Friday, May 04, 2007

Sirius Cash

April 4, 2007
Tyler Savery

It seems that the information supplied so far from the Sirius conference call has caused a bit of a stir and a bit of assumption making by many. What we here at SSG would suggest is that readers avoid making assumptions, and refer to the full 10Q when it is released. The report should be released soon.

In the mean-time, we thought it would be prudent to address a few items that seem to be main points of interest.


It seems many people are applying the cash burn of Q1 to future quarters and coming to a conclusion that Sirius will need additional finances. Investors should refer to various cash flow analysis reports regarding the subject. Reputable firms such as Bear Stearns, Morgan Stanley, Merrill Lynch, and CitiGroup, etc. have detailed analyses, and have tracked this aspect well in the past.


This topic falls in line with the above subject. The answer to this question will be answered in time, but there are many factors to consider. Revenues will be increasing as time passes. The structure of Sirius’ OEM deals are very cash flow friendly. At this point they are still expanding the installation rate. While this does involve an initial investment by Sirius, the structure of the deal has cash coming back to Sirius rather quickly. In my mind it is possible that Sirius will raise additional funds, but not a certainty. Investors need to run their own projection models to make a determination. Bear in mind also that there is a $100,000,000 credit facility for satellite expenditures. Another thing to look at is how the bonds are trading. Bonds are trading at par. Thus, the debt market does not seem to take any exception to Sirius' liquidity.


While there are terms that prohibit either company from borrowing or diluting, there is also a Schedule 4.2g that is part of the agreement but not made public. The merger agreement references this, and references that Schedule 4.2g outlines terms of borrowing that can transpire. Reasonably speaking, both Sirius and XM would have weighed out their anticipated cash needs to get through the merger period, and also built in a reasonable cushion on top of that. This process is not rocket science, and you can rest assured that both companies gave deep consideration to their cash position and the merger agreement prior to entering into it. People that would suggest that either company is hamstrung by the merger agreement are quite simply not thinking very deeply.


In a related matter, there seems to be a common error being made by people trying to analyze the financials without seeing the full balance sheet. Those that attempt this do so at their own risk. The common mistakes that I have seen is that people take items from the Q4 2006 balance sheet, and make an assumption that Sirius has not improved in this area. What they are failing to consider is the stock based compensation from last year will no longer be seen on the balance sheet. This will improve this item substantially, and unless you take the time to go through the financials of last year, it can easily be missed by those who simply took the information provided so far relative to cash in the Sirius conference call. I have seen several instances where people are coming to a conclusion that Sirius made no improvement in Accounts Payable or Accrued Expenses. I have seen the methodology they employed to come to that conclusion. I can tell you that there are factors such as that listed above that they are failing to consider. Readers should wait to see the financials.


In looking at the cash flow model of Sirius and the financial statements there is no doomsday where $300,000,000 suddenly becomes due immediately. Many items will be an ongoing process……such as the OEM deals and how they are structured. Figure on a substantial portion always being committed to the OEM channel for future buildout (perhaps as much 6 to 9 months worth of inventory). Sirius subsidizes a radio, Sirius receives money for a subscription…..Sirius subsidizes a radio……Sirius receives money for a subscription and so no and so forth. Over time, the subscribers garnered begin to fuel the process to grow, or get to the bottom line. Basically this relationship allows for continued production, and can also fuel growth in the OEM channel. The retail channel has its own part in all of this as well, as do content deals such as the NFL, etc.


Assume nothing. Wait for the financials to come out and look and compare the data. Too many people are jumping through hoops and coming up with bad analysis. Better to use the real numbers than to make them up.

Disclosure - Long SIRI - Long XM at time of writing.

5/04/2007 07:57:00 PM

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  • Good Work SSG

    By Anonymous Anonymous, at May 04, 2007 9:31 PM  

  • Good work, SSG. But wrong.

    a) The relevant balance sheet data can be inferred from the cash flow statement that was presented. It is relatively simple to back into what the pertinent balance sheet accounts look like based on the adjustments portion of the cash flows statement. It is not necessary to make ANY assumptions, whatsoever, in this regard.

    b) It is important to remember that for every one of those DCX prepayments, SIRI is having to pay a similar amount for the receiver which is installed in the car. The extent to which these transactions wash is not known, but a review of deferred revenue changes can paint a reasonable picture.

