By Brandon Matthews
Sirius XM Radio (SIRI) has announced that the company will report third quarter 2009 earnings on November 5, 2009, and of course Satwaves will cover the event live beginning at 6 am EST on that day. With today’s announcement, I will once again embark on my quarterly exercise in futility and post my own expectations of what we might expect to hear from the company. It should also be noted that I have been conservative in these estimates & calculations, and that the only numbers that truly matter are the ones that will be reported by the company. Specific patterns or trends are only just beginning to emerge since the merger of Sirius and XM Satellite Radio, making estimates difficult.
Perhaps that is why so few are willing to put their reputations at risk these days. Wall Street has shunned the company in recent months as many firms had dropped coverage earlier in the year, leaving these exercises to armchair analysts such as myself as we anxiously await their return. Let’s begin on the subscriber front. The weakness in the economy the past two quarters has resulted in two consecutive quarters of subscriber losses. I feel confident that the worst is behind Sirius XM at this point, and am projecting positive subscriber growth of 132,285 subscriber additions to be reported for the third quarter — based on self pay monthly churn of 1.9%.
- Q3 OEM Net Additions: 1,041,164
- Q3 Retail Net Additions 150,000
- Total Additions: 1,191,164
- Less Churn (1.9%): 1,058,879 = 132,285 net subscriber additions
Subscriber estimates are always the easy part. Earnings estimates are a completely different story as each quarter seems to bring a new round of debt refinancing and charges that make earnings estimates complicated. This was the the case in every quarter that I can recall since the merger was approved over a year ago. Once again it looks as though the same pattern will hold true for Q3 2009, which may turn an exceptional quarter into a modest one.
Wall Street is looking for the company to report a loss of .02 per share, which typically does not factor in one time charges and is based on forecasted results of operations. In my estimation, without any one time charges, Sirius XM Radio would likely report a first time earnings profit of .01 per share — which would beat the street handily by a whopping .03 per share. Unfortunately, a 120 million dollar charge will be reported relating to the retirement of the final Liberty Capital (LCAPA) loan that was repaid in full during the third quarter, which equates to a .03 per share charge.
Although interest expenses going forward are now substantially reduced, other revenue streams such as retail, advertising or investment related revenue will have had to outperformed in an exceptional way to make up for this one time charge. As a result and as the charts below demonstrate, I am conservatively calling for Sirius XM Radio to report earnings in-line with Wall Street expectations of a loss of .02 per share on revenue of $624,700,000 and an operating profit of $77,150,000. Click on images below for larger view.
Position: Long SIRI
It is my belief that the markets will look beyond this 3rd Qtr release toward the next 4th Qtr release due in February, as much of the impact from significant new developments such as the Apple relationship, SkyDock, etc., will not begin contributing to revenue until the holiday season of the next few months. For this reason – while 3rd Qtr. figures will certainly be closely scrutinized, I do not believe they will significantly alter the current trading patterns of SIRI – which are now dominantly strong and projecting further upside potential into 2010. As seen over the last few days – it is now all systems go” for Sirius XM Radio and SIRI. The Apple numbers were a “blowout” and the tremendous demand for iPhones and iPod Touch devices clearly benefits Sirius by greatly expanding the potential for SkyDock to work “hand in hand” with this new market going forward. We are now seeing better marketing geared to the holiday season (online and print ads) and expanded relationships within the auto industry, as well (pre-owned autos, etc.). The potential for Sirius, given the need to replace and upgrade the ageing U.S. auto fleet in coming years, coupled with the potential from new wireless and internet devices (worldwide) – is expanding significantly and the company now appears to be on the threshold of really capitalizing on all this into the future. From this perspective – the 3rd Qtr. release is important but far from the end of the game – this is really the early stages of a resurgent company.
Very interesting article Brandon–One question as im a novice here–Didnt i see when they retired that debt to Liberty(and refi that with new lower paying/longer period debt) that they mentioned in their press release that this was done at no cost(penalty) Or did this repayment come from cash as i thought it was just a wash with the new debt that replaced it??
