Satellite Radio Playground

by Dennis “Cos” Costa

This is the third installment of a three part series on Sirius XM Radio (NASDAQ: SIRI), which in July 2008 received final merger approval from the FCC. The intention of the series has been to give current and future investors an in depth, fact-based review of this unique media company’s struggles and successes since the merger. The series is a chronological archive of macroeconomic events and their impact on the internal financial operation of the company.

The first installment, Part 1 – A Look Back, discussed the period between the FCC merger approval to a time when the company’s debt maturities, together with the global banking crisis, made it necessary for the company to strike a deal with John Malone’s Liberty Media (NASDAQ: LCAPA, LCAPB, LINTA, LINTB, LSTZA, LSTZB). In the second installment, Part 2 – The Recovery, the time-frame reviewed was from March through December of 2009. This was a critical period for the company, which rebuilt investor confidence when they returned to subscriber growth, displayed product pricing elasticity when increased subscription costs resulted in manageable customer churn, outperformed projected operating expense reductions from merger synergies, and ended the year free cash flow positive with a net income of $14M.

In this third installment, Part 3 – A Look Ahead, the company’s financial performance in the first quarter of 2010, their current and future commitments to debt, and a review of their capital expenditures will be assessed.  The company’s unique business model of providing subscription based premium content on a unique delivery system of satellites and terrestrial repeaters, and their associated costs will be reviewed. To sum it up — Part 3 will be a detailed review of how debt, capital expense, revenue growth, and operating synergies with unique premium content will impact future returns to investors.

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A Brief Review:

In assessing the company’s ability to generate cash from operations from mid 2008 (the merger) through early 2009, events were identified as contributors to the company’s inability to generate sufficient cash to meet maturing debt obligations.

• The company’s past practice of refinancing debt was crippled by the macro-economic pressures brought on by the global credit crisis in September 2008.
• The extended 17 month FCC and DOJ merger approval process, and debt maturing for Sirius and XM six months after the merger, made it impossible for the combined company to generate adequate cash from operations to satisfy the impending need.
• Offering common shares for debt also proved inadequate, while the process diluted existing shareholder equity, with its failing nearly driving the company to a bankruptcy filing at the end of February 2009.

In the end, it was a combination of diluting shareholders and restructuring the company’s debt with a bailout from John Malone’s Liberty Media (NASDAQ: LCAPA) which avoided the bankruptcy filing. Although Sirius XM repaid the Liberty outstanding notes, and terminated all lending agreements within five months of their origination. Liberty retained a 40% Preferred Share equity position, and a proportional number of Board of Director seats on the company’s board for their efforts.

Throughout the rest of 2009, the company executed its business plan effectively, realizing merger synergies which reduced expenses by 20% year-over-year, represented by an improvement of $509M.  They grew revenue by 4%, or $90M to $2.527B, primarily by initiating several revenue generating programs affecting most existing and all new subscribers. This increased revenue came from the U.S. Music Royalty fee introduced in the third quarter 2009, the sale of “Best Of” programming, and rate increases to the company’s multi-subscription and Internet packages.

These expense-side efficiencies and revenue generating efforts, resulted in the company’s first full year of Free Cash Flow (FCF) of over $185M, and a year-over-year improvement in income from operations of ~$600M. In the fourth quarter of 2009, on a Generally Accepted Accounting Principle (GAAP) basis, the company earned its first time ever profit of $14M, compared to a loss of ($246M) in the same 2008 quarter. These notable efforts by management, allowed the company to pay debt of ~$83M maturing in 2009, and $58.8M maturing in 2011 with cash on hand, and without any further dilution to existing shareholders. They also finished 2009 with ~$380M of cash and cash equivalents, reflecting their ability to generate cash from operations – while also meeting current debt due obligations. Read More