give us a sense of where his company's headed. Mr. Karmazin, welcome back to Mad Money. Mel, good to see you.
MEL KARMAZIN: Good to see you, Jim.
JIM CRAMER: Good to see you. Have a seat.
MEL KARMAZIN: How are you? Thank you.
JIM CRAMER: First, I want to thank you. When my father got sick this summer-- he was at a hospital in Philadelphia. And they didn't have CNBC on TV, so we very quickly got him a Sirius XM radio, which had CNBC you guys are doing a whole lot more than just when you first started.
MEL KARMAZIN: Oh yeah. I mean things have been great. I mean I've been here now almost eight years and when I joined the company we had 600,000 subscribers and we had revenues of like $67 million. So it's been an extraordinary run.
JIM CRAMER: Now I like to measure your company as a cash flow company, because you taught me to do that when you were in radio. People don't understand, because they see it's a $2 stock. They think, "Well, it must be losing a lot of money." Can you explain to people how it's the cash flow that matters and how that has really ramped up since the merger.
MEL KARMAZIN: So I believe, and have for a long time, that free cash flow is the only metric that creates wealth for investors.
JIM CRAMER: Right.
MEL KARMAZIN: Free cash flow is what enables you to buy back your stock, make acquisitions, pay down debt. And I believe free cash flow is an important metric. Our free cash flow now, is growing-- it's extraordinary. Before the merger we had negative free cash flow of $500 million. Negative free cash flow. This year we will have $700 million of free cash flow. We haven't given guidance for next year. Analysts have us at a billion of free cash flow and continuing to grow. So it's a great start.
JIM CRAMER: You-- they are in tune? They are off the mark?
MEL KARMAZIN: Who am I to say what analysts say. But we have not acknowledged what is going to happen beyond 2012.
JIM CRAMER: But it wouldn't shock you to do that?
MEL KARMAZIN: No. I mean if we've gone from $400 last year to $700 this year, you know, and the year before that we were at a $100 and something, that growth rate looks like it's going to continue--
JIM CRAMER: Okay.
MEL KARMAZIN: --for some time.
JIM CRAMER: But Mel, if that's the case, you got one of the smartest guys in the world, 40% shareholder, Liberty. Why shouldn't they, now that the standstill's gone away, start buying and buy the rest of the company for, say, $250, which is what some of the analysts are saying, capping all the return that you can give shareholders?
MEL KARMAZIN: Well-- Liberty Media is free to do anything they want to.
JIM CRAMER: Yeah, they can do what they want and you can't tell them what to do.
MEL KARMAZIN: And I have no interest in telling them what to do. But what I am able to do is represent the best interests of the non-Liberty shareholders as well. So the way I look at my job now I'm responsible for all of our shareholders, including Liberty. If there ever was to be a transaction that Liberty would want to initiate, my responsibility would be to our shareholders to make sure that they are treated very fairly.
JIM CRAMER: All right. Just a couple days ago Pandora reported a number. Everyone thought Pandora's spotified, these are all these free internet models, can destroy you. I look at Pandora and I think that they actually have rising costs and that you don't have, and that the competitive threat is overstated. But I need to hear it from you, because a lot of people tell me, "Jim, you're nuts believing in Sirius at this point?'
MEL KARMAZIN: So Jim, we have a lot of competition. Right? And I believe business models matter. Now I mean some people could sit there and disagree and say it's about eye balls or it's about something else. I believe it's about the business model. We competed with our terrestrial radio for the last 11 years. Grew from zero subscribers to 22 million subscribers. We now have competition from I.P. You know?
JIM CRAMER: Right.
MEL KARMAZIN: They're-- no barrier to entry. Anybody could be an I.P. audio content company. They have a questionable business model, because it's depending upon advertising. I have believed, for the last 10 years, from before I came to Sirius XM, that the internet has created so much inventory, so much inventory in the advertising world, that a business model that is principally advertising-driven, whether it be terrestrial radio or I.P. radio, it's advertising driven, is at risk. I don't particularly like that business model. Great company, Pandora. Great product. But not-- question about the business model.
JIM CRAMER: Right. Now speaking of your programming costs, there are a lot of deals that were put together when XM and Sirius were-- fighting tooth and nail. So you paid a lot more. Is it possible-- I don't think how much the Stern contract is. I know he is going to be on NBC soon. And I'm very excited about that. Very excited about that. But I'm trying to figure out whether you have a bunch of levers, including your costs, unlike Pandora's, could principally go down over the next four or five years as contracts roll over?
