Direct sale of home units that offer satellite services to home and commercial audio systems and products that provide access to the internet radio services in the home without the personal computer.
HD Radio. Many radio stations have begun broadcasting digital signals, which is similar to satellite signals. These stations do not charge a subscription fee for their digital signals but do generally carry advertising. To the extent that traditional radio stations adopt signal transmission technology, any competitive advantage that satellite radio enjoy over traditional one because of clearer digital signal would be lessened. Approximately 15 automakers have committed to installing HD radio equipment as either a factory standard or factory option.
Internet Radio. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming. Major media companies and online providers, including Clear Channel, CBS, Pandora, Lost.fm and slacker, make high fidelity digital streams available through the internet for free or for little fee. In addition, there has been wide proliferation of mobile internet enabled Smartphone, many of which have the capability of interfacing with vehicles. These Smartphone can play recorded or cached content and access live internet radio via application or browsers. The past few years have seen a steady increase in the audio quality of internet radio streams and in the amount of audio content available via the Web, resulting in a steady increase in internet radio audience metrics. The improvements from higher bandwidths and wider programming selection are likely to continue making internet radio an increasingly significant competitor in the near future.
Portable Audio Devices. Portable audio devices are portable digital music player that allow users to download and purchase music online like Apple iPod and Google Nexus. They are compatible with certain car stereos and home speaker systems. Certain automakers have entered into arrangements with manufacturers of portable media players.
Direct Broadcast Satellite and Cable Audio. Some companies provide audio services through either direct broadcast satellite or cable audio systems. There services are targeted to fixed locations. The radio services provided is often included as part of a package of digital services with video service. And customers generally do not pay additional charge for the audio service.
Traffic News Services. Clear Channel and Tele Atlas deliver nationwide traffic and travel information to drivers. Competitive Positioning (SWOT Analysis)<br />Strength<br />Extensive choices and customized programming: Sirius XM offers a dynamic programming lineup of more than 135 channels of commercial-free music, sports, news, talk, entertainment, and traffic and weather on it platform. The “Best of SIRIUS” package offers to XM subscribers the Howard Stern channels, Martha Stewart Living Radio, SIRIUS NFL Radio, SIRIUS NASCAR Radio, Playboy Radio and play-by-play NFL games and college sports programming while the “Best of XM” package offers to SIRIUS subscribers Oprah Radio, The Virus, XM Public Radio, MLB Home Plate, NHL Home Ice, The PGA, Tour Network, and select play-by-play of NBA and NHL games and college sports programming. Listeners are also allowed to customize and enhance standard programming lineup. The competitor ClearChannel Communications offers I love Radio, an application that offers all of ClearChannel's radio stations which includes news, live talk radio, and music. But it doesn't provide customized service. Competitors Pandora and Slacker do track the listeners' preferences and tailor the music based on the listeners' tastes. Nevertheless, they do not offer news, talk programs or live DJ's.<br />Deep penetration into automakers: Sirius XM have agreements with almost every major automaker — Acura/Honda, Aston Martin, Audi, Automobile Lamborghini, Bentley, BMW, Chrysler, Dodge, Ferrari, Ford, General Motors, Honda, Hyundai, Infiniti/Nissan, Jaguar, Jeep, Kia, Land Rover, Lincoln, Lexus, Toyota, Mazda, Mercedes-Benz, Mercury, MINI, Mitsubishi, Porsche, Rolls-Royce, Volvo and Volkswagen — to offer satellite radios as factory or dealer-installed equipment in their vehicles. As of December 31, 2009, satellite radios were available as a factory or dealer-installed option in substantially all vehicle models sold in the United States, which is definitely an advantage over all its competitors.