Worldspace had tried offering satellite radio services in India as well as other nations, but ran into financial troubles and ceased most all operations some time ago. Some have speculated that there could be future potential for a relationship between Worldspace and Sirius XM. Liberty seems to hold all of the cards at this point, so only time will tell what will become of Worldspace.

Thanks Muscle

Position – Long Sirius XM, No Position Liberty or Wordspace

Business Wire Story

After the close on Friday, Sirius XM announced that instead of $550 million, they would be closing the deal by borrowing $800 million. So what happens to the other $250 million? Their press release spells it out clearly. They are using that to pay down some 2012 debt. Typically, when companies put an offer out, the level of interest is gauged. It seems clear that there was substantial interest in this offering, and the company was able to raise far more than initially sought.

The debt load for Sirius XM remains essentially the same, but the timing of the debt is far more manageable than before. 2013 is still a big year for debt, but is more manageable than before. With the company showing an ability to be cash flow positive, they should be able to generate the cash needed to take care of their existing debt.

Position – Long Sirius XM

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

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.

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.

Mel Karmazin dealt with the issue in a conference call last week, where he stated that the company would only conduct a reverse split if forced, and that they would file for a six month extension if they did not regain compliance by March 15th.

After the company closed Friday, my own confidence that they would remain above 41.00 was bolstered. Today, the trading action seems to be a battle of those that want to see it gain compliance vs. those that want the reverse split cloud to remain in place. With only a few hours left in the trading day, it will be interesting to see how this plays out.

The company actually has one more ten day window available before March 15th, but that would require being over $1.00 at the close of business tomorrow, March 2, 2010. Shareholders have approved a reverse split for compliance. That approval expires in June.

The move that brought Sirius XM above $1.00 was a bold move on what appeared to be little news. It was almost as if the equity was being driven to regain compliance. After reporting good metrics, and offering up what appears to be profitable guidance, the $1.00 mark appears to be in danger. Who will win this test of wills? We will know within the next 48 hours.

Position – Long Sirius XM

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.

The company is in a good position in 2010 to fill the cash coffers in anticipation of expenses that will begin to come to fruition in 2011 and beyond. Building cash allows the company to better negotiate long term debt, and this can and should build investor confidence.

On the subject of NASDAQ compliance and a possible reverse split, the company outlined their full intentions. Sirius XM needs to remain above $1.00 until Tuesday, March 2, 2010 to gain compliance with the minimum price requirement of NASDAQ. Should that happen, the threat of a reverse split will be removed. Should it not happen, the company still has time before March 15th to try to get above $1.00 and remain there for 10 consecutive trading days. If March 15th arrives and the company is not in compliance they will file for a six month extension, thus buying more time to meet the requirements to remain listed. Shareholder approval for a reverse split expires in June (If the company has to file an extension, a new shareholder vote would have to be conducted to extend the timing possibility for a reverse split) . I am of the opinion that the stability demonstrated in today’s call will be enough for the company to put this issue behind them, and the the price per share will indeed remain above $1.00 through Tuesday.

One high point of the call was the OEM channel. The company reported that they saw 60% OEM penetration. This was slightly higher than expected, and will lead to long term growth. The pre-owned car channel is still young, and over the next two years will become a contributing factor. Some felt that pre-owned cars were already beginning to make a dent in the subscriber numbers. The contribution is still minimal, but this growth area will pay off slight each quarter for several quarters to come. When will we know how much of a contribution the pre-owned sector is making? When the numbers are big enough to be material the company will give a statistic on it. At this point, the company remains silent on this segment, which given their past reporting behavior, means that the the numbers are not a big driver at this point.

The company also delivered some “cautions” in the call. They expressed that with a car sale build-up, the line item for associated costs will move upward. They explained it well, by stating, “the full cost is absorbed at the time a subscriber is signed. The revenue trails the cost. These costs are an investment into future revenue.”

The Howard Stern subject and other programming issues were also discussed. Karmazin indicated that the company is talking to Stern. They expressed that this is the last year of the NFL deal, and that the NASCAR deal is also winding down. Look for the company to negotiate hard on these deals.

In my mind this quarter represents a stability and strong foundation for Sirius XM Radio. This is what this company needed. They have demonstrated an ability to make money on the current subscriber base. While they did say that most merger synergies have been realized, they still have room for more. Cost savings will continue, and the debt load/structure are manageable. If they can produce this type of quarter in the current economic environment, they can build far better numbers when the recovery takes effect.

Position – Long Sirius XM Radio

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.