MEL KARMAZIN: If you take the entire premium entertainment category, so include television-- you know, cable television, satellite television, their costs are all going up. You see how there's these wars between the MSOs--
JIM CRAMER: Right. Right.
MEL KARMAZIN: --you know, and the content owners. What we have said is that our content costs are going down and as a percentage of revenue it's going to be less. There is no-- your company, Comcast, is faced with the idea that their programming costs are going up. Ours are--
JIM CRAMER: Going down.
MEL KARMAZIN: --going down. And they're going down because-- though we have all of this competition, there's only one satellite radio. So if CNBC wants to be on satellite radio, because it's one of the buckets-- they want to be on the internet, they want to be on cable. There's one conversation they can have and that's with us.
JIM CRAMER: Right.
MEL KARMAZIN: And that's different than when we were at war with each other.
JIM CRAMER: You guys were at war with each other. You know, I got my bill. I didn't even notice I guess it's a little bit higher. Am I, like everybody else, you've now had, what, a couple of-- you've had enough time to gauge whether there's been a fallout for that price increase?
MEL KARMAZIN: So-- Sirius started getting its first subscriber, as you pointed out, 10 years ago, having never had a price increase.
JIM CRAMER: Yeah. It's a bit of a bargain.
MEL KARMAZIN: When I first came to the company I thought we ought to raise prices because from the time it started got Howard Stern, got the NFL, other great content and never passed along those costs. We wanted to grow rapidly. Decided to hold off. Was looking at doing a price increase again. The merger came along. I said, "You know what? We don't need to do a price increase. We can get the savings that way." So now 11 years later, we've raised the price for the first time. I think we handled it really well. You know, we learned a lesson from another company that--
JIM CRAMER: Yeah, and I want to talk about it, because that company's--
MEL KARMAZIN: But--
JIM CRAMER: --valued much less than you, but it's a subscription model with similar number of clients. We're speaking about Netflix. Trying to understand 15 billion. I'm trying to get my arms around why you should be worth $15 billion and not $7 billion or $6 billion like Netflix. I don't understand, Mel.
MEL KARMAZIN: So on the price increase-- and I'll give you the answer on that one, is that our consumers have been really loyal and they really love our product. And the reaction has been very modest. Very modest. So, you know, we feel very good about, you know, the subscriber growth in light of the fact that we put in a price increase. On the valuation, I don't make the valuation.
JIM CRAMER: I know you don't, but it's hard for me to get my arms--
MEL KARMAZIN: Well--
JIM CRAMER: --around why you should be at $15.
MEL KARMAZIN: What is a company that is throwing off you know, 80% of its EBITDA is free cash flow. That free cash flow is growing at 75% last year. It's going to normalize. Keep growing. And the idea is that the competition that we are facing today, the competition we are facing today, terrestrial radio, is not investing in new content. They're not going to get bigger. On the I.P. side of the house, don't know who is going to win. I think that you know, today we are the number one radio revenue company. Number one radio in the world.
JIM CRAMER: Right. So therefore--
MEL KARMAZIN: In the world. And have growth characteristics. A growth company characteristics.
JIM CRAMER: Right. You do know that I want to understand it. Maybe -- boy, I'd love to make some news here, but you're-- got so much cash flow. You can only buy back so much debt because you have a lot of restrictions on co-options. Why not initiate a gigantic buy back and make all those people who have stuck with you and that stock for so long recognize that you believe, like they do, that the stock is way too cheap?
MEL KARMAZIN: So what we've said-- and this isn't the first time I'm acknowledging this, so I-- though I always love making news on--
JIM CRAMER: And I appreciate--
MEL KARMAZIN: --your show.
JIM CRAMER: --that. Oh, I appreciate that.
MEL KARMAZIN: Okay. But the fact is that when you have all of this free cash flow you could make-- you use the free cash flow for an acquisition. There is nothing else.
JIM CRAMER: There's nothing.
MEL KARMAZIN: There is nothing, zero, out there that I want. Okay. So you're not going to make an acquisition. You could return the capital to shareholders. At the end of this year, at the end of this year, we'll have between a $1.2 billion and a $1.5 billion of cash on our balance sheet. I don't know what to do with it other than to use it as you're characterizing.
JIM CRAMER: Fair enough.
MEL KARMAZIN: Now it's a board decision.
JIM CRAMER: Right.