<br />Multi access to service: Sirius XM’s service can be accessed by internet, radio and Smartphone while competitors like Pandora, lost.fm’s service can only be retrieved by either internet or Smartphone. <br />Weakness<br />Competitors like Pandora and lost.fm provide free service to their customers. People’s iPhone can get Pandora for fee anywhere and do not have to pay for the monthly charge. People also build up databases of music on their own computer. There is really little need for younger generation to have a paid service to get music. <br />Another weakness Sirius XM radio has is that it is heavily dependent on its third-party partners. Partnership with automakers which actually is a strength contributes to the major revenue of Sirius XM Radio. But it can also turn into poison sometimes. If any of these partnerships were to fail, the company would find it difficult to survive. <br />Opportunity<br />Exploring new ways to distribute satellite radio to their customers is one way that set the company apart from competitors. Usually in the broadcast industry this comes in the form of partnerships. For example, Sirius XM has partnered with Dish Network satellite TV, allowing Dish subscribers to access Sirius XM’ programming through their television set. <br />Another area of opportunity would be in the product line and programming offered by the company. Is there a product that allows them to access satellite radio wherever they want to go? For example, Sirius XM released a “walkman” like satellite radio with a hefty price tag. <br />Lastly, what are people listening to? Sirius XM signed America’s most controversial talk show host, Howard Stern. Because love him or hate him, this is sure to be a strong seller for the company.<br /> Another opportunity for Sirius XM lies in the pre-owned market which opens up an entirely new channel of customers. As of year-end 2009, there were approximately 27 million satellite radios installed in cars, with only 11.6 million that were active. Imagine how much revenue could generate if Sirius XM can remarket to non-subscribers with the device already in their cars.<br />Threats<br />The company is facing the threat of losing subscriber base. It has a churn rate of 2.00% which is actually very high. Direct TV has a churn rate of 1.5%, AT&T 1.4%. Sirius XM Radio’s is higher than those companies which make them los a lot of subscriber base. <br />Nature may be the biggest threat. Having satellites in space is extremely costly Storms and disruptions in space threaten to shutdown the company, and imply a huge maintenance cost when something is wrong? It is costly to insure problems in space?<br />Costly operation, expenses, and possible technological failure, threaten the company’s outlook. Subscribers and consumers may be turned off to this industry, meaning Sirius XM has to spend a great deal in advertising and marketing to emphasize the product as positive and worthwhile. However, rapid technological advances could make satellite radio service incompetent anytime. <br />Financial Analysis <br />Despite economic headwinds and a devastated auto industry, the company’s 2009 financial results are impressive. <br />Earnings Analysis and Projection<br />Sirius XM is the only major U.S. radio company to grow revenues in the last year. The total revenue increased from $1663,992 to $2472,638.The total revenue is composed of subscriber revenue, advertising revenue, equipment revenue and other revenue. we see an increase of 48% in subscriber revenue due to merger effect and the sale of quot;
best of programmingquot;
, an increase of 10% in advertising revenue due to inclusion of XM revenue from merger, decrease of 10% in equipment revenue due to decrease in sales through direct to consumer distribution channel and low product royalties, increase of 599% in other revenue due to the introduction of the U.S Music Royalty Fee and the inclusion of XM revenue for a full year. <br />Over the next few years, we project Sirius XM's revenue to grow driven by increasing subscriber number and improving economy.<br />Cash Flow Analysis<br />2009200820072009vs. 20082008 vs. 2007Net cash provided by operating activities433,830(152,797)(148,766)586,627(4,031)Net cash provided by investing activities(248,511)728,425(54,186)(976,936)782,611Net cash provided by financing activities(182,276)(634,002)248,351451,726(882,353)Net increase in cash and cash equivalents3,043(58,374)45,39961,417(103,773)Cash and cash equivalents at beginning of period380,006438,820393,421(58,374)45,399Cash and cash equivalents at end of period383,489380,446438,8203,043(58,374)<br />Figure 4: Cash Flow in $ thousands<br />Sirius XM achieved over $185 million in free cash flow for 2009, also the first year of free cash flow- a dramatic increase compared to a negative free cash flow in 2008<br />Balance Sheet Analysis <br />Figure 5: Balance Sheet Data ( in $ thousands)<br />2009Cash and cash equivalents383,489Restricted investments3,400Total assets7,263,528Long-term debt, net of current portion3,062,693Stockholders’ equity(37,432)<br />Figure 6: Debt Principal and Interest due<br />The debt load the company has right now is too