The company did not pre-announce ARPU. This would lead me to believe that there is nothing spectacular in the number that will be reported. This is not a bad thing, it simply is what it is. Churn was improved, and that likely is attributable, at least in part, to customer retention efforts which will be a drain on ARPU. If a customer calls to cancel, and is offered discounted service, that subscriber will now effectively lower the ARPU. Again, this is not bad, it is simply the cost of doing business. The key is that the company can show improvement. Given the status of the economy, the importance of showing lower churn is paramount, and a small sacrifice in ARPU would be appropriate.

Subscriber Acquisition Cost – SAC

This is the cost associated with obtaining a new subscriber. Costs include marketing efforts, advertising, etc. The company was aggressive in Q4 with advertising on television, on line, and in print. These costs will flow directly into the SAC line item. It should be expected that the Q4 SAC would be higher than other quarters. This is likely why it was not included in the pre-announced numbers released by the company. Is spending money and having a higher SAC bad? Not necessarily. Advertising and marketing efforts are an investment into the future. Look at the growth of a company like Geico, and you will see that spending money getting exposure has its rewards. The key here is control, and Mel has demonstrated that he is not a foolish spender. As an investor, simply be prepared to know that the company did plunk down a healthy sum on advertising.

OEM Penetration

In simple terms this represents the percentage of manufactured cars that have satellite radio installed. This is the bread and butter of satellite radio, and should not be ignored. The company had stated earlier in the year that they anticipated being close to 60% penetration by the end of 2009. Whether or not they achieved this has many variables, not all of which the company can control.

What we do know is that the company announced that 46.4% of those who bought a car with satellite radio elected to become self paying subscribers. Thus number rose above the prior year, and that is quite good. The natural question is what kind of ARPU per conversion the company is getting, but don’t look for that answer any time soon. The key is showing a bit of growth in this area, even if at the expense of some ARPU. I think the company accomplished this. Knowing the penetration rate allows investors to model and anticipate the number of subscribers going forward if they apply the take rate. Of course this is Sirius XM, and given how each manufacturer has a different deal, building a model can be a real challenge.

The penetration rate can be looked at a a barometer for future growth. The take rate can be viewed as how positive consumers feel about satellite radio. I would expect that penetration will be announced at somewhere between 57% and 59%. This is good, and will be within the expectations of the company, and thus the street. What would be a surprise in the penetration rate? Anything below 55% or above 63%.

GUIDANCE

This is perhaps the one area that savvy investors will want to focus on. It is tricky at this point because Q1 has not historically been a strong quarter for satellite radio. The key here is for the company to offer good guidance that demonstrates growth, but not be so aggressive that average Q1 numbers will put questions into the heads of analysts and the street that the guidance is attainable. Guidance can always be adjusted when Q1 numbers are better known. The advantage Sirius XM has is that by the time they conduct the Q4 conference call, they will have about two thirds of Q1 under their belt. This may be enough information for Mel to be more aggressive in the guidance than he otherwise would.

Conference calls are always a time of anticipation. This one, in my opinion carries a lot less anticipation than normal because many metrics have already been announced by the company. I am not saying that the call is not important. It is. This is where we get the meat and potatoes of the company. I do feel that most of the metrics will be as expected, and thus the numbers will not be a driver of the stock one way or the other. What the driver will be is some sort of announcement outside the typical financials such as guidance.

Position – Long Sirius XM

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.

Sirius XM may stave off a forced reverse split, but could potentially still move to perform one anyway. This however would be done in an entirely different set of circumstances. The company would not have the “Reverse Split Gun” to their heads, but rather could do it as a business decision.

Frankly, at any price under $1.50, the company remains in potential danger of getting out of compliance again by a retracement, bad news, or near catastrophe in the economy. Technical traders will be nervous about gaps in the stock price that transpired on the way up. There would still be a level of uncertainty surrounding investment in Sirius XM.

What Sirius XM could do is proactively seek a reverse split to build a cushion well above the $1.00 threshold. As a business decision, this would make the price per share more on level with their peers, and even allow additional institutional investment if the reverse split price were to take the equity share price to above $5.00.

There is a distinct difference between being forced to conduct a reverse split, and doing it of your own accord. Yes, reverse splits have a bad connotation, but typically they are conducted out of survival, not as a business decision. If the company were to sell this potential with the benefits associated with it, it is possible that they could mitigate the negative aspects associated with reverse splits, and be on their way to a less rocky compliance road.

Why should the company consider this option?

