Investor News

Sirius XM made a giant stride with their balance sheet today by calling in $500 million of the 9 5/8% notes due 2013. The move is coupled with a new $550 million issue of Senior Notes due 2015. The new notes do not yet have a published interest rate, but it is assumed that it will be better than the current rate given market conditions and the strength of the company. About 25% of the debt that was due in 2013 is now pushed off to 2015, and thus, the balance sheet improves.

This move does not take out all 2013 debt. Also due in 2013 are the $778MM Senior Notes at 13%. This merger associated debt has covenants that do not allow them to be prepaid. Thus the company refinanced the debt that they could. 2013 will still carry about $1.3 billion in debt.

The new issue will carry minimal impact on the Q1 financials. In order to extinguish the 9 5/8% notes, the company must pay a premium. Most of the costs associated with the refinancing will be a non-cash charge. The big news here is that the debt load of Sirius XM is far more manageable now than it was previously.

All in all, this is the type of move made possible by the company showing strength. The new notes are fiscally responsible and a positive for investors.

Position – Long Sirius XM

Investors in satellite radio are well aware of the importance of new car sales to the growth of the subscriber base. With weak auto sales reported for February 2010, some may think the outlook for satellite radio is dimming. The fact of the matter is that the company is maintaining or above the pace of last year, and still in line with their guidance.

The reason less worry is warranted is because the company is now being installed in 60% of all new cars manufactured. Last year at this time the penetration rate was barely over 50%. On top of this, Sirius XM is being smarter about which cars it is being installed in. In the midst of the gain in penetration, Sirius XM has improved the take rate. The number of customers electing to become self paying subscribers is growing.

Yes, Sirius XM could use the boost provided by much higher car sales, but the key take-away for the short term is that they based guidance on annualized auto sales of 10,000,000 units and currently the auto sector is on or above that pace. It is the auto sector that will deliver the 500,000 net subscriber gain Sirius XM guided to in their last call.

Sirius XM Radio is only two market closes above $1.00 away from gaining NASDAQ compliance to remain listed on the exchange. After a tough Friday, the company closed above the one dollar threshold to bring the above $1.00 streak to 8 consecutive closes. For most people, Friday was the hurdle that would prove most difficult, but instead, it looks like today is the toughest day yet.

The company has been trading below $1.00 for most of the day. Volume is high, and shares seem to be trading at a record pace. With the company’s reliance on car sales, the weak numbers anticipated for new car sales in February are not helping matters.

Sirius XM has until March 15th to trade above $1.00 for ten consecutive days. The rule is based on the bid at close, and the company has successfully remained above the target price for 8 days. If the company were to close above the $1.00 level today and tomorrow, they will have gained compliance and averted the cloud of a reverse stock split.

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Sirius XM Radio conducted their Q4 2009 conference call prior to market opening, and all things considered the company demonstrated a stability that has not been shown before. The company reported a small per share gain, but there was not quite enough to report a penny to the positive. Despite this, the company beat wall street expectations, which in some cases were calling for the company to report a small loss.

The company is in a stronger position than ever. That is great news, but for those looking for a big spike, it did not come to fruition. The reason is that Sirius XM pre-announced many numbers in January, and a good quarterly report was virtually baked into the current stock price levels. While some investors may be frustrated by this, it is perhaps a blessing in disguise. What Sirius XM needs is stability. The whiplash effect that this company often goes through frustrates investors, and adds fuel to the speculation fire.

Sirius XM demonstrated cost controls, the ability to leverage and that they will generate free cash flow. The big news of the call was in guidance offered by the company. They anticipate adding 500,000 subscribers in 2010, but more importantly are expecting cash from operations to be up to $550 million.

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If you follow Sirius XM, you are likely well aware that the company pre-announced some Q4 metrics back in January. They announced the addition of about 247,000 subscribers, a churn rate of 1.97%, an OEM take rate of 46.4%, and the fact that they anticipate that the end of 2009 will have seen the company over $100 million in free cash flow. These are all positive numbers, and this news is already baked into the stock.