heavy. As of December 31, 2009, the company had an aggregate principal amount of approximately $3.1 billion of indebtedness on their balance sheets. That translates to $214 million interest expense for 2010 and $308 million for 2011. The company has rolled them to the future, but the interest cost is till there. And eventually the company has to deal with that debt load. <br />Valuation<br />Discounted Cash flow Model Analysis: Using a three-stage FSEF model in which free cash flows grow at 21% for the first year, slow to 15% growth over a four-year period, and stabilize at 2.5% subsequently, we arrived a valuation of $2.47 using Damodaran's spreadsheet. The cost of equity used in the model is derived from the capital asset pricing model with the key assumptions as follows:<br />-Risk-free rate: 3.65%<br /> - Market Premium: 6%<br /> - Beta: 1.95<br />Comparable Company Analysis: While Sirius has no competitors that directly replicate its business model, we find a combination of CBS and CC Media as sufficient comparisons. CBS is currently at an EV-to-EBITDA multiple of 9.45, and CC Media share is at 13.63x. Applying weights based on revenue mix, we arrive at an EBITDA multiple of 9.45. Based on our estimate of 2010 EBITDA of $690.4 million, we forecast price per share of $1.68 for the coming 12 months.<br />By blending the two target price with equal weight, we arrive at a price target of $ 2.075, which implies that the stock is undervalued at its current level.<br />Investment Risks <br />Heavy debt<br />As of December 31, 2009, the company had an aggregate principal amount of approximately $3.1 billion of indebtedness. A substantial portion of cash flows from operations is dedicated to the payment of principal and interest on its indebtedness which could adversely affect its ability to raise additional capital to fund operations and could limit its ability to react to changes in the economy or industry. <br />Business too dependent on automakers<br />The sale of lease of vehicles with satellite radios is an important source of subscribers for Sirius service while subscription fee account for more than 80% of its total revenue. So the subscription growth is dependent in large part on sales and vehicle production by automakers. Unfortunately, a number of automakers have experienced a sharp decline in sales, have reduced production and are experiencing extreme financial difficulties. If the vehicle sales continue to decline or the penetration of satellite radios in those vehicles reduce and there is no offsetting growth in both of areas, subscriber growth for Sirius’s satellite radio services will be adversely impacted. <br />Technology renovation<br />The audio entertainment industry is featured with frequent innovations, rapid change and evolving standards. Incapable of keep pace with these changes will make the company less competitive in the market. <br />Failure of satellites<br />The company is currently operating eight satellites, four supporting the Sirius service and four supporting XM service. But the business could be significantly damaged if the useful life of its satellites is shorter than expected, whether as a result of a satellite failure or technical obsolescence and Sirius does not launch replacements in a timely manner. <br />. <br />Investment Thesis<br />Sirius XM is the only provider of radio services via satellite. It generates revenue from four businesses sectors: subscription fee, advertising, equipment sales and other businesses. The total revenue increased from $1663,992 at the end of 2008 to $2472,638 at the end of 2009. Delivering Sirius XM app for Smartphone and tapping pre-owned market further fuel the growth over a five-year period. However, heavy dependence on its third-party partners to generates revenue increase its risk profile. If any of partnerships were to fail, the company would be in difficult situation. <br />Despite economic headwinds and a devastated auto industry in past two years, Sirius XM has managed the auto industry crisis, which threatened its ability to gain new subscribers and overcame a mountain of debt through refinancing and a deal with cable pioneer John Malone that gave his Liberty Media a 40% percent equity stake. <br />Balance sheet metrics is also improving. The new addition of 171,000 subscribers for the first quarter of 2010, benefiting from better car sales and users signing after free trial left the Company in much greater financial health. Cash levels have increased from negative at the end of 2008 to $3,043 million at the end of 2009. All these shook off the threat of a Nasdaq delisting. Finally, $113,685 million of 10% Senior PIK Secured Notes due 2011 will be redeemed ahead of schedule on June 1, which will decrease a large portion of financing costs for the company.