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Steiny

Sirius XM Radio (SIRI) Analysis

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A little late this time around, but here are my Q4 YTD estimates vs. Q4 YTD actual #'s:

Revenues - 3.404B estimate vs. 3.402B actual

Operating income - 885M estimate vs. 872M actual

Comprehensive net income - 3.542B estimate vs. 3.472B actual

Adjusted EBITDA - 926M estimate vs. 920M actual

Free Cash Flow - 714M estimate vs. 709M actual

ARPU - 12.05 estimate vs. 12.00 actual

SAC - 53.90 estimate vs. 54.43 actual

The reason for the large difference in my net income estimate is the NOLs. I incorrectly estimated a positive 60M tax benefit vs. a (15M) tax expense. I thought there were about 60-75M of NOLs left to book as of Q3.

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Wanted to follow up on the NOL conversation from the radio show last Thursday. At this time I believe that each quarter in 2013 will see a write-off betweend $100 - 200M of the NOL deferred tax asset (about $3B) booked in 2012, or about $(.015) to $(.03)/share on the EPS.

This is how I determined this range:

1) Looking at the 10-K SIRI had about $675M of taxable income for 2012 (based off the change in the gross NOL carryforward as stated in the footnotes) which is about 95% of FCF. So FCF for 2013 is estimated at about $900M, so we can back into taxable income of about $950M. So about $950M of NOLs will be used, which equates to a tax savings of about $400M-$450M depending on effective tax rates. The tax savings is the change in the NOL, which would be the yearly write off (or $100 - $115M agains the bottom line).

OR

2) There are $923M of ST deferred tax assets on the balance sheet for an increase of about $790M. The increase in NOLs that are "usable" as of this year was about $3B. My thought was a large portion of the increase is from the NOL release. Being that this a short-term asset, this amount is expected to be used in 2013. So to be conservative I am assuming all of the $790M is the NOL and SIRI will see about a $200M writeoff on average each quarter.

After the Q1 results are released we will know alot more and I will adjust this estimate if necessary.

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I would probably lean more towards $100-$125M write off each quarter, but i like to be conservative when I am unsure of what's going to happen. Just wanted everyone to be aware of what is potentially coming in May.

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FYI - once we find out what happens with the 2014 debt, I will be posting an updated look-forward analysis to 2015.

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Good stuff...loving it! Steiny, I was wondering where you physically are located? Anywhere near the DC area?

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Hey ASM,,Steiny is a neighbor of mine,around philly suburbs...he is providing great info here,appreciate it Steiny,,ty..

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Hey ASM - I live around Philly and my business is located closeby.  Both are right near Irish.

Good stuff...loving it! Steiny, I was wondering where you physically are located? Anywhere near the DC area?

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No problem Irish, hope everyone can benefit some from what I post up here.

 

FYI to everyone - I will posting a full out analysis to 2015 over the weekend.  I need to tweek a few things before I completely finalize it.  I have to drop my 2013 PPS prediction to $4.12 - $4.39 based on what I'm calculating right now. 

Hey ASM,,Steiny is a neighbor of mine,around philly suburbs...he is providing great info here,appreciate it Steiny,,ty..

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Attached is my updated analysis to 2015 files.  This time around I separated the files into estimates based the company's current guidance plus ~20% increased EBITDA per year and estimates based on my own personal estimates.  I also added an estimated NOL analysis and an estimated debt/interest analysis.  

 

For 2013, I am looking for the PPS to reach about $4.05 - $4.31 at some point; 2014 for the PPS to reach $5.28 - $6.10; and in 2015 for

the PPS to hit $7.30 - $9.26. 

 

Just a word of caution to the PPS estimates above:  I am assuming Liberty/SIRI is going to leverage up SIRI each year to make sure the debt to EBTIDA ratio stays at 3.5 to 1 and then almost exclusively use this money to buy back stock.  I am looking for around 1.8B to 2.2B of stock to be bought back between now and the end of 2015.  So if these events don't occur this could significantly limit the upside of the PPS going forward.

SIRI Analysis to 2015.zip

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Here is my explanation of the NOL write-offs that I believe are coming....

 

As SIRI generated GAAP and taxable losses in the past years, SIRI records an adjustment to the books for the net effect of the NOL to the company (i.e. the cash savings).  The amount booked is the amount of taxable loss X the Federal tax % plus the state tax % (state tax % is usually a blend of the state taxes in the various states SIRI files in for its taxes each).  A good % to use for the total Fed + state rate is between 40 - 45%.  The entry made to the books is:

 

DR:  Deferred tax asset

        CR:  Income tax benefit

 

After this is done, the auditors & SIRI determine if the NOL deferred tax asset is booked will more than likely be realized (i.e. over 50% change it will be realized).  There are many factors that come into play such as historical and future performance (among many others).  If SIRI's case, for many years it was determined that it was more likely than not (less than 50% chance) the NOLs will be utilized by the company.  So to remove the income tax benefit booked above, an adjustment is made to what is caleld a "valuation allowance" (VA).  The VA is essentially a contra-asset account (wipes out the asset).  So in SIRI's case it was determined 100% of the NOLs would not be realized until just recently.  The entry made is:

 

DR:  Income tax expense

        CR:  Deferred tax asset/valuation allowance

 

The income tax expense wipes out the benefit from the balance sheet to $0.  Each year the VA is re-evaluated by SIRI and the auditors.

