By Relmor Demitrius -
On November 5th, 2009, Sirius XM Radio reported its 3rd quarter earnings. I presented a preview of the 3rd quarter results before the conference call. Let us see how Sirius XM did in comparison to our expectations at Kingofalltrades.
******************* KOAT ******** Sirius XM 3rd Quarter Results *******************
Earnings .01 cent 0.00 cents
Operating Revenue 613 million 618 million
Operating Costs 570 million 552 million
Subscriptions Gain of 248,000 Gain of 102,000
ARPU 10.75 10.87
FCF 43 million 27 million
Looking at expectations versus results, we can take a look and see possibly why these differences occurred.
Earnings were a miss due to more charges related to accounting reasons than expected. There was around 40 million more in charges than I was expecting. This accounts for the difference here. This is no cause of concern to investors, as it has no effect on cash holdings, or cash flow.
Operating revenue was a bit low, but that was due to royalty charges being placed in this line item; as this was the first time expensing this to their 10k’s, Sirius XM has decided to put royalty charges in the “other revenues” line item on their balance sheet. They gained around 12 million dollars in this line item from Q2 of 2009. Mel Karmazin, CEO of Sirius XM Radio, stated even more royalty charges will apply in Q4 than Q3, as more plans come due, and new subscribers that pay the royalty charges replace subscribers who were not paying royalty charges.
Operating Costs were lower than expected. I think I guessed high on this metric bracing for higher OEM chip costs, and other related expenses. Sirius XM, since they merged, has done well in controlling costs, and realizing synergies. Over 500 million dollars in synergies have already been realized already.
Subscriber totals were off due to higher than expected losses in the retail subscriber line item. I was expecting a loss of around 200,000 retail subs and 400,000 retail subscribers were lost. I attribute this once again to channel changes, internet charge, royalty charges, continued rumours of bankruptcy and the merger confusion. Also older radios got replaced with newer OEM models (a shift to OEM subs from Retail subs is taking place, although with new additions in the retail radio market and the new XM Skydock, this trend should reverse soon). Overall subscribers are up however, from Q2 to Q3
The miss on ARPU can also be associated with royalty charges being applied to revenue.
The difference in free cash flow was negligible. I was looking for anything positive here as a huge bonus for Q3 (a historically high cost associated quarter, making Q3 the hardest to achieve FCF). Since FCF was achieved in Q3, great things look in store for Q4 (historically Sirius XM strongest performing quarter).
After reviewing the 10-Q, here are some key points of interest.
There are still over 2 billion shares available of the 9 billion total available unattached to obligations for any reasons. This gives Sirius XM incredible flexibility in the future to dissolve some debt with no cash. Wall Street and investors factor a 6 billion share dilution in already, adding the Liberty 40% preferred stake into the 3.8 billion share float total already. 3.7 billion shares have been put aside for warrants, this preferred share conversion, stock plans, and debt obligations. This leaves still almost 2 billion shares, even removing Liberty’s 40% from this portion as well.
According to a cost to debt study done by a KOAT long time investor/stockholder named John, he predicts cash payments for future debt possible till 2013(possibly minus a small amount left at the end) based on guidance from the company. Here is what John wrote.
