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.
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