Less than twenty four hours before the Sirius XM Radio Q1 conference call on the first quarter, Janco’s Murray Arenson and Barrington’s James Goss and John Hain, Jr. have issued reports. Investors, who in years past had up to a dozen reports to consider, are seeing less analyst coverage than ever before regarding Sirius XM.
Janco’s Arenson, like many others is expecting weak subscriber numbers to be reported tomorrow. While I have written that the focus is shifting away from pure subscriber numbers and more to fundamentals, we see an indication that the subscriber roles will still act as a measuring stick to some analysts. The question, and what will impact tomorrows action the most is what metrics the press decides to focus on.
Arenson notes that the weak sub numbers open the door to a strong adjusted EBITDA because SAC (subscriber acquisition cost) will be trimmed. Arenson notes that Sirius XM has guided toward adjusted EBITDA of $300 million for FY09, and they believe Sirius will demonstrate ample progress toward that goal. As I have noted, the EBITDA metric is likely to be a main focal point on the call, and perhaps, going forward, the street as well as investors will indeed shift their focus away from sub numbers and towards the bottom line.
Janco does not expect Sirius XM to provide much in the way of guidance regarding subscriber growth, but they do believe the company will point out its conservative assumptions going forward. This is exactly what the company needs to do at this point in my opinion.
Arenson feels that it is early yet for Sirius XM to add much color concerning possible next steps related to additional refinancing or refining of its relationship with Liberty Media, which will leave investors to speculate. Perhaps more than anything this will be one of the bigger let downs of tomorrows call. People are seeking a sense of direction, and while EBITDA and other financial metrics provide that, the Liberty deal still does not have clarity that people can sink their teeth into.
Janco has both a target price and stock rating under review.
In a straight-to-the-point note that reported on several companies, including Sirius XM, Barrington Research noted:
Their estimates for the quarter call for a net loss per diluted share of $0.02 on revenue of $645.6million. This is in line with the consensus mean estimates, which call for a net loss per diluted shareof $0.02 on revenue of $647.6 million. For the full year, our forecast calls for a net loss per diluted share of $0.09 on revenue of $2,628.8 million, whereas the consensus mean forecast calls for a net loss per diluted share of $0.11 on revenue of $2,593.0 million.
Liberty Media Corp. agreed to make an initial $530 million investment in Sirius XM that became part of a plan that effectively pushed off any impending maturities for at least a year. Liberty’s agreement addressed the impending bankruptcy risk by providing $280 million of funds that took out the $172 million of maturing 2.5% convertible notes then due and owned by rival Charlie Ergen’s EchoStar/Dish. Another $250 million of loans in two stages by Liberty, plus a separate $250 million maturity extension from bank lenders addressed the immediate crisis. However, the second phase of the deal with Liberty involves issuance of 12.5 million of preferred stock, convertible into 40% of the SIRI common stock. Thus, bankruptcy risk is reduced, but the near-term upside appears greatly sacrificed to this dilutive element.
While substantial dilution is in the cards, the solution to the bankruptcy risk enables management to return its focus on managing the fundamental operations of the company. We feel the priorities include continual addressing of the cost structure (including a special focus on programming costs), a reevaluation of the OEM relationships (while maintaining a target of total penetration of all car models), and the generation of positive EBITDA of more than $300 million this year, with positive FCF close behind.
A new development is a restructuring involving Dr. Malone’s Liberty Entertainment, which will merge with DirecTV Group in a tax-free reorganization. Liberty Media Corp. is to combine Liberty Entertainment’s 54% interest in DirecTV with the balance of the DirecTV shares, which are publicly owned. Mr. Malone will have a 24% voting interest in the new DirecTV versus a 33% interest before, and Liberty Entertainment’s tracking stock will no longer exist. A simplified structure for DirecTV creates the potential for additional deals, as well as a possible role for Sirius XM as a component in programming packages that may be developed. While nothing in this regard is set in stone, the indirect implications of this development are potentially positive.
While our MARKET PERFORM rating has acknowledged the dilutive potential associated with Mr. Malone’s involvement with SIRI, the market has now had some time to reflect this potential, and now has an additional possible catalyst with the reorganization involving Liberty and DirecTV. The quarterly report and conference call could provide some added insights into the value of these developments.
Position – Long Sirius XM Radio