<br />Despite these positive fundamentals, Sirius is currently trading at a discount which is supported by our comparable company analysis and our DCF model. Both point to a higher valuation than the current market price. The current price to sales per share ratio of 1.88x is also well below its normal historic range from 86.42x to 12.24x, which justify a premium valuation for it. <br />Based on our above analysis, we believe that the stock is undervalued and has room on the upside. We have a 12 month target price of $2.075. We recommend a BUY. <br />Figure 1: Income Statement<br />$ in millions<br />Source: Company Documents, Student Estimates<br />SIRIUS XM RADIO INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, (in thousands, except per share data) 2009 20082007Revenue: Subscriber revenue, including effects of rebates 2,287,5031,548,919854,933Advertising revenue, net of agency fees 51,75447,19034,192Equipment revenue 50,35256,00129,281Other revenue 83,02911,8823,660 Total revenue 2,472,6381,663,992922,066Operating expenses (depreciation and amortization shown separately below) (1): Cost of services: Satellite and transmission 84,03359,27927,907Programming and content 308,121312,189236,059Revenue share and royalties 397,210280,852146,715Customer service and billing 234,456165,03693,817Cost of equipment 40,18846,09135,817Sales and marketing 228,956231,937183,213Subscriber acquisition costs 340,506371,343407,642General and administrative 227,554213,142155,863Engineering, design and development 41,03140,49641,343Impairment of goodwill _4,776,190_Depreciation and amortization 309,450203,752106,780Restructuring, impairments and related costs 32,80710,434_Total operating expenses 2,244,3126,700,7411,435,156 Income (loss) from operations 228,326(5036,749)(513,090)Other income (expense): Interest and investment income 3,6459,07920,570Interest expense, net of amounts capitalized (306,420)(144,833)(70,328)Loss on extinguishment of debt and credit facilities, net (267,646)(98,203)_Gain (loss) on investments 1,931(30,507)_Other income (expense) 3,355(9,599)31Total other expense (565,135)(274,063)(49,727)Loss before income taxes (336,809)(5,310,812)(562,817)Income tax expense (5,981)(2,476)(2,435)Net loss (342,790)(5,313,288)(565,252)Preferred stock beneficial conversion feature (186,188)__Net loss attributable to common stockholders (528,978)(5,313,288)(565,252)Net loss per common share (basic and diluted) (0.15)(2.45)(0.39)Weighted average common shares outstanding (basic and diluted) 3,585,8642,169,4891,462,967(1) Amounts related to share-based payment expense included in operating expenses were as follows: Satellite and transmission 2,7454,2362,198Programming and content 9,06412,1489,643Customer service and billing 2,0511,920708Sales and marketing 9,60813,54115,607Subscriber acquisition costs _142,843General and administrative 45,63449,35444,317Engineering, design and development 4,8796,1923,584Total share-based payment expense 73,98187,40578,900<br />Figure 2: Balance Sheet<br />$ in millions<br />Source: Company Documents, Student Estimates<br />SIRIUS XM RADIO INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS As of December 31, (in thousands, except share and per share data) 2009 2008 2007ASSETS Current assets: Cash and cash equivalents 383,489380,446438,820Accounts receivable, net 113,580102,02444,068Receivables from distributors 48,73845,95060,004Inventory, net 16,19324,46229,537Prepaid expenses 100,27367,20331,392Related party current assets 106,247110,4272,161Deferred tax asset 72,64031,27035,000Other current assets 18,62027,47437,875Total current assets 859,780789,256678,857Property and equipment, net 1,711,0031,703,476806,263FCC licenses 2,083,6542083,65483,654Restricted investments 3,400141,25018,000Deferred financing fees, net 8,9029,19713,864Intangible assets, net 611,461688,671-Goodwill 1,834,8561,834,856-Related party long-term assets 110,594128,3573,237Other long-term assets 39,87881,01990,274Total assets 7,263,5287,459,7361,694,149<br />LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses 543，686625,264464,943Accrued interest 74,56676,46324,772Current portion of deferred revenue 1,086,2051,002,736548,330Current portion of deferred credit on executory contracts 252,831234,774-Current maturities of long-term debt 13,882399,72633,801Related party current liabilities 105,47168,3731,148Total current liabilities 2,076,6412,407,3361,074,994Deferred revenue 283,942247,889110,525Deferred credit on executory contracts 784,0781,037,190_Long-term debt 2,799,1272,820,7811,278,617Long-term related party debt 263,566__Deferred tax liability 940,182894,45312,771Related party long-term liabilities 17,508__Other long-term liabilities61,05243,5509,979Total liabilities 7,226,0967,451,1992,486,886Commitments and contingencies (Note 