It was a 250m discount loan, which means all fees, interest and taxes were deducted from the loan in advance. In this case Sirius only received 123 million. They wrote down the other 122 million last quarter.
They repaid Liberty 250m….the whole thing, and will now have to account for the 122 million dollar discrepancy on their books. My understanding is that it is solely an accounting mechanism (in which I am less than novice), but never the less, will affect the bottom line.
Credit should go to homer985, who alerted me to this (in his usual subtle manner) several weeks ago.
I don’t care about eps and neither does anybody on the street. Talk EBITDA. There is not one Wall Street firm that has ever valued any media company on eps mulitiples in over 20 years.
You guys are living on another planet that you created for yourselves.
Brandon
what about the new $2 fee that SIRIUS started charging for royalties in the 3rd Q ?
If SIRIUS was covering that fee prior to the 3rd Q this could add up to an extra $100 million in profits couldn’t it ?
So what is the advantage off paying early if everything was deducted? Something is not clear here.
Randy..I allowed for about 20 million in revenue increase for sirius and xm each…as I said, I was being conservative.
Petro…The advantage is lower interest expenses in future quarters
But interest expenses were deducted?
i would love to see on the CC some guidance, future plan talk etc. You would think that they would really spell out some marketing, initiatives in order to garner interest(and hopefully move the PPS as wall street always looking 6 months in advance)
Thanks for the explanation Brandon.. I enjoy learning info on this site(and really cant handle some others anymore)
Oh how I wish I had alot of dry powder to load up even more here.
Anyone who is waiting to buy, don’t wait – we are heading to .93 cents.
HAS ANYONE SEEN THE OPTIONS ACTIVITY IN THE LAST 2 DAYS? IS THIS NOT EMBLEMATIC OF A MOVE SHARPLY HIGHER? CHECK OUT JAN. ‘10 $2.50S AND $5.00 CALLS. CAN SOMEONE WITH REAL OPTIONS EXPERIENCE IDENTIFY WHAT THIS PORTENDS FOR THE UNDERLYING STOCK PRICE? ARE WE NOT ON THE PRECIPICE OF AN EXPLOSIVE MOVE UPWARD? VERY LONG SIRI!
Brandon, How did you factor in the increased sales of Certified Pre Owned cars that have a very low SAC? Shouldn’t this be enough to offset the increase in OEM SAC? These programs were rolled out in the Q3 and were generally given incentives to encourage sales. Couldn’t this be significant? Also, how did you estimate the increase in revenue from the $2.99 for Premium Internet Service for the iPhone app, or the Royalty Fees, or even the first full Q increase of the Family Plan subs at $2.00…that will also have an impact in offsetting the SAC number. All of these initiatives should have a significant positive impact on the EPS for Q3? Anyway, as you say, you were being conservative…I think we all will be pleasantly surprised, but I like to look at the glass as being half full…
See Disclaimer: “Conservative”
Great Article – There are a lot of variables that will flow into the equation and they are all “Positive” I think the Certified Pre Owned vehicle stats will be some icing on the cake.
Will the recent arrest of the hedge fund chief, associates and insiders have an effect? The SP has looked good the past two days.
You all should look to what Liberty Media is going to do for Sirius, SIRI stock is going to sore in years to come. Liberty media who owns Direct TV and now a big player in SIRI radio has just put in a big bid to save overseas Satellite radio WORLDSPACE, yu ca find the info here:
https://www.fis.dowjones.com/WebBlogs.aspx?aid=DJFDBR0020091019e5aj000b5&ProductIDFromApplication=&r=wsjblog&s=djfdbr
this is not the half of what sirius radio is in for. Could you imagine the new reasons to buy SIRI? If Liberty is planing a big move which i believe they are, They most likely will make their company worldwide. Imagine this for a second, indian, italian, spanish, french.. ect talk shows and music now available on SIRI? the amount of subscribers in America would grow by x3 at the least, Combine this with Direct TV offering a package of their instillation for their network with SIRI, you now could have howard stern back on TV, Mad Dog Russo, Opie and Anthony. Oprah could do her talkshow on TV, ect. ect….
