Five Positive Points on Sirius: Is the Street Listening?

With the economy being what it is, a feel-good economic story is hard to digest. It is a challenge faced by many companies, as they try to hold the line, maintain a positive outlook, and guide the street to be understanding of numbers that are better than should be expected, but not as good as years past.

Sirius XM (SIRI) CEO Mel Karmazin spoke with Reuters Wednesday, and much of what he outlined should be seen as a positive for the company. However, the street needs more than good intentions and words, and even when a company delivers on their guidance, as Sirius XM did in Q3, people still look at anything with a jaded eye.

Karmazin made several statements, which in normal economic conditions would be enough to get some traction in the equity. Wednesday, this news was simply absorbed with a shrug of the shoulders, and a show-me mentality.

POSITIVE POINT #1

Karmazin sees double digit revenue growth on a percentage basis in Q4. Wonderful news that seems to have fallen on deaf ears. In a time when other media companies are seeing double digit declines, Sirius XM Radio is still growing, yet no one seems to care that Sirius XM’s revenue is a polar opposite to all of the bad news out there. Perhaps it is too difficult to grasp that there are still companies that are in a growth trend at this point in time.

POSITIVE POINT #2

Karmazin is confident the company can refinance debt due in 2009. Perhaps this issue is the overshadow that simply refuses to go away. Karmazin has been expressing confidence with this subject for a while, and this issue is where a “show-me” attitude is likely warranted. That being said, I have always felt that the company will indeed be able to get the debt issue resolved. I would have hoped that it would have been done by now, but still, it should get done. For the equity to see improvement, an answer on the debt needs resolution.

POSITIVE POINT #3

Karmazin has no immediate plans to cut its subscription prices, even in the midst of the economic recession. At a time when prices are being slashed left and right, you would think news that they will be able to hold the line would be news that is well received. Instead, the street barely reacts. This is substantial news. This means that churn is stable. It means that new subscriber numbers are satisfying the business model. It means that revenue can continue to grow. Perhaps the lack of a profit from Sirius XM tempers this news a bit, but with the continued positive trend, shouldn’t the street give this a bit more weight?

POSITIVE POINT #4

“We did exactly what we wanted to do for Black Friday, which is not great news because we didn’t have high expectations,” Karmazin said, referring to the Friday after Thanksgiving, which kicks off the holiday shopping season.

While humble sales are not a positive point, the fact that the company was able to meet their expectations is stable. Had sales been shy of low expectations, the worry lines would rightfully appear. With the news being that holiday shoppers are being cautious, meeting your expectations is a small victory unto itself. On a side note, meeting those expectations did not come without an expense. Many retail radios came with free service for three months. Thus, you have a new subscriber, but no revenue just yet.

POSITIVE POINT #5

Perhaps the biggest bit of news from the Reuters Media Summit was Karmazin’s statement that Sirius XM Radio is not for sale. “We don’t feel that we need to be acquired,” he said. “You should assume the company is not for sale.”

With stock prices at low levels, one distinct worry many may have is that the company sells itself. Investors who believe in the long term outlook of the concept of satellite radio would potentially be looking at a situation where they would not participate in the success of the company in the years ahead. Of course, there is no guarantee that the company will be an overwhelming printing press of cash, given that it has at times been a printing press of shares. However, those that have maintained faith in the concept should be able to reap the reward should it come.

In the end, it boils down to what transpires over the next few months. Will Karmazin’s outlook be realized? Will the street finally be able to digest good news? Will satellite radio be successful in refinancing their debt? There are a few questions that seem to be keeping many hesitant.

[Reuters]

Position: Long Sirius XM

Comments

[Bill R.:]