MEL KARMAZIN: It's a board decision. I would hope that the board would share my feelings that way, but that has to be the agenda.
JIM CRAMER: Okay. Absolutely.
MEL KARMAZIN: That absolutely has to be the agenda.
JIM CRAMER: I want to talk about Howard, because he's still amazing after all these years.
MEL KARMAZIN: He's the best.
JIM CRAMER: He's amazing as ever.
MEL KARMAZIN: He's the best.
JIM CRAMER: He's coming back and doing TV. You like that from your point of view? You don't mind sharing him with NBC?
MEL KARMAZIN: I think Howard is the-- absolutely the greatest radio performer of all--
JIM CRAMER: In history. Right.
MEL KARMAZIN: --time. In history of all time. We are very identified with Howard because he does these radio shows. The bigger Howard gets and the more exposure Howard gets, the better it is for me-- for us, our company.
JIM CRAMER: Right.
MEL KARMAZIN: Howard's not doing it for us. Believe me.
JIM CRAMER: No he’s making good money, right? He's making hundreds of millions.
MEL KARMAZIN: Howard's doing it-- Howard-- and he's worth it. Whatever-- I mean he's not-- it's not that he's paid badly. He's worth the money that he's getting. And it's great for us that he is so successful. And I'm happy for Howard because I've known him for a long time.
JIM CRAMER: One last question, because I'm still a business guy about where you get your customers. The average car in this country is 11 years old. Are you beginning to see from used cars a major growth initiative or is it really going to have to come from new cars and that 14.5 million build could provide a lot of upside in 2012?
MEL KARMAZIN: So, so far this year on the new car side, right? Most people seek-- are seeing a number between 14 and 15--
JIM CRAMER: Yes.
MEL KARMAZIN: --mil. That's up huge. So--
JIM CRAMER: Yeah, from nine a couple years ago.
MEL KARMAZIN: That's going to drive our top line, together with the price increase, okay, that we're doing. And that's where the top line revenue growth is there.
JIM CRAMER: Okay.
MEL KARMAZIN: Used cars. There's 200 million used cars on the road today. We-- a lot of them have satellite radios in them because we started five years ago. We started ramping it up. We believe that used cars are going to be a big driver. We're working hard to find the information. So, as an example, I know how to deal with the certified pre-owned, I know how to deal with Auto Nation, Auto Nation dealers.
JIM CRAMER: Right.
MEL KARMAZIN: If you sell a car to me, I got to-- I want to find out how I can get that information so I can market to you and give you a three month trial. It is a big deal.
JIM CRAMER: Are you going to solve it--
MEL KARMAZIN: The numbers are small.
JIM CRAMER: --this year?
MEL KARMAZIN: Well, we're working and we're get--
JIM CRAMER: All right.
MEL KARMAZIN: --we're getting better every day.
MEL KARMAZIN: Used cars are contributing toward the growth number that you said in the fourth quarter. Record year last year. Oh, by the way, you talked about Pandora, you talked about risk. In 2011, last year, with all this competition, we added the most number of subscribers since our merger.
JIM CRAMER: Well, I think you guys are--
MEL KARMAZIN: So--
JIM CRAMER: --you know, I it is a remarkable story. I did think that you were dead, Mel.
MEL KARMAZIN: I know.
JIM CRAMER: I did. And you--
MEL KARMAZIN: It's a great-- and by the way, you said that.
JIM CRAMER: Right.
MEL KARMAZIN: And in fairness to me, you know, it hurt.
JIM CRAMER: I know. I know. Look, and I appreciate you coming on the show because that was not-- you know, it was a hard hitting thing that I did. I know that.
MEL KARMAZIN: And you were--it could have been right. And a lot of companies-- a lot of companies-- Warren Buffet was lending money to Goldman Sachs and G.E. at 10% plus warrants. So when we spoke to 22 companies, okay, that were frozen, they wouldn't do it. And to his credit, you know, John Malone and Greg Maffei stepped up and, you know, made great investment for them and great investment for us.
JIM CRAMER: Well, congratulations on your 10th year. You deserve it. You're a winner. Mel, terrific. Thank you so much--
MEL KARMAZIN: Thanks a lot.
JIM CRAMER: --for coming on Mad Money.
MEL KARMAZIN: It's fun. As usual it's always fun.
JIM CRAMER: Mel Karmazin, CEO of Sirius XM Radio. Please-- Google him and see the successes and you'll know exactly was Sirius XM it going to be a huge success beyond where it is now. Stay with Cramer.
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