Extraordinary Surprises Unlikely
With Sirius XM Radio (NASDAQ: SIRI) scheduled to report third quarter earnings on Thursday, November 4th, as reported in a recent press release, investors are eager to see what the recent addition of subscribers will mean to the company bottom line. On October 13th, the company released net subscriber additions for the third quarter of just under 335K, pushing the company subscriber numbers to a new record high of over 19.8M. This announcement of record subscriber numbers pushed the company stock price to a new high for the year of $1.40 per share at that day close.
With the conference call scheduled, and record subscriber numbers already declared, investors are now looking for the next catalyst to bring new money into the investment pool, driving the stock price even higher. With that purpose in mind, I thought it prudent to separate the hype from the reality and take a look at what the upcoming call most likely will mean for investors as a singular event.
Of course, with Sirius XM, it's not always the reported numbers that move the company stock price. Contract announcements for content, such as the pending Howard Stern deal and the NFL agreement, each having year end deadlines, are also potential stock price movers, depending on the outcome of those agreements and the reported details. Debt restructuring announcements, with improved interest payments and extended maturity dates, also serve as catalysts or stability building events in the stock price, showing improving credit conditions and reflecting an overall lower default risk. The result of favorable debt restructuring draws the attention of the credit rating agencies, resulting in credit risk upgrades from both Moody Investor Services (MCO) and Standard and Poor To begin, the analysis of Sirius XM third quarter financial performance, an estimate of Total revenue is a good place to start. Total Revenue is comprised of Subscriber revenue net rebates, Ad revenue net fees, Equipment revenue, and Other revenue. Subscriber revenue has been providing steady year over year growth for the company in the first six months of 2010, at 5.35%. Sequential growth for Q2 over Q1 of 4.1% was reported in the August 2010 filing with the SEC. Subscriber revenue represents 86.5% of all revenue derived from Sirius XM Radio business.
The management of subscriber churn with subscriber retention incentives has an inverse relationship to Subscriber revenue. This in turn represents a key measurement of management effectiveness in managing subscriber retention incentives against the company ability to maintain subscriber revenue growth. While the growth in net subscriber additions looks and feels good to investors, subscriber revenue growth is what makes the company money. There should not be any surprises lurking in Subscriber revenue in this report, and an expectation of a sequential increase of 4.5% for Q3 over Q2, resulting in Subscriber Revenue of $628M is reasonable.
With Ad and Equipment revenue representing 2% of total revenue each, the impact to total revenue growth is minimal, but their impact on net income and adjusted earnings from operations is more significant. The growth rate for both categories has been impressive. Ad revenue has improved Q2 over Q1 by 8.75%, and Equipment revenue has improved by 29.5% for the same period. Equipment revenue growth is attributed to royalty improvements from increased OEM installations. I see these two line items continuing to perform well, with Ad revenue posting a 9% increase to $17.2M, and Equipment revenue posting an 18% increase to $22.2M for Q3. Music Royalty fees passed on to new and renewing subscribers, and is found in the Other revenue category. Initiated at the end of July 2009, the Other revenue category has contributed $191M to total revenue, and $119M in the first six months of 2010, compared to $11M in the same period of 2009. The $119M represents about half of the revenue share and royalties payments currently being made by the company in 2010. While I understand that this category also includes affiliate revenues, content licensing and syndication fees, they represent a small percentage of the total category. I anticipate the Other revenue number will remain consistent at $58M for Q3.
Q3 Estimated TOTAL REVENUE: $725M
Most of Sirius XM operating expenses are relatively stable since restructuring the cost centers post merger. Items like Programming and Content, Customer Service, Satellite and Transmission, and others related to standard operating process Andrew Jackson Womens Jersey for the company, are relatively fixed and apportioned throughout the quarter.
Other expenses such as, Sales and Marketing, Subscriber Acquisition Costs Authentic Donte Moncrief Jersey Revenue Share and Royalties, while still being standard to operating process, are more variable in amount. These charges are directly proportional to the amount of subscribers the company adds during the quarter, and advertising and distribution costs necessary to support the sale of subscription based services. Sequentially from Q2, I would expect costs to decrease for Q3 for Sales and Marketing from $56M to $49M, a decrease of $10M in SAC from $108M to $98M, and small increase $2M in Revenue Share and Royalties posting an expense of $109M.