My thought is that SIRIUS XM is a company with a very unique service, one that offers a comprehensive choice of unique, specific listening options to subscribers. Many big names have linked themselves with the company and have vested interests in it's success. Additionally, SIRI does not have any true competition in this arena and there are not any options currently with auto-makers in terms of offering alternate sources of satellite radio. Finally, SIRI has not stopped moving forward with adding programming and seeking new sources for expanding the scope of their channel offerings and this momentum is indicative of confidence in their future. In terms of negatives, a large amount of debt is coming due in the short-term and we have yet to see the consolidation gains promised due to the merger. But, it has not been long enough since the merger to see the gains and this will take another year or so to truly be reflected in their financials. For the debt, between seeking alternate sources of cash from lenders plus refinancing some of the existing debt with the holders should be viable options for a company in this position with sound projections for the future. Yes, the tightening credit markets are a huge concern as cash has dried up across the board, but that is not to say that deals can still be made where the cash does not all have to be paid when the intial terms are up. A quick example would be a no-interest, no payment financing account offer (i.e. Best Buy's credit) that must be paid off be paid off by MM/YY to avoid incurring interest charges. It would be ideal to pay this off before due but if the cash is not avialable the debt can be maintained with the cost of the debt being incurred by the debtor. This is not a perfect example in any way but one that comes to mind for what SIRI can do with their debt - incur the cost of extending the terms rather than worry about paying off $300 million in a couple fo months from now. It's a lot more complicated, I know, but conceptually this may be the best mindset for SIRI to have when seeking funding. A reverse-split and additional dilution would be devasating to shareholders, BK would be devasating to new subscriptions and utlimately survival and acquisition would be, well, who knows. In the end, I will be holding my shares of SIRI and expect to see it back to $3 a share without a RS by next March. Once Mel determines the course of refinancing the company will embark on, shares will recover with shareholders much more aware and observant of the company's financial status, which can only help with ensuring this type of situation - being up a creek without a paddle - cannot happen again. My two cents.

Bill R.

2008 Dec 06 02:38 AM

[Scot's Slant:]

Scot here. Shure 46, point well taken. Just as your numbers were not to be taken as "factual accuracy," and were more "opinion," I did the same. And in the same vein, I'll go back to earnings versus debt for SiriusXM.

As profit and loss statements show a balance sheet that APPEARS to be in the red, it's the it's the billion dollar debt load that throws the numbers out of whack. For the prospect of future lenders to restructure SiriusXM, underwriters will take a hard look at SiriusXM's ability to repay loans. It's like a homeloan: Mortgage bankers look at the future earnings of potential borrowers (well, at least they're supposed to based on this current housing crisis where underwriters did not do their job).

Anyways, here again is Scotty's Slant: With SiriusXM's healthy monthly revenue stream, and management team building a powerhouse of a business model, their current and future earnings potential should far outweigh the billion dollar debt issue....

And by the way, there is one more thing: My opinion might be just as constipated as that "Up the Tailpipe Again" person. I think he forgot to read the "tailpipe" instruction manual where it says: "Caution, to avoid serious intestional blockage, cut crimped end off tailpipe before inserting up rectal orifice....

Scot's Slant

2008 Dec 06 01:02 PM

[canis major:]

a year or so from now we will be looking back at this ridiculously wonderfull opportunity of a lifetime prices we have gotten to average down here. i cant wait to see the day when the smoke clears and the economy gets rolling again and our patience is rewarded 100 fold!!!
thanks for all the wonderful knowledge and insight guys, and may we all share a cyber bottle of champaign some day

2008 Dec 06 03:47 PM

[I'm Not Jim...:]

Bill R. 15 cents to $3 in four months in the middle of a recession would be something not even Spielberg or Lucas would propose to film. The shareholder that Mel cares about is Mel and the reverse is not going to be devastating to him. If the RS and DIL weren't going to happen, they never would have been proposed. Make your plans accordingly.

2008 Dec 06 11:52 PM

[shure46:]

Scots Slant - ....... True , if it weren't for the debt , the profit / loss would be in the black , not the red ............ The interest alone accounts for $20M a month ( maybe more ) ....... and if siri could cut costs / generate more revenue , to make up for that $20M a month , things would be right as rain ....... but the plan is to Rob Peter To Pay Paul in whatever form it takes ...... new debt to pay off old debt , or another public offering which will dilute current shareholders into oblivion ........ probably tanking the PPS as we know it now down to .05 - .10 in actual value ............ after that , modest earnings , because removing the debt only gets you back to earning and spending $200M per month ( break even , or possibly a small profit ) ........ Nothing that will pump the stock 100 fold ......... but right now break even looks good , but is it worth the massive dilution we will have to stomach ??????? ...... That's the question ........ and IMO , anyone now at a buck or so is going to be ok ....... might take some time , but a 30 -1 RS would be looking at a $30 PPS to break even ...... very feasible ........... but Siri has a tenuous future because technology could either be an asset or a possible liability in the future .......... Who knows what may pop up as a competitor in a few years ........ It's a race against time ........ HD terrestrial radio with some uncensored content channels could be a threat ......... but I have a sneaky feeling the goal is to have ALL TV and RADIO as a subscription PAY service ........ NOTHING is free nowdays ......... I am expecting a Toll Booth on my driveway one day !!!!!!!!!!!!!