Over see’s you now can have SIRI in your hotel room or in your rented car, or in bars all over the world so you can listen to any language, any music?
In the future… wait and see a DIrect TV comes out with it’s own Satellite Navigation system with Video and SIRI radio. I mean it’s going to dominate and can become a hudge monopoly world wide in Satellite coverage.
Now let me calm down a second and say this is all wishful thinking…. but i’m a guy who is only a middle class dude hoping for the best… and if i can dream this stuff up.. it’s not out of this realm to believe anyone in Liberty is not smart enough to actually know this is the route they could follow too.
Will someone please answer Harvey’s question. I too am very interested in finding out about the options activity… THANK YOU!
Great artical Brandon!
Going forward Sirius will be turning head very soon IMHO!
@SatMan
This is just throwing some crumbs to the masses to make us feel there is real enforcement.
GS deep pockets own everybody from both parties and folks in charge of regulatory agencies…just look at their resumes…nothing changes. Folks need to look at history. Remember the “Robber Barrons” from the late 19th through the early 20th centuries. What continues to go on now makes those folks look like paupers…IMHO
Brandon,
Shouldn’t you use the fully loaded churn for your subscriber estimate? It’s closer to 2.7% and applies to all the promotional subs and parking lot subs.
@sxminvestor
we’re already bought, man; have been for months and years;
still waiting for the ship to come in. cheers
Brandon while I feel this 3rd quarter will be better then other 3rd quarters, you have to remember that 3rd quarter has always been a terrible quarter for the metrics, like SAC, EBITDA, FCF, and EPS. The simple reason is they always pay forward for the radios and chipsets for the 4th quarter. That is why the 4th quarter is always a great quarter for all the metrics and the 3rd quarter sucks in general. Now add that to the fact that if what you say is correct and they plan to take all those cost as a one time charge then it will not boad well for the 3rd quarter as far as the metrics go. the real news will come in the 4th quarter which as usual makes up for the 3rd quarter in spades.
@Mootie
This options activity happens around many stocks heading into earnings. If you’re on the selling side of the options you have the potential to make much more.
Just think. Someone is selling/writing all those calls. Who wouldn’t with a beaten down stock heading into earnings with a slim chance of it hitting $1 before expiration.
@harvey
By the way… Many of the 2.5 and 5 options are a little deceiving because they are leftover XM calls. I’m talking about the symbols that begin with a “K.” They are not really $2.50 and $5 – you must divide by 4.6, the number of SIRI shares givin for each XMSR share at the time of the merger. So – the $2.50’s are really .54 options and the $5 are really $1.08. Conversely, when you see that the Jan $5 call is trading at .30, you also need to divide that premium by 4.6 to understand the implied value – .065
I sold my entire stake in SIRI yesterday at .63 cents a share. I paid between .12 and .21 cents a share when I bought last year around October 2008. I still think SIRI is a great long term play, and think they will recover down the line or get taken over. But I think we killed after the third quarter earnings., and I will be able to buy on a dip again.
sorry about that I just mean the storm isn’t over.
Wish I understood this one time 122 million dollar charge better…guess I’m just an idiot; but I will be very interested in seeing how this is treated on the income and balance statements for Q3? Seems to me if the entire discount was treated as prepaid expense and now needs to be adjusted out then we should have benefited in Q2 to the tune of 122 million on the asset side…didn’t see that, but maybe missed it? Is there an accountant here that can provide exact details on this transaction? Also, thought there was no prepayment penalties?
@A Wynter
Wynter,
The 122 million discount was booked as a contra-liability so you would not see it as an asset on the balance sheet….If you look at the Q2 09 10-Q, the auditors/SIRI provided a schedule of debts outstanding in the footnotes. Directly under the 250 million LM loan line item there is a separate line that reduces the loan by the 122 million discount.
