Investor News

Conspiracy theorists will love this article. There are many who feel that Sirius XM Radio stock is heavily manipulated. In many ways, it is hard to argue against that stance. However, like many things in life, it is hard to find the smoking gun, and thus the debates begin.

Sirius XM Radio has a $100,000,000 credit facility with Loral Space systems. The credit was established for payments to Space Systems Loral on Sirius XM’s FM-5 and FM-6 satellites. Okay, conventional thinking states that the line of credit can not be drawn on to pay down the February debt. While this is true, there are provisions for Sirius XM to draw against payments already made. Simply stated, they could take back every nickel they have paid into the satellites back and use it as working capital. Further, they could continue to draw on the facility to keep the satellite construction rolling along.

THE CATCH

Sirius XM needs to decide on whether or not to use the credit facility by December 19, 2008 (The day after the annual shareholder meeting)… BUT… Sirius XM also needs to have a market cap of at least $1,000,000,000 to borrow.

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I’m beginning to wonder if my vacation was a good thing or bad. Having taken a sabbatical from all things Sirius, I feel like I’ve come back to absolute confusion among our readers and colleagues. Everything I’ve read regarding the recent conference call led me to believe it was another awful show on the part of Sirius XM management. I relunctantly decided to listen for myself.

I have to say that I was pleasantly surprised and I do not understand the negativity surrounding the call! I have followed Sirius for many, many years now, and unlike a lot of people, I have made a lot of money with the stock. None recently of course, but I’m well in the black none the less.

This conference call was by far one of the best in years, possibly the best I’ve heard under Mel. Special consideration should be given to David Frear. For years, I, like most of you, listened to Mr. Frear lay out the numbers on a quarterly basis in a monotone, matter of fact  manner that lacked any humility whatsoever.

Think back and you may recall waiting as I did for Mel to read his prepared statement and wishing David would stop talking. David was much more interesting this time around. This call was different. David was much more confident in his tone. He was also much more open to visibility, and offered to work with analysts on their models. This has never happened before. It would seem the street has finally beaten Sirius XM into submission. That is good for investors, and is what Wall Street has been asking for since the inception of satellite radio…CLARITY!

Mel Karmazin also did an outstanding job and clearly demonstrated to me that his intent is to bring Sirius XM to its goal of acheiving cash flow breakeven in 2009. His willingness to answer questions relating to the 2009 debt refinancing indicates to me that he is fully aware that the current stock price is absolutely dependant on Sirius XM concluding its refinancing needs prior to February.

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The conference call of Sirius XM Radio is behind us, and analysts are beginning to weigh in with their respective thoughts on the first quarter as a merged satellite radio entity. Among those issuing reports today were Merrill Lynch, Goldman Sachs, Miller Tabak, and JP Morgan.

MERRILL LYNCH

Merrill analyst Jessica Reif Cohen noted that subscriber numbers were light, but that the subscriber issue was mitigated by cost reductions. On the subscriber front, Sirius XM’s gross sub number came in 130,000 short of Merrill estimates. Cohen said that the weaker number was not really a surprise given that the company had already guided down, and that OEM sales have been weak.

The analyst noted that self-pay churn was in line with Merill estimates, as was ARPU which came in at $10.47. On the positive side, Cohen noted that the EBITDA loss of $37mn (includes $27.5mn one-time programming), was $49mn better than MLe $86mn loss. Cohen attributes this to a demonstration by Sirius XM Radio that synergy benefits are real. Cohen stated, “Mel Karmazin, CEO of SIRI, has a history of successful merger integrations, and 3Q08 SIRI results provided some tangible evidence of synergy realization at SIRI.”

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At the conclusion of the conference call today regarding the third quarter, Sirius XM CEO Mel Karmazin made a crystal clear statement relating to the issue of a Reverse Split. Karmazin stated that the reverse split, if needed, is “to satisfy listing requirements of NASDAQ”.

Thus, should the company get the share price above $1.00 in a manner timely with the NASDAQ requirements, there will be no need to conduct a reverse split. Karmazin requested that shareholders support the measure in the proxy.

Additionally Karmazin noted that the additional authorized shares requested is to provide the company a cushion if needed. Mr. Karmazin has made it a point to avoid dilution as much as possible in the past. His statement at the end of the call seemed to indicate that the company is seeking a cushion, and he encouraged investors to support this measure as well.

There were two reports issued by analysts today in response to the guidance issued by Sirius XM radio. Analyst Kit spring of Stifel noted that Sirius XM Radio’s guidance exceeds the Stifel model. This could be substantial in that there is at least some indication that sirius XM is being conservative in their numbers.

Spring notes that a stable churn is important, and if the company can maintain stability in churn, even in tough economic times, that it may help give some validity to the business model. Stifel’s spring is maintaining his BUY rating on Sirius XM with a price target of $1.25.

The second anlayst that issued a report today was Mark Wienkes of Goldman Sachs. Wienkes has been highly critical of Sirius X<. and in this report, little has changed.