1. In my opinion, that price cushion could erase a lot of uneasiness on the part of investors.
2. The company would be priced with their peers on a per share basis.
3. The float number would not be so huge that it is incomprehensible
4. Puts technical gaps out of reach on non-compliance levels.
5. Could help promote more institutional investment.
6. Removes the danger of Q1 numbers reporting from taking a hit on the stock if they are not “up to par” with expectations.

The company seems to be on a stable path. In my opinion they need to prove to the street that they can be a profitable concern quarter after quarter with sub numbers above 18 million with the current subscriber pricing structure. Until this happens, there will always be factions that are uneasy about this equity. By removing any threat of non-compliance, the company can effectively begin to mitigate the unease factor associated with this stock.

Is the company going to do a reverse split anyway? Only time will tell, as this is mere speculation on my part. Should they consider it under the right circumstances? Sure, a smart company considers everything. Should investors fear this potential? Not necessarily. Conducted under the right circumstances, and “marketed” the right way, there are potential benefits. Still, the term “Reverse Split” does make many people shudder under any circumstance. What is your opinion?

Position – Long Sirius XM Radio

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.

Sirius investors have approved a reverse split, as part of a plan to regain compliance with NASDAQ listing requirements. That authorization expires this summer. Mel Karmazin has indicated in the past that a reverse split would only be initiated as a last resort. Over the past months, there has been opinion by analysts that the company should go ahead and get the reverse split done. Now, the company is on the cusp of regaining compliance without the reverse split. Recent developments have brought about the possibility of lengthy extensions, buying the company more time. However, a new shareholder vote to approve a reverse split would need to be conducted for the company to take advantage of those extensions…if needed. As you can see, there are a lot of variables at play.

So what is a Sirius XM investor to do? Well, that story is much the same as it has been for quite some time. Wait out the process and watch the market carefully over the next week. Volume on Sirius XM has been higher than average. Options for March have a lot of interest. The move above $1.00 has been building for quite a few weeks. Whether the company can stay over $1.00 with all that is happening is the burning question on everyone’s mind.

Stay tuned

Satellite radio investors seem to like the idea of Stern becoming a judge on American Idol. His fans seem to like the idea as well. After all, this will bring more exposure to Stern, and by extension, to satellite radio. It would seem to make all of the sense in the world that this is potentially great news, right?

Well, the exposure would help satellite radio gain some “free” publicity, but in my mind this deal would have been better a year or two ago. As many already know, Howard is in the last year of his contract with Sirius XM. As any business man will tell you, you want to increase your market value as much as possible prior to negotiating a contract. Thus, the American Idol speculation brings added value to the Stern brand, as well as his negotiating power.

If Howard is a success on American Idol, it would be a gig that would pay him handsomely. Perhaps it would even pay him enough to make that his main form of employment. Being a judge on American Idol would increase the amount of leverage he has at the negotiating table with Sirius XM. Even the speculation serves that same purpose. Yes, it would bring exposure to Sirius XM. Perhaps the added exposure will even be enough to make it in Sirius XM’s best interest to try their hardest to keep The King of All Media on board. The risk however is all with Sirius XM. If Howard were to cut a deal with Idol, he is in the drivers seat when it comes to a potential contract with Sirius XM.

Stern is in a win/win situation:

1. If he wants to slow down, the Idol job will allow him to do just that while at the same time keeping his bank account healthy.

2. If he has no intention of signing with Idol, the mere speculation will increase his value at the table as he negotiates with Sirius XM.

3. If he really wants to cash in, he can do both Idol and Sirius XM.

Over the years, there have been many who question the relevance of Howard Stern. He has passionate fans, and people who passionately hate him. Those that say he is not relevant really need to wake up and look at what is happening. He is indeed relevant. He is relevant because his name gets attached to rumor after rumor. He is relevant because even those that hate him make him relevant by expressing their opinion about him.

Whether or not Howard Stern re-signs with Sirius XM will be some of the key speculation this year. Losing their flagship personality to Idol would not be the end of the world for Sirius XM. Losing hin to Idol and having him still conduct a radio show or podcast elsewhere could be bad news. Stern’s very relevance makes keeping him important. It is just a question of the cost to get the deal done, and the value Sirius XM can get out of the deal. Any other year than a contract year, this American Idol news would be a coup for satellite radio. This year, it is a mixed bag, and a wild card.

Renewing Howard’s contract has always been a priority for Sirius XM and he was always going to command top dollar. The idol news simply solidifies his position. I would watch for Howard to shoot for fewer radio broadcast days, and perhaps even work towards a three day show schedule with other Howard 100/101 programming and perhaps new morning shows filling in on the off days. As with anything that Howard Stern does…he is in the drivers seat.

Position: Long Sirius XM Radio