2008 Dec 07 11:06 AM

[cos1000:]

INJC,

Just a question on your position at this point in time and I am being completely serious. Do you see any level of dilution or any need for a Reverse Split for this company in the future? Given its current realities and not its history.

2008 Dec 07 12:19 PM

[163888:]

dayworker, I told you exactly what Mel has said. Then told you what the posibilities of what he said were.


Now as for the RS, I dont even think they know right know what it may need to be, except for what they believe would be the maximum that they would need to do, if at all. What would you want them to do, ask for a 1 for 10 split, then have to come back and say sorry we were wrong the first time we now need a 1 for 40 split. That just is not what is going to happen. Lets not forget that they are asking for this possibility all the way out to Dec of next year. Dayworker, do you even know exactly how much you will spend on Chrismas next year? Are you getting it yet? The best you can do is estimate depending on the situation that you are in at that time.

Now I dont know how much clearer I can be. Mel said the delution would be done for on going cost like they have done for the last 4 years and maybe for if needed, refinancing of debt. That right now they just dont really have any shares avalible to do any of it. As for the when or how much the same gos for that as the RS they most likely dont know what kind of financing they can get. Now when I say that, I will give you a example, so you can understand: Mel may have all the financing he needs except it is at 20 something %, How good is that percentage rate? it sucks, right. I would rather it be taken out using delution, I am sure that Mel would say the same thing. Now lets say its not all at 20 % but some is at 7%, some is at 10%, some is at 14%, and some is at 20%. Then there is a good chance that there is a combination of deals, for instance he can get some at 7% but also needs to take some at 20% to get that deal. Then there is the different kinds and different dates which may have combinations in it. I think you get the point it maybe impossible to know exactly the amount that needs to be taken out using delution. I dont think it is any quintessence that the time frame they have given is the same time frame that the financing has to be done in. First debt issue is Feb. the last one is Dec. The meeting is Dec 18th and the time frame that is being asked for it to be eligible is Dec. What that does is it gives them every way they may need to take out the debt without being hamstrung into any specific way. For instance, Mel may have a deal right now that would take all the debt out but the interest rate is not great or even good it is barely exceptible, or he also has a deal that takes some of the 2009 debt out and is better and the best he can get in these times but if he takes it then the other deal is off the table and he then has to get the other debt done another way, in another deal. I think anyone who reads this can get the point. That there is alot going on, it involves alot of money and time (2 months to a year). things are not black and white, right and wrong. There are gray areas and if you think you are going to get specifics your nuts. If you are a exceptional CEO you would be planning for every possibility. That is exactly the kind of man Mel is. If you remember in that interview on MSNBC he said that " I have 2 or 3 plans for the plan that may fail or has not even been put into motion yet." So in the end Mel has given you everything you need to know which is what he may need for the worse case, to make sure he does not get stuck with the worst financing.

2008 Dec 07 03:42 PM

[163888:]

cos1000, are you going to tell me you dont remember the things Mel has said, I know you have seen them. You have made comments on every Seeking Alpha article were the information was, ether the main topic or was discussed (comments section) and given link to the information .

2008 Dec 07 03:53 PM

[163888:]

P.S. dayworker, you make it sound impossible for the stock to hit 50 it would be hard with 3 billion shares but Is not with 300 million. There have been many that have done it. DISH is a perfect example It went from 3 bucks to over 80 and did 3 splits ( the last split happened just after the down turn in the stock) in just over a year.

2008 Dec 07 04:01 PM

[cos1000:]

163888

When I said this:

I want to know where they said that as well....... but I don't hold 163888 accountable for the location of that information. As a matter of fact can I get that for every company that I invest in??? LOL

My point to dayworker in response to his post is that no one has ever given the kind of exact guidance and numbers that he was asking you for. That is just not done. That's why I said I wanted it for all companies that I invest in.... If you read his next post he got my sarcasm .......

2008 Dec 07 05:44 PM

[PS1EAI:]

Mel is the man who can get this job done. The Motley Morons will eventually recommend this stock.

2008 Dec 07 08:11 PM

[163888:]

cos1000 as you can see I must have read your post to fast. Sorry for the mistake.