Wienkes noted that SIRI now estimates 2008 year end subscribers at 19.1 mn versus 19.5 mn previously and that he feels that number is sharply below the Goldman estimat of 19.6 19.6. Wienkes also notes that Sirius XM ended Q2 with 18.6 mn subs, and thus, the new guidance implies only about 500,000 net adds in all of 2H08 vs. 900,000 as previously forecast, and about one-quarter of the 1.95 mn added in 2H07. Wienkes gives no indication as to whether he thinks Sirius XM is being conservative or aggressive in their guidance.

Rather than issue a new price target, Wienkes noted that the Goldman Sachs estimates and price target are under review.

The report stated, “The lowered subscriber outlook reflects both the weak auto market and a higher saturation of natural demand for the product, in our view. We see more signs signaling further caution is prudent for any investor in satellite radio. Specifically, (1) Sirius’ lowered outlook; (2) a pending change in retail distribution partners (yesterday Directed Electronics announced the cessation of its Satellite Radio distribution deal as of 1/2009); (3) Time Warner Cable noted it was seeing a pull back in its premium service offerings; and (4) higher churn at DirecTV”

Position - Long SIRI

As anticipated here on SiriusBuzz Sirius XM radio came out with a press release today on the Q3 reporting. The company will issue their quarterly report Monday, November 10, 2008, and will host a conference call the same day at 4:30 PM.

Perhaps more important than the guidance provided by Sirius XM Radio is the reason that the guidance was issued. The company states, “The company is in discussions with several financial institutions regarding a financing to replace its 2-1/2% Convertible Notes due 2009. In connection with these discussions, the company is releasing the material elements of its five-year operational and financial forecast.”

Refinancing of the debt has been a huge weight on the stock ever since the financial market collapse two months ago, and any news that a successful refinancing is happening could serve as a boost to the price per share.

Among the news was the release of guidance for the next five years.

In the past Mel Karmazin has always maintained conservative guidance. Under Promise and Over Deliver has been the track record. Time will tell how aggressive or conservative this guidance is. There is little doubt that a weak OEM channel has had, and will have an impact on this company, as this is the method by which most subscribers are derived.

Position: Long SIRI

While Sirius XM radio has not yet made an announcement about when they will have their Q3 2008 conference call, we can tell from SEC regulations that we will see the information by Monday, November 10, 2008. It is for this reason that I believe that we will see an 8:00 AM conference call on Monday.

The big question in everyone’s mind is what this quarter will look like. Will synergies be noticeable at this point? Will there be a lot of One Time charges? Will guidance be given?

What the street is expecting is a loss of 9 cents on revenue of $587 million.

One thing is certain. There will be a lot of information to digest. How are various metrics going to be tallied? What impact will the merger related expenses have? What types of synergies are we beginning to see.

Often when a quarterly report is issued, there is a swift reaction in the equity. This is one case where a bit of patience may be prudent. When the report is issued, investors should consider the information very carefully. They should make an effort to understand the expenses, and whether they are operational or one time events. they should look at how various metrics are counted, and get a full understanding of where the company is heading.

In my opinion, a PR about the Q3 call will be issued on 11-6 or 11-7.

Position - Long SIRI

It was announced today that Directed Electronic and Sirius XM Radio are parting ways. Directed Electronics has been the main distribution arm for Sirius Satellite Radio for a few years, and enjoyed the retail boom with Howard Stern’s arrival to Sirius, as well as the retail slumps of the past year and a half. The new distribution partner will be New Age. While official confirmation of New Age has not yet been released, we have reason to believe that the company is New Age Electronics, a company that specializes in retail and distribution.

According to the New Age website, the company describes their expertise as:

New Age began as distributor in 1988. Our customers continue to achieve aggressive sales targets and have pushed New Age to expand its service offerings. Today, we offer a complete solution encompassing logistics and product recovery programs.

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We have all seen the headlines for the auto industry over the past few days, and they have not been good. Car sales are dismal. The message is plain and simple to see.

• The Worst Auto Sales In 25 Years
• GM Sales Down 45% - Ford Down 30% - Toyota Down 25%

However, we here at Siriusbuzz, and our readers demand information that goes a bit deeper. With that in mind, lets look back 25 years, the date by which current auto sales were compared. The year was 1983. February of 1983 was the bottom for auto sales. The industry was in a dire situation, and things were very bad. In early 1983, the discussion and headlines about car sales were all doom and gloom.

So how is there good news on the horizon? Well, fast forward to January 1984, and you will find an interesting New York Times headline that points to a banner year in the auto industry.

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Merrill Lynch analyst Jessica Reif Cohen issued a critical report on Sirius XM Radio today. The media analyst notes that the auto sales for 2008, and even 2009 appear to be troubling for satellite radio as the OEM channel has been an integral part of the growth of satellite radio.

Cohen has lowered her projections on subscribers, noting, ” 1) September’s broad decline in US retail (lowest in 3 years); 2) soft electronics sales with Best Buy posting -2% September comp; 3) ML lowered US auto forecast for ‘08/’09 to 13.8mn/12.5mn vs. current SIRI guidance of 14mn; and 4) credit crisis has made SIRI ’09 refinancing prohibitive.”

The analyst lowered net adds by 47k to 409k, which represents a down 51% year over year comparison. She has also adjusted ARPU to $10.47 from $10.53, and has trimmed revenue by $7mn to $611mn (+15.4% Y/Y).

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