Q3 Estimate of Total OPERATING EXPENSE: $559M
Q3 Estimated Total INCOME FROM OPERATIONS: $166M
Other Expense is a operating expense category. When looking at Cash from Operations above, this expense is not include in the calculations. Interest expense, a key component to this category, has been consistent for the first two quarters of 2010, and should remain so for this quarter at ($77M). Without any debt restructuring resulting in Loss on Exinguishment of Debt in the third quarter, there will be a reduction in this category in Q3 over Q2, of $31.9M. This is a non cash accounting expense that represents discounts not fully consumed throughout the life of a loan, or note maturity. This will result in an improvement of income (loss) by that amount for Q3. Holding all other items as equal for Q3 in the other expense category, an estimate in total Other Income Expense of ($77M) can be expected.
Q3 Estimated Total OTHER INCOME EXPENSE: ($77M)
Q3 Estimated Total NET INCOME $88M
EPS (Basic): $.02 per share
EPS (Diluted): $.01 per share When trying to estimate Cash Flows for the period which determine the company ending Cash balance, three areas need to be evaluated; net cash from operations, net cash used in investing activities, and net cashed used in financing activities. As will be reported, the Cash balance account is reconciled over the nine months of operations for 2010.
As of June 30th the cash balance was $258M with significant financing activities taking place in Q2, impacting significantly cash used in investing activities, which was reported at ($105M). Additionally, the Q2 Cash used in investing activities was reported as ($160M), and the Cash used in operating activities was reported at $140M. Together the cash used in these three categories resulted in a depletion of the cash account by ($125M), from a balance of $383M at the beginning of the period.
With no cash being deployed in financing activities for Q3, and an estimated ($42M) cash being used in investing activity, primarily for XM5 launch Donte Moncrief Kids Jersey and build commitments, the third quarter may provide a surprise when the cash balance is reported. With a projected net income of $88M and a growing deferred revenue account from continued subscriber growth, the company may post a net increase in cash and cash equivalents of $100M, resulting in a Cash balance of $358M as of September 30th 2010.
Estimated CASH ON HAND: $358m
Estimating EBITDA for Sirius XM is very difficult to evaluate without sitting in on the final computations with the company CFO. For the purpose of this estimate, a figure of $155M can be used, and would be on track with CEO Mel Karmazin end of year projections of over $575M at the Liberty Media (LCAPA) Investor Meeting.
In addition, adjusted FCF reported by the company has been forecast to reach over $150M for the year 2010. Currently adjusted FCF is ($18M), representing a significant recovery in this metric for the remainder of the year. The primary drag on adjusted FCF for the company was a lump sum payment made in January 2010 for deferred payments from 2009, and the use of cash on hand to pay for employee incentive bonuses rather than issuing stock for this payment. The second quarter showed good recovery in this category posting a positive $108M. Given the broad latitude in computing EBITDA and adjusted FCF, an estimate $125M for Q3 is reasonable.
Estimated EBITDA: $155m
Estimated ADJUSTED FCF: $ www.officialcoltsnflauthentic.com/authentic-andrew-jackson-jersey.html 125m
As I have assessed the financial and operating performance for the company during the third quarter of 2010, it is highly unlikely that there will be any extraordinary surprises in this upcoming report. From a stock price point of view, this report should show steady improvement in maintaining good cost containment processes, and the efficient use of cash to support operations and continued growth in the company primary markets. Other than a surprise to the upside in building cash on hand, this report should support current stock price levels.
With uncertainty lingering from the Howard Stern deal, I would expect range bound activity absent any other catalyst for the upcoming weeks. From what is being presented here, it will take another quarter of solid financial performance, securing the company premium talent, and some aggressive 2011 projections by the company to get the stock price to the next level. Mel Karmazin needs to present more accurate forecasting for future performance for the company to get the attention investors are looking for from street Long SIRI, No Position LCAPA
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