2008 Dec 08 08:00 AM

[Bababooie:]

"Why can't we all just get along"
- - - - - - - - - - - - - - - - - - -Rodney King


LOL

2008 Dec 08 12:06 PM

[Bababooie:]

Shure46-
They wont need a tool booth .. Technology today could read a transponder in yout car and gather all the info it needs. NUmber of mlles above spped limit (Local Ca Ching), Number of City miles Driven(Local Ca Ching), Number of Hiway miles driven (Federal and State Double Ca Ching). Toll booths are to expensive. The Government will just make you bring in your vehicle under the guise of emissions testing.

It's been too long since we had a conspirency topic on these blogs.


LOL

2008 Dec 08 12:14 PM

[directcommu...:]

I agree a year from now we will look back, however Siri is a high gamble in my opinion.

2008 Dec 08 01:20 PM

[sl62:]

Saw a Radio Shack spot that featured SIRI over the weekend...share those costs...


gurgle gurgle blurp blurp...

Ah yes...resting comfortably on the bottom with the occasional air bubble glurping toward the surface...something's 'bout to break.

2008 Dec 08 05:23 PM

[mlongj:]

163888

Very insightful scenarios regarding the debt and how Mel may be taking it out. At least he is giving himself options, which is a sign he is working very diligently on the debt issue. When he pulls this off many will change their tune on his management abilities.

I do have a question for you on this. Is it possible that dilution and reverse split can be avoided even after they are approved at the Dec 18 meeting? I would be interested in your opinion on this.

Long Sirius

2008 Dec 08 06:02 PM

[163888:]

mlongj, For what it is worth, I do believe the RS could be avoided. So far Mel has mad it clear as to the reason for asking for it, which is not to be delisted. Now you can take Mel at his word or you can disbelieve him. I will believe him for now because he really has not given me any reasonable reason not to.

As for the delution I do think some is going to be done they have been doing it for some time, just by not that much. It is no secret that many contracts they have include shares as part of the pay package. Now as for the delution to refinance some or all the debt that is possible that they wont have to, I just would not bet on it. I believe there is at least some (maybe all) that will need to be done. I do think when the 4th quarter FCF comes in many will be surprised at how large it is. I am expecting that number to be at least 200 million, I also think that is being conservative. There is one good thing about the OEMs not delivering, it means that each one they dont, is one that SIRIXM does not have to pay a 100 dollar subsidy on. They also have been saving on advertising. Not to mention all the savings from the merger will start to show them selves alot more in the 4th quarter. Those will all add to the 4th quarter FCF and something I did not add in whern considering the 200 million number. I get that by estrapulating the 4th quarters FCF from the last 3 years and seeing the increase from year to year. For example 2005 they were both at about even FCF. In 2006 SIRI and XMSR both had just over 30 million and just under 30 million. in 2007 SIRI went from just over 30 million to just over 80 million. While XMSR had none they also had just paid off the last satellite (CAPEX) they had at a cost of about 85 mllion. (In the conference call, they gave that as the main reason for not have a good FCF number and said that would improve greatly because they will not have to deal with that cost for a long time.) Now while there was only about hhalf as many subscribers add from 2007 to 2008, that still means that if you just go by the sub number you cut the 2006 to 2007 jump in FCF positive in half, that is still over 25 million more for the SIRI side and just under 25 million for the XMSR side of business. Add that to the 82 million SIRI had in FCF you get 107 million. By the way, the rest of it has to do with how much cost cutting Mel did in 2008 compared to 2007, while up to the merger the difference was a little less for 2008 then it was for 2007. I think that all changed after the merger happened, and those cuts will be way more then 2007. This is just my opinion, you can take it or leave it. Because I actually believe SIRIXM is in the best position then they have ever been in. The financing is the only thing left to take care of and I think Mel will take care of it.

2008 Dec 09 07:07 AM

[mlongj:]

163888

Thanks for the professional post to my question. Facts are stubborn things, and you have outlined many facts which support a positive direction for Sirius going forward. I agree with your perspective and appreciate your in depth accounting of SiriusXM regarding the dilution and reverse split. It just may not be as bad as some are predicting. Thanks again!

Long Sirius

2008 Dec 09 05:51 PM

[mlongj:]

163888

Thanks for the professional post to my question. Facts are stubborn things, and you have outlined many facts which support a positive direction for Sirius going forward. I agree with your perspective and appreciate your in depth accounting of SiriusXM regarding the dilution and reverse split. It just may not be as bad as some are predicting. Thanks again!

Long Sirius

2008 Dec 09 05:51 PM