2009 / 2010 / 2011 / 2012 / 2013 / 2014 / Total
Long-term debt obligations:
85,746 / 13,742 / 407,889 / 239,541/1,804,406 /812,260 /3,363,584
Cash interest payments:
65,638 /304,935 / 295,019 /276,326 / 244,049 / 88,871 /1,274,838
Satellite and transmission:
34,685 / 98,933 / 106,834 / 36,659 / 2,370 / 22,183 / 301,664
Programming and content:
87,630 /257,126 / 147,529 /129,236 / 38,638 / 29,955 / 690,114
Marketing and distribution:
51,529 / 43,666/ 24,868 / 14,533 / 3,000 / 4,500 / 142,096
Satellite incentive payments:
1,801 / 7,384/ 8,851 / 10,505 / 11,099 / 74,342 / 113,982
Operating lease obligations:
13,338 / 7,352/ 22,851 / 18,861 / 15,046 / 14,854 / 122,302
Other:
16,321 / 34,096/ 20,677 / 8,234 / — / — / 79,328
Total (in thousands): 356,688 / 797,234/1,034,518/733,895/2,118,608 /1,046,965/6,087,908
This shows that they clearly have all the way to 2013 before the first major payment is made. For some that want to say, yea sure but take a look at the interest that also needs to be paid. I say to that, that is nothing new and I would remind you that they have not EVER missed any interest payments in the past so they have always made those payments. The point being that if they can get to a point this 4th quarter (end of this year) where they have at least 200 to 230 million in FCF then they will end the year with about 600 million in COH at the end of 2009 and will still have 3 MORE years before the main payment will come due. Now if things go as expected and have done in the past (where FCF has increased greatly in the 4th quarter) and now we see that we could very well have FCF positive NOT only in the 4th quarter but in EVERY quarter from here on out then by the time those major debt payments come due in 2013 they should be well on there way to being able to pay most of that off using COH. I can see them having at least 1.2 to 1.4 billion in COH by the time 2013 debt comes around. I know that still leaves .4 billion….
*** *** ***
As you can see, this is very exciting to ponder for Sirius XM investors. Convert a few shares for debt, refinance the rest, or they may simply have more cash by 2014 than expected, and all debt is accounted for till 2013. Worst case they can extend the 2014 debt out until more cash can be generated. Since the 2014 bonds are convertible at a price of 1.87 a share, this debt could be erased by a simple stock for debt swap, as one can see a much higher stock price evaluation is in the cards. Not out of line to think in a few years of performing, Sirius XM could have a stock price well over $2, and a bondholder would want to make the higher profit, and convert rather than wait for a 7% loan till fruition. There is a reason these bondholders chose convertible bonds, they wanted to be able to capitalize on any event whether positive or negative.
Sirius XM also payed a portion of the 10% Senior PIK Secured Notes due 2011. This will help in the future with their cash flow.This was done in October of this year, so on the 10k for Q3, the debt appears on their report. Sirius XM paid cash to terminate this debt.
Approximately 60 million shares were returned to Sirius XM and subsequently destroyed, as part of the lent shares to bondholders in the merger deal from July of 2008. This brings the total lent shares from 260 million to 200 million. This is a great help for Sirius XM longs, as the short side is more and more ignored.
This is great news for Sirius XM investors, as they appear to be targeting “common equity holder unfriendly” debt first, as these shares to short the bonds were not obtained in the free market, but loaned to Morgan Stanley for direct purpose of hedging a bond return rate. These shares were not counted when calculating earnings per share, but were counted in the total float, however.
Q4 should hold even more answers for Sirius XM, and is pointing to be their first profitable quarter in history (before charges). Their 400 million in EBITDA guidance will be no problem to achieve, validating year long guidance by the company, and forcing validation of future guidance by the company (At least 20% growth in revenue in 2010) and continued growth in the subscriber totals.
Disclosure: Long SIRI
Good article and predictions and due diligence on this fine company, called SXM, is top notch work and very much appreciated here, Relmor….
Good things are here and waiting is over for road to profitability,now the SP just has to cooperate lol
CUDDOS!!!
Judging on a numbers basis, half of you observations were within 1% of estimates and require NO JUSTIFICATION! Only your outlying observations needed clarifications. The clarification is where the numbers come from, more than the numbers themselves. The three areas that needed clarifications; Earning per share, Subscriptions, and FCF.
EPS:
The actual EPS was .00+, as in POSITIVE! Getting the positive call was excellent on your part. The new during the period by the company was sparse, and could only be picked up by the most observant follower.
Subscriptions:
WOW, this was a wild card due to the passing on of the Royalty fees. Although your estimate was more than twice the actual, it is still less than 1% of the TOTAL subscriptions. Estimations when dealing with a 10M unit New Auto market, and the Introduction of the Used Auto market are well within reason.
FCF:
Once again the numbers theselves are deceiving. When taking the Operating Revenue & Costs into consideration (The Lions share of FCF calculations), a realization that the amount is again les than 1% of the figures used for a base.