    c) While borrowing in the "ordinary course of business" is likely permitted under the terms of the merger agreement, it is absolutely clear that "securities" (which is defined to mean stock or secured debt) is off the table.

    d) As of today, the YTM on SIRI's 2.5% bonds due '09 is 3.474%. On the 3.25% due '11 it is 5.366% (that is, trading at 91.736, NOT par). The 3.5% due '08 haven't traded since 3/1. And the 9.625% (that would be JUNK bonds) due 2013 traded with a YTM of 9.498 -- i.e., 100.50). If you want to try to use this as support for a claim that SIRI's debt position is good, you're out of your mind. Just ask S&P.

    e) SIRI's Line of Credit (unlike XM's) is restricted to use for paying against the satellite and cannot be used to support operating cash expenditures.

    f) No, there is no immediate crisis involving $300M coming due, but SIRI does face LTD maturities of nearly $340M between now and 12/31/09. That is in addition to funding hundreds of millions of negative cash flow from operations, as well as the 4th satellite costs. In addition, shortly after that 300M comes due they will have to start funding the replacements for their current 3 satellites. So, it depends on how far off you call it "looming", but over the next 2.5 years they face principal payments of nearly $340M. And they most definitely do not have that kind of cash available to them.

    g) Considering that the cash balance includes the deferred revenue from a significant number of OEM subs that WILL NOT GENERATE MORE CASH DURING THEIR LIFETIMES (since the cash which was prepaid has already been spent), if the OEM pace slows for any reason, SIRI's cash flow problem is exacerbated and could well become critical BEFORE year end.

    They are definitely facing a problem. Whether they will be able to find anyone to fund their continued cash burn is anyone's guess.

    By Anonymous Anonymous, at May 05, 2007 12:23 AM  

  • In response to your comments:

    a)The relevant balance sheet data that you are staing can be inferred from the cash flow statement that was presented is not really accurate. In fact, I have seen many people off by well over $100,000,000 is making bad assumptions. That is why IU pointed this out.

    b) The DCX susidy gets less expensive as they graduate to newer chipstes. This began to happen last year and will continue to see improvement as more vehicles are made. Thus, what begins to happen ius that the subsidy is less expensive than the cash received back. Regardless, the point is that once the investment is made, the system can perpetuate.

    c)You are making assumptions regarding what types of borrowing could be made. Often what ssems absolutely clear in one part of an sgreement has provisions in another part of the agreement. As I stated, only a fool would assume that Sirius and XM have not considered cash, cash needs, and everything else when entering into this agreement. Basically, there is really very little that is clear regarding the contents of 4.2g. To state that anything is "off the table" is making an assumption.

    d) While there are fluxuations in the bond prices tend to trade around par, and have for some time. The point is that there is no overwhelming concern of sirius' liquidity reflected in the bond market.

    e) The article clearly stated that Sirius' credit facility was for the satellite....."Bear in mind also that there is a $100,000,000 credit facility for satellite expenditures."

    f) Sirius does have long term debt due out into the future. They also have a scaling business model that is beginning to see cost efficiency and expanded revenue. It is quite possible that sirius could choose a path similar to XM with their GM debt. The point here is that there is not the immediate crunch that many have insinuated.

    g) Your analysis of the OEM situation is curious in that you warn of a danger if the OEM pace slows. Perhaps an example will illustrate the cash flow, and the expansion. Assume Sirius sibsidzes 10 cars at $130 each. Sirius is now at ($1,300). They receive $150 in revenue for a 12 month subscription. Sirius is now at +$200. They then turn around and subsidize 11 cars at $130 and they are now ($1,230). They process goes on. After a 1 year period, 50 % of the subs leave and 50% stay. The ones that stay generate ongoing revenue which can be used to fuel oem growth, or can be used for operations, or can get to the bottom line. The point here is that the OEM growth model can perpetuate. I would like to see your example of how the OEM siutuation can become "critical BEFORE year end". That is the type of doomsday statements that I have been seeing regarding the cash from people making horrendous assumptions and neglecting to consider all of the components. I fear that you are in such a situation regarding the structure of the OEM deals for Sirius.

    Thus, at the end of the day, my point still stands. Loomj at the financials and metrics when they are presented so as to avoid error and bad assumptions

    By Blogger SSG, at May 05, 2007 9:57 AM  

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