To answer your question, SIRI did get a “benefit” on the balance sheet in the 2nd qtr, but its not explicitly stated on the face of the financials.
For Q3, since SIRI paid off the loan, they must write-off the discount. The write-off would cause a loss to be recorded on the Q3 income statement. The write-off will not affect any of the Q3 cash flows, however.
Let me know if you have any follow up questions and I will happy to help you out.
@petrovich
As much as your comment seems insignificant….. It Is the most important part of why charges are going to be taken now as a debt prepayment charge, not a penalty…. It is the essence of what this is all about when talking about “Other Expense”…. Prepaid Interest is amortized over the course of the loan…. as principal amounts are still paid in full…. If you refinance the debt at a lower interest rate… the new interest is lower over time, but the accelerated interest and fee “Discount” now has to be accounted for… An example would be a discount of 48K on a 100K loan for 12Months would be amortized (simply) as 48K divided by 12, or 4K per month and ACCOUNTED for as 12K per Quarter. When this loan is paid early, the discount still has to be accounted for, and the principal repaid…. Example after 3 months, 48K is now 36K in discount, to be accelerated and accounted for in the next reporting period. If done through a refinance, then the principal is paid by the new loan, at a better rate, decreasing going forward interest rates into a term usually extended beyond the original loan. If the period (term) is the same, there is no reason to accelerate the payment… as you asked… “Why Would They Do It”…. Interest rate alone is not a sufficient enough motive, if the Term (duration) is not extended…..
disclosure: I am not an accountant but, I did sleep in a Holiday Inn last night…..
@Steiny
Thank you Steiny for that detailed explanation.
@cos1000
Thank you Cos also, for that detailed explanation.
@john
Hey John…… I knew that this quarter would entice you to post up…. glad to read your thoughts… Your historical perspective is an important consideration as you say…. Many costs are going to, as always, be thrown into the Q3 to generate new sales for the upcoming Q4. The interesting point that I feel is different this year than those of the past, is the accelerated OEM sales from the Gov’s C4C, that have helped clear inventory, and whose costs were paid for by non performing past Q1 and Q2. This is an interesting variable that along with the Certified Pre Owned market, with little hardware costs and a “questionable” rev share to the original OEM, based on GM and Chryslers BK, could boost revenue in this quarter over the past history’s experience.
Also with retail being very flat and new product generation in Q3, being more limited in volume and choice, even with the skydoc rollout, I don’t see a big hit to SAC as sum do… I do see more of these new Product costs rolling to Q4, as the skydoc get a lazy rollout along with the other new radios for retail…. Q3 to me might have a surprise that no one is expecting due again, to increase revenues from all of the pesky fees, multi sub, and primium internet increases…. Should be interesting as always with Sirius Xm…
Oh…. Brandon by the way….. thanks for putting it out there as always…. No One Else is… it creates a great forum for debate, based on definite possibilities…. We can all argue the numbers, but you were the one that put them forth ….. Great Job……
@Steiny
That helps Steiny…thanks!
Anyone with an interest in SIRI who is not reading Satwaves on a daily basis is nuts!
Can we break out up a little this week to .70 ?
I thought analysts estimates usually dont take into consideration one time charges….arent they usually announced as EPS EX -ITEMS? So wouldnt their -.02 cents consensus be before any charges?
I don’t see any speculation here about the possibility of gaining subs through the Sirius/Xm internet feed.
With the releases of the first Sirius/Xm I-Phone app. Sirius/Xm could have generated alot of new subs internationally through the internet sattelite radio stream.
cos1000, Same here buddy.
Those cost were seen in the great metrics (SAC, EBITDA, FCF) of the 1st and 2nd quarter. The fact is, as they ramped up sales in OEMs it will decrease the metrics as far as SAC, EBITDA, FCF, and EPS. It is as always the “catch 22″ of the business. The unfortanate part about the business is that SIRIXM pays forward for the growth. That is why Mel believes as time gos on and the more subscribers they get, the bottom line will grow greatly compared to years prior. The reason is simple the present subscribers are paying for all the new ones coming on line that is why it is always important to retain them for longer periods.
