Royalty Decision Sends Sirius XM Soaring

Dec.14.12 | About: Sirius XM (SIRI)

If you are invested in Sirius XM (NASDAQ:SIRI) you are well aware that the company pays out a hefty sum in royalties. You would also be aware that a few years ago the company was able to garner a reduced rate when in its most dire financial situation. That was then. This is now.

The issue of Sirius XM's royalties has been before the Copyright Royalty Board for some time and a long awaited decision was expected today. The atmosphere was tense, and whether investors realized it or not there was a lot hinged on that decision. In fact, the lack of clarity relating to royalties has likely been impacting the equity for a while now.

At stake is a substantial sum of money. Sound Exchange, the company Sirius XM pays royalties to, was seeking 2013 royalties to be set at 13% of revenue with an increase in years 2014 through 2017 up to 20%. Sirius XM was seeking about 6% of revenue with incremental increases from there. The difference between the two parties was vast and is a very real reason why we have not seen the company issue guidance for 2013 as yet. Currently Sirius XM was paying about 8%.

The decision by the Copyright Royalty Board was released today and the news sent the stock up above $3.00 per share in after hours trading. When the decision came down Sirius XM was trading at $2.69 and had been range bound for weeks.

While Sirius XM did not get its desired result, the decision was very positive for Sirius XM. The rates will start at 9% in 2013 and rise 1/2 a point each year though 2017. This means we have a cap at 11% of revenue and no real cloud surrounding royalties until 5 year from now. It also means that Sirius XM may not have to increase the fees it charges subscribers to listen to the service.

Clearly Sirius XM's argument relating to royalties carried some weight and the result was very favorable for the Sirius XM business model. With rates now set a large question mark in the possible financial performance of the company has been erased.

While the equity did trade as high as $3.10 in after hours, it did settle back down to about $2.91. Whether this move was compelling enough to hold up is yet to be seen, but with short interest at over 330 million shares it could prove to be a compelling factor as shorts got stung on this news. Bear in mind that a peak would be a possible point for active short traders to initiate a new position. Watch the equity closely on Monday. Even with this pop in share price the moving averages are very tight.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.