Directed Electronics said it will exit the satellite radio market, citing softening sales of aftermarket satellite radio products.
Directed will stop acting as Sirius' exclusive retail distributor on Jan. 31, 2009, the company said during a conference call with analysts when it released its third-quarter financial. (See p. 61.)
Citing Sirius XM's debt of more than $1 billion, and the unfavorable credit markets, Directed said the relationship with Sirius no longer provides a favorable "risk-reward tradeoff." It offers "a relatively small contribution [to sales] vs. the potential risk of a catastrophic situation for us if they can't refinance," said Jim Minarik, president and CEO of Directed's parent, DEI Holdings, on the conference call.
Minarik also told TWICE that Sirius plans to appoint a new distributor shortly. Audiovox, the distributor of Sirius XM's brand, did not comment on this report. Sirius XM also did not comment on a possible replacement for Directed during its earnings conference call or in response to questions by TWICE last week.
Sirius XM will purchase nearly all Directed's remaining satellite-radio receiver inventory during the first quarter of 2009 and will assume full responsibility for all product returns and warranty costs after Jan. 31, Minarik said.
Minarik said Directed's revenues in satellite radio have declined steadily since 2006, from $220 million that year, to $118 million in 2007, and are expected to fall to between $70 million to $90 million during 2008, marking a further reduction of 25 percent to 40 percent.
Minarik added, "Combining this substantial downward sales trend with the other negative realities of this business, including declining margins … and a significant working capital investment, we believe our decision to exit this category is really the only logical choice."
Directed has approximately $27 million in Sirius inventory, DEI Holdings' chief financial officer Kevin Duffy told analysts. "Exiting the satellite-radio business will allow us to focus on our core categories and also increase our ability to pay down debt by recovering the $20 to $25 million of working capital we have committed to this business," he added.
The company does not expect Sirius inventory will be sold at reduced margins.
Minarik stated, "We have enjoyed an excellent partnership with Sirius over the past four years and expect to continue working closely with them to ensure the smoothest possible transition to their new distribution partner between now and early 2009."
Minarik told TWICE that as for the rest of its business, "Our point is we have a very healthy business with our brands, Viper, Clifford, Python … what we need to do is get back to focusing all of our attention on those businesses."