Sirius XM: Important Points In The Q1 Report You May Have Missed

Apr.29.14 | About: Sirius XM (SIRI)


Sirius XM reported EPS of $0.02 for Q1 2013.

Earnings were reduced due to one time issues.

Share repurchases of 39,500,000 were made in March at $3.26 per share.

This article is borne from a tip sent to me on Friday from a reader who prefers not to be mentioned. Credit is due to them for pointing these things out.

Sometimes things are easily missed when a company issues its quarterly report and carefully structured conference call. The 10-Q may contain issues that many investors who simply listen to the call or read the ensuing headlines, may not pick up on. I believe Sirius XM's (NASDAQ:SIRI) most recent Q1 report contains a few issues that investors should be aware of.

Q1 earnings were reported at an EPS of $0.02 with a slight revenue beat but a reduction in net income over the same quarter in 2013. Nothing to write home about, right? Everything was generally in line, right?

Not so fast. Certain unique issues in the first three months of the year may have contributed to a stifling of income, and results may have been significantly better without these issues.

First issue

Investors are well aware of the offer (which is now off the table) proposed by Liberty Media (NASDAQ:LMCA) for an equity swap for the rest of Sirius XM's shares earlier in the year. Some expected the deal to go through in one form or another. I did not.

The deal did not go through.

Even so, there were costs involved on Sirius XM's side due to legal counsel on the deal. You can find the important information related to this in the most recent 10-Q on page 37.

For the three months ended March 31, 2014 and 2013, general and administrative expenses were $76,243 and $56,340 , respectively, an increase of 35% or $19,903 , and increased as a percentage of total revenue. The increase was primarily driven by personnel costs associated with our connected vehicle services business for the first quarter of 2014, legal fees and costs, particularly legal and investment banking expenses, related to the Liberty Media proposal.

$19.9 million is a significant amount of money when figuring EPS, and it's reasonable to assume that the lion's share of this cost was related to legal expenses surrounding the Liberty proposal. Moving forward we'll assume $13 million to keep things simple.

Second issue

Investors should also be aware of the forward contract Sirius XM had with Liberty Media to buy back a large number of shares. This was postponed to 4/25/2014 and has now been completed, but by the time of the Q1 report it had not been. The result of this is a loss, calculated based on the per share value of the derivative contract which was $3.66 per share.

Related information can be found on page 49 of the 10-Q:

On October 9, 2013 , we entered into an agreement with Liberty Media to repurchase $500 million of our common stock from Liberty Media. Pursuant to the agreement with Liberty Media, we repurchased $160 million of our common stock from Liberty Media in 2013 . On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240 million repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. On April 25, 2014, we repurchased $340 million of our shares of common stock from Liberty Media at a price of $3.66 per share.

And the reduction to net income can be found in a line item on page 1. This is listed as a loss on change in value of derivatives and is listed at $27,023,000.

Combined these two unique issues provide for a reduction in net income of approximately $40 million, which is certainly enough to make it look like Sirius XM is having a bit of trouble from Q1 of 2013 to Q1 of 2014.

It isn't. These one time issues are now gone as the proposed deal has been taken off the table, and the share repurchases from Liberty Media are now complete.

Speaking of share repurchases, did you miss it?

The final issue I wanted to note from the 10-Q is listed on page 49

You will notice that Sirius XM did indeed resume its buyback program in March, repurchasing 39,500,000 shares at an average price of $3.26, leaving $2.1 billion remaining under the announced plans. We can assume the buybacks resumed after Liberty Media pulled the offer from the table in mid March, and the quantity of shares repurchased indicates a pace of 80 million shares or more to be repurchased per month at current prices.

It's reasonable to assume that Sirius XM continues to buy back shares at current pricing in April, and may even be buying back at a faster rate due to share pricing hovering around $3. That's a good thing for investors, as this is your company and thus your money, and you want your return of capital repurchasing shares at lower pricing for greater future gains.

Moving forward

Moving forward three months from now to the Q2 report, I expect that it may be received well, assuming the company keeps up its performance. With the share buyback back in place along with a significant number of shares purchased from Liberty Media, and the absence of the one time issues discussed above, the report may generate much better headlines based on perception of improvement. That's something to look forward to in a short 3 months.

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.

Additional disclosure: I am long SIRI January 2015 call options long at $2.50 for the majority of my position, as well as smaller positions in $3 and $3.50 calls.