 

As everyone remembers, in Q3 SIRI and the auditors determined that SIRI will use the NOLs and essentially reversed all the VA adjustments from the past and picked up the income tax benefit all at once (about $3B).  So as you will see on the balance sheet the $3B NOL was booked to both the ST deferred tax asset and LT deferred tax asset based upon when the auditors believe SIRI will use the NOL. You will notice that the ST deferred tax asset went up about $800M and LT deferred tax asset went up about $1.2B, for a total of $2B balance sheet adjustment.  Additionally the deferred tax liabilities went down $1B, for the $3B increase to SIRI's GAAP net worth.

 

As the $3B NOL is realized by the company through taxable income quarter to quarter and from year to year, the entry to remove this large one-time tax benefit that was booked in Q3 2012 is:

 

DR:  Income tax expense (the write-off)

        CR:  Deferred tax asset

 

Using the NOLs is a great thing overall because SIRI is finally realizing cash savings from these prior losses and therefore won't be paying much, if any, income tax for the foreseeable future.  My main issue is this:

 

How will the street react when it sees the EPS being only .01 or .02 due to the NOL write-off? 

 

I could see a temporary dip in PPS until people realize why the EPS is low.  The NOL write-off is a non-cash expense, so I suggest that you use the EPS before the NOL write-off in any of your personal analysis quarter to quarter.  I'm not a stock analyst as you know, but I wanted to make sure evyerone is aware of what is about to happen.

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Thanks for the #s Steiny. Good job.  Perhaps it's time you used your expertise and understanding of NOL accounting usage to pen an article for hopeful publication on SA, the Fool, or the Street in an effort to minimize a knee jerk market reaction to the false interpretation of the eps for Q1. I'm sure you would be well received and possibly obtain some good attention to your business.

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Thanks for the kind words GG.  Right now I would like to keep my analysis as a KOAT exclusive, but moving forward I will have to consider your suggestion.  I never even thought about doing something like that.

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Steiny,

 

Thanks for the comparison analysis.

I'll just say - as long as your future yearly estimates on share price are close... I'll be happy. :-P

 

 

Attached is analysis of my estimates vs. actual numbers reported.  I was a little off this time, I guess I will need to do some better analysis for Q2. :-o

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Steiny,

 

 Does the following sound correct?

 

Omega's Thesis on Sirius XM (SIRI)Cooperman's fund has held a SIRI position for a while, but continues to like the name because the company has a ton of subscribers and has negotiating leverage when acquiring exclusive content. Omega has identified four growth drivers for Sirius XM:"First, SIRI can be more proactive in addressing the used-car market and converting people who have the hardware in the car into paying subscribers at little to no cost. Second, a rising SAAR lends itself to higher additions from new-car sales. Third, current estimates of almost 100-million cars with SIRI preinstalled by 2017 points to massive potential over the next few years compared with the current installed base. And fourth, the price hike announced in 2011 and implemented over the last year demonstrates significant pricing power embedded in this model. We believe that the best way to value SIRI is on a free-cash-flow per share metric as the company has over $7 billion in gross NOLs, is buying back shares aggressively, and at these levels the amount of NOL per share increases via the buyback. Therefore, the more aggressive SIRI is, the longer the NOL lasts per share...to the point where, in our models, if the stock stays at $3.00 per share, it is possible to buy back the entire company before the NOL runs out. We think downside is limited and see significant potential in the years ahead for SIRI, with a price objective of $5 using a low-teen multiple of 2015 cash flow."SIRI has been a favorite play among many hedge funds. While Omega Advisors is one of the top institutional holders of SIRI, other hedge funds involved as of the end of Q1 include: Blue Ridge Capital, Coatue Management, Slate Path Capital, and Hound Partners. Not to mention, John Malone's Liberty Media (LMCA) has amassed quite a sizable stake in SIRI         

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MS-

 

The stock buybacks have absolutely nothing to do with how long the NOL lasts on the books.  As we all know, stock buybacks are done via liquid cash on hand.  The NOLs are based on taxable income earned by the company.  Buying more stock doesn't extend out the NOLs any longer at all, but he is right about NOL per share increasing.  In addition, the NOLs are, in essence, helping to finance a portion of the buybacks since we don't pay any taxes on net income.  This is money that stays in SXM's coffers and doesn't go the taxing authorities.