What investors need to begin to focus on is some of the numbers that were not pre-announced so that any surprise factors are mitigated. Even if all of the surprise is taken out for you the reader, it is the attitude of the street that will carry the day. The company has been doing a good job at giving the street direction to focus, so in my opinion, the numbers will not carry any bombshells and the opinion of the quarter by the street will be neutral to positive. There will of course be detractors, but that is to be expected. Some things to watch for include:

Average Revenue Per User – ARPU

Average Revenue Per user, or ARPU will be an important metric to understand and watch. ARPU represents the average of how much money the company collects from the subscriber base. This number is expected to grow because the company is now collecting royalty fees, and has added services such as “Best Of” which command more dollars from subscribers. The wild card here is that the royalty fee increase is staggered because it does not come into effect for a subscriber until their current plan expires. Thus, the company has a bit of wiggle room to work with on marketing efforts, and will have this wiggle room until the Royalty rate issue is more fully absorbed as a cross section of the subscriber base. In layman’s terms, the company can conduct retention efforts that include some free or discounted service, because the amount that APRU is expected to go up can not really be quantified by analysts. If absent such efforts ARPU would have been $12.00, but because of such efforts it come in at $11.75, no one would really be the wiser. The key here is that some growth is expected, and the company needs to show that the ARPU line is growing. Basically, there is a balancing act between keeping all of the metrics in a range that meets or exceeds expectations.

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With Sirius XM still trading above $1.00, the threat of a reverse split begins to diminish. The company must trade above $1.00 for ten consecutive trading days to regain compliance with NASDAQ listing requirements. Three days are already in the books, and the fourth seems a near certainty with the trading day half over.

Speculation surrounding the potential reverse split has been wild over the past couple of months. From those dreading the possibility to those that want to get the pain over with like pulling off a band-aid, there has been no shortage of opinions on the matter. Right, wrong, or indifferent, most of those opinions are water under the bridge at this point and now everyone is focused on getting the six remaining trading days needed to regain compliance.

Let’s assume for a moment that they do indeed remain over $1.00 and regain compliance. Personally, given the trading action, I believe this is a real possibility. Will that remove the potential for a reverse split? There is a scenario where a reverse split is still possible, but this scenario does not involve the company being forced into the action.

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On Wednesday, February 17th, Sirius XM eclipsed the $1.00 price barrier for the first time in well over a year. The event is meaningful in that the company was on a collision course with a forced reverse split in order to stay listed on the NASDAQ exchange. In order to get off of “Reverse Split Boulevard”, Sirius XM needs to stay above $1.00 for ten consecutive trading days. Thus, the stock needs to maintain current until the market closes on March 2nd.

As with anything that involves Sirius XM, things are not always that simple. In the middle of all of this, on February 25th, the company will announce earnings. The earnings call always brings about speculative trading, and this could prove to be a dangerous situation for the ten consecutive trading days. Thankfully there is enough time after the earnings announcement for Sirius XM to gain compliance prior to the March 15th deadline.

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Today Sirius XM announced that it ended the year with 18,772,758 total subscribers, adding 257,028 net subscribers in the fourth quarter of 2009.  Even more important then this being the second consecutive quarter of net subscriber additions, CEO Mel Karmazin notes that this is the first year in the companies history that they have generated a positive free cash flow for the entire year.

Karmazin attributes the recent upturn to what he says are “Improvements in automotive sales, conversion rates and better than anticipated self-pay churn suggest that the outlook for the auto sector and the effects of the economy on our business are beginning to improve.”

Another promising number is 2.2%, the increase in the conversion rate to a self-pay subscription from a trial included in the sale of a vehicle in Q4 2009 (46.4%) from Q4 2008 (44.2%). The fact that this percentage is still a little less then a coin toss is still troubling to me. I can’t imagine anyone listening to this service for a few months and not wanting to stick with it. If Sirius XM wants to improve moving forward, they need to get feedback from these non converting trials and figure out exactly what is holding them back.

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