Now you said yourself that the inventories were drawn down well as we know those inventories well have to be replaced and we know with the reports from the OEMs that that is what they are doing, that will cost SIRIXM in chipsets/subsidies and so not only do they have to account for that but the normal new ramp up of the new years models coming out which happens in the 3rd quarter.
Next while I believe all the new fees will bring the ARPU up and also go directly to the bottom line, but also that it will take much of those fees much longer then most may think to be fully implemented. There will be a somewhat direct effect to the ARPU/bottom line from new subscribers but that many of the older subs will not be paying that for at least a quarter or 3 or 4. People sould be able to realize and I wrote about this in Seeking Alpha a while back that all this is like what the cable and satellite tv companies did. they give you an increase and then give you a discount to off set that increase for a period of time then after a few months to a year they more slowly phase them in there by getting the increase and still keeping the sub. For those that dont think it works, think again I will bet it has happen to each and every one of you that has called to dispute a increase in your bill on any subscription service. In the end most of you stay for much longer with the increase then you would have have before. Those gift cards they are now offering are a perfect example to what I talked about. For those that were not invested in satellite radio for that long or dont remember, it was about a year or two ago that they had given substantial rebates which effected the ARPU and SAC to the negitive, it was the main reason both gave in their CC for the bad numbers.
P.S. For those that are expecting a great EBITDA, SAC and FCF number better be ready for a not so good number, I believe it will at least be worse then the 1st and 2nd quarter numbers. Thats ok though because as usual that is why the 4th quarter is always spectacular and will more then make up for the 3rd quarter. Remember back in 2007 SIRI had a 4th quarter FCF number that made them FCF positive for the last half of the year even though the 3rd quarter was a negitive.
@winagain35
I UNDERSTAND BUT IM TALKING ABOUT THE “QXO” JAN OPTIONS. IVE BEEN THRU THIS OLD OPTIONS DEAL PRE MERGER AND IM NOT TALKING ABOUT THOSE! IM ASKING ABOUT REAL RELEVANCE AND IS THERE A CHANCE OF THE STOCK PRICE APPROACHING $2.5 +. SOMEBODY IS BETTING ON IT, RIGHT? CAN SOMEONE GIVE ME MORE CLARITY? RAD WENT FROM .25 TO 2. IN ABOUT 3 MOS.
I know that Sirius has lost a ton of money over the years. But if the company is heading toward s cash flow positive position, why hasnt any considered a stock buyback, instead of a reverse split. AT these depressed price levels, the company should be taking as much stock off the street as possible, and retire those shares.
Please, give me a break. What, are you his cousin or something? It ain’t all that. Mediocre at best.
You have my permission!
@jmssvnnhdsprs
Another non event.
Thanks, Brandon. Good work.
I’ve got a lot of faith in the product and Sirius XM’s relationship with Apple. I’ve got faith post-meger in the company’s ability to make it as the economy slowly recovers from this historical correction. What I’m very concerned with is Sirius XM’s lack of regular effort to connect to the market (investors and a sense of direction investors are constantly searching for – a CEO’s comment or a press release from the company can counter so much of the ridiculous propaganda from articles by TheStreet.com, etc.) and to the American consumer (Please take Apple’s lead and invest in suppoting your technology and phenomenal products through more advertising.) They just don’t do it. It’s disappointing. NOTHING regarding the SkyDock release!!! Not a single release of excitement or encouragement regarding what it might represent in the future…The stock hit .05!!! Does this company have the luxury of such a passive marketing strategy??? Let’s get up to speed PLEASE…
@MUSCLE13
Nobody cares about EBITDA either, or any accounting distortions for that matter. If you want to find an intrinsic value for this company you need to back out the accounting distortions get yourself to NOPAT (net operating profit after tax) and discount back to free cash flow AFTER taking into account the investments that the company is making in capital projects. This is the blind leading the blind here. You’re all price takers.