 

On the second part about buying back all of the shares before the NOL runs out, I think its in the realm of possibilities.  I have only projected out until 2015 and through this time period I am estimating SXM to generate $3.2B (of taxable income) of the $7B NOL (cumulative taxable losses).  If this pace kept up by SXM, its possible all of the NOLs will be "eaten up" as early as 2017 or 2018.  I am also estimating a little over 2B of shares will be repurchased through FCF and increased leverage through 2015.  This assumes the stock buybacks will average $3.50/share this year, $5.00/share next year, and $6.50/share in 2015.  At this pace, I don't see all of the outstanding shares being purchased for many years down the road.  However, if the stock price stayed flat at $3.00/share during these years, then the stock buyback number would move to over 3.3B shares through 2015 (based on my projections), which would eat up almost all of the non-Liberty shares.  Then, moving forward, if Liberty wanted to sell all of their shares, the company could easily purchase the remaining 3.6-3.8B shares from Liberty over the next few years IMO, especially if the sub base grows exponentially and SXM implements price increases during this time.  This is all very hypothetical but based on SXM's financial position it's in the realm of possibilities (but staying flat at $3.00/share has practically a zero chance of happening).

 

 

Steiny,

 

 Does the following sound correct?

 

Omega's Thesis on Sirius XM (SIRI)Cooperman's fund has held a SIRI position for a while, but continues to like the name because the company has a ton of subscribers and has negotiating leverage when acquiring exclusive content. Omega has identified four growth drivers for Sirius XM:"First, SIRI can be more proactive in addressing the used-car market and converting people who have the hardware in the car into paying subscribers at little to no cost. Second, a rising SAAR lends itself to higher additions from new-car sales. Third, current estimates of almost 100-million cars with SIRI preinstalled by 2017 points to massive potential over the next few years compared with the current installed base. And fourth, the price hike announced in 2011 and implemented over the last year demonstrates significant pricing power embedded in this model. We believe that the best way to value SIRI is on a free-cash-flow per share metric as the company has over $7 billion in gross NOLs, is buying back shares aggressively, and at these levels the amount of NOL per share increases via the buyback. Therefore, the more aggressive SIRI is, the longer the NOL lasts per share...to the point where, in our models, if the stock stays at $3.00 per share, it is possible to buy back the entire company before the NOL runs out. We think downside is limited and see significant potential in the years ahead for SIRI, with a price objective of $5 using a low-teen multiple of 2015 cash flow."SIRI has been a favorite play among many hedge funds. While Omega Advisors is one of the top institutional holders of SIRI, other hedge funds involved as of the end of Q1 include: Blue Ridge Capital, Coatue Management, Slate Path Capital, and Hound Partners. Not to mention, John Malone's Liberty Media (LMCA) has amassed quite a sizable stake in SIRI         

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Thank you Steiny for your detailed response. It's is greatly appreciated.

No problem MS, always willing to answer these type of questions.

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Below are my Q2 estimates.  I originally had ARPU around $12.10, but after seeing the GS report, I have to believe ARPU is going to be higher than what I originally thought.

 

Attached is the detail behind on these number.

 

 

Financial Metrics - in '000s    

Adjusted EBITDA             290,000  

Free Cash Flow               285,000  

Gross Revenues              937,000  

Operating Income            276,000  

NOL Used                          90,000  

Comprehensive Income   141,000            

 

Non-Financial Metrics:      

Net Sub Additions             715,000  

ARPU                                    12.19  

SAC                                            51  

Churn                                       1.9%  

EPS (Diluted) - Before NOL    0.036  

EPS (Diluted) - After NOL       0.022  ** this is what will be reported most likely

SIRI Q2 2013 Estimates.pdf

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No problem Yash.... I'm liking the early conference call date, what do you think?

 

Steiny, thanks for the good information.

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No problem Yash.... I'm liking the early conference call date, what do you think?

 

As mentioned by few other members also in SIRI thread I was also expecting for a early call.

Hope Melone want to share the good news earlier.

 

Also, thanks for putting so much effort and providing the estimates.

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Attached are SIRI's revenues by quarter since 2009 - if we get a 12% YOY increase SIRI will top analyst's average estimates and hit the GS estimate.  Based on the past 5 quarters, this doesn't seem unreasonable.

SIRI Revenues by Qtr since 2009.pdf

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Attached is my updated analysis to 2015 files.  This time around I separated the files into estimates based the company's current guidance plus ~20% increased EBITDA per year and estimates based on my own personal estimates.  I also added an estimated NOL analysis and an estimated debt/interest analysis.  

 

For 2013, I am looking for the PPS to reach about $4.05 - $4.31 at some point; 2014 for the PPS to reach $5.28 - $6.10; and in 2015 for

the PPS to hit $7.30 - $9.26. 

 

Just a word of caution to the PPS estimates above:  I am assuming Liberty/SIRI is going to leverage up SIRI each year to make sure the debt to EBTIDA ratio stays at 3.5 to 1 and then almost exclusively use this money to buy back stock.  I am looking for around 1.8B to 2.2B of stock to be bought back between now and the end of 2015.  So if these events don't occur this could significantly limit the upside of the PPS going forward.

 

 

Steiny will you be updated your file after the next call? Sounds like 2B buyback will be completed and another one started before the end of this year.

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that was my plan mike... probably will have something posted a week or so after the call. i will most likely not include any agero financial data unless siri gives us some info at the conference call.

Steiny will you be updated your file after the next call? Sounds like 2B buyback will be completed and another one started before the end of this year.

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