15) Stockholders’ equity: Preferred stock, par value $0.001; 50,000,000 authorized at December 31, 2009 and 2008Series A convertible preferred stock (liquidation preference of $51,370 at December 31, 2009 and 2008); 24,808,959 shares issued and outstanding at December 31, 2009 and 2008 2525_Convertible perpetual preferred stock, series B (liquidation preference of $13 and $0 at December 31, 2009 and 2008, respectively); 12,500,000 and zero shares issued13_Convertible preferred stock, series C junior; no shares issued and outstanding at December 31, 2009 and 2008 __Common stock, par value $0.001; 9,000,000,000 and 8,000,000,000 shares authorized at December 31, 2009 and 2008, respectively; 3,882,659,087 and 3,651,765,837388236521,471Accumulated other comprehensive loss, net of tax (6581)(7871)_Additional paid-in capital 10,281,3319,724,9913,604,764<br />Accumulated deficit (10,241,238)(9,712,260)(4,398,972)Total stockholders’ equity 37,4328,537(792,737)Total liabilities and stockholders’ equity 7,263,5287,459,7361,694,149<br />Figure 2: Statement of Cash Flows<br />$ in millions<br />Source: Company Documents, Student Estimates<br />SIRIUS XM RADIO INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in thousands) 2009 20082007Cash flows from operating activities: $ (342,790)$ (5,313,288)$ (565,252 )Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization 309,450203,752106,780Impairment of goodwill _4,766,190_Non-cash interest expense, net of amortization of premium 33,818(6,311)4,269Provision for doubtful accounts 30,602 30,60221,5899,002 Amortization of deferred income related to equity method investment(2,776)(1,156)_Loss on extinguishment of debt and credit facilities, net 267,64698,203_Restructuring, impairments and related costs 26,964__Loss (gain) on disposal of assets _4,879(428)Loss on investments 13,66428,999_Share-based payment expense 73,98187,40578,900Deferred income taxes 5,9812,4762,435Other non-cash purchase price adjustments (202,054)(68,330)_Other Changes in operating assets and liabilities: _1,643_Accounts receivable (42,158)(32,121)(28,881)Inventory8,2698,2914,965Receivables from distributors (2,788)14,401(13,179)Related party assets 15,305(22,249)(1,241)Prepaid expenses and other current assets 10,027(19,953)11,118Other long-term assets 86,674(5,590)13,691<br />Accounts payable and accrued expense(46,645)(83,037)52,492Accrued interest 2,42923,081(8,920)Deferred revenue 89,14473,334183,582Related party liabilities 54,60634,646_Other long-term liabilities 44,48130,2491,901Net cash provided by (used in) operating activities 433,830(152,797)(148,766)Cash flows from investing activities: Additions to property and equipment (248,511)(130,551)(65,264)Sales of property and equipment _105641Purchases of restricted and other investments _(3000)(310)Acquisition of acquired entity cash _819,521_Merger related costs _(23,519)(29,444)Net cash (used in) provided by investing activities (248,511)728,425(54,186)Cash flows from financing activities: Proceeds from exercise of warrants and stock options _4714,097Preferred stock issuance costs, net of costs (3,712)__Long-term borrowings, net of costs 582,612531,743244,879Related party long-term borrowings, net of costs 362,593__Payment of premiums on redemption of debt(17,075)(18,693)_Payments to noncontrolling interest _(61,880)_Repayment of long-term borrowings (755,447)(1,085,643)(625)Repayment of related party long-term borrowings (351,247)__Net cash (used in) provided by financing activities (182,276)(634,002)248,351Net increase (decrease) in cash and cash equivalents 3,043(58,374)45,399Cash and cash equivalents at beginning of period380,446438,820393,421Cash and cash equivalents at end of period 383,489380,446438,820<br />Disclosures:<br />Ownership and material conflicts of interest:<br />The author(s), or a member of their household, of this report holds a financial interest in the securities of this company. <br />The author(s), or a member of their household, of this report knows of the existence of any conflicts of interest that might bias the content or publication of this report. The conflict of interest is…<br />Receipt of compensation:<br />Compensation of the author(s) of this report is not based on investment banking revenue.<br />Position as a officer or director:<br />The author(s), or a member of their household, does serves as an officer, director or advisory board member of the subject company.<br />Market making:<br />The author(s) does not act as a market maker in the subject company’s securities.<br />Ratings key:<br />Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.<br />Disclaimer:<br />The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with NYU-Poly or the NYU-Poly Equity Research Report Competition with regard to this company’s stock. <br />