Tuesday, December 27, 2005

Sirius Satellite: Beware of this DOG.

Satellite radio provider Sirius Satellite Radio Inc.(SIRI - $6.99) said today that it recently topped more than 3 million subscribers to its service and expects a strong finish for the year. The Company currently offers more than 120 channels-65 channels of commercial-free music and over 55 channels of sports, news, talk, entertainment, traffic and weather programming for a monthly subscription fee of $12.95.

Helping to grow the Company's subscriber base, Sirius recently launched a Martha Stewart channel and agreed to a multimillion deal with radio shock jock host, Howard Stern.

Sirius' primary source of revenue is subscription fees. The Company also derives revenues from activation fees, the sale of advertising on its non-music channels and the direct sale of SIRIUS radios and accessories. Currently Sirius receives an average of approximately nine months of prepaid revenue per subscriber upon activation.

The increase in average revenue per user, ARPU, which consists of subscriber revenue and subscriber net advertising revenue, rose to $11.15 for the three months ended September 30, 2005, from $10.84 for the prior year period. Management said that this gain was primarily attributable to the effects of improvement in its Hertz program (Sirius radios in rent-a-cars) and increased advertising revenue and promotional activity, offset by the dilutive effects of mail-in rebates and the timing of commencement of revenue recognition for prepaid subscriptions.

The Company reported subscriber acquisition costs (SAC) per gross subscriber addition of $149 for the third quarter of 2005, a 35% improvement over SAC of $229 in the year-ago quarter. Management continues to project SAC per gross subscriber addition of under $145 for the year. These declines are attributable to the reduction in manufacturing and chip set costs.

However, the 10Q Detective suspects that total SAC costs could increase in the future as the Company rolls-out next-generation products and continues to offer subsidies, commissions and other incentives to acquire subscribers.

Sirius reported a net loss of ($180.4) million, or ($0.14) per share, for the third quarter of 2005 compared with a net loss of ($169.4) million, or ($0.14) per share, for last year.

According to Thomson/First Call, sixteen out of thirty Wall Street research firms either have a current buy or strong buy on Sirius Satellite Radio common stock. Catalysts include the rationale that the Company should benefit from auto partnerships with the likes of Ford Motor and DaimlerChrysler unit Chrysler, an exclusive NFL deal, next-generation retail products, Howard Stern subscribers, and the idea that free cash flow will either be neutral or positive in 2007.

The 10Q Detective believes that the market evaluations for Sirius are overblown, similar to Internet start-ups in 2000. For starters, this is a company carrying a total debt-equity load of 191% and has never turned a profit. In addition, Sirius has a market capitalization of more than $9 billion! And do not overlook, acquiring subscriber costs continue to run higher than subscriber revenues, and there is the threat of higher churn-rates because of continued competition from the other satellite radio provider, XM Satellite (XMSR), as well as alternative entertainment/music forums, such as Apple's iPod.

The company believes high costs of entry in the radio space (Sirius has accumulated a $1.9 blllion deficit) coupled with the difficulties of dealing with the Federal Communications Commission will make it harder for new competitors or technologies to challenge Sirius. What management has failed to tell shareholders (unless you read the fine print of 10Qs), is how expensive (and possibly dilutive) all of their carnival acts to attract--and retain--subscribers are to the bottom-line.

Sirius currently has 1.3 billion shares outstanding, but is authorized to issue 2,500,000,000 shares of its common stock! Entertainment does not come cheap:

  • In January 2004, Sirius signed a seven-year agreement with the NFL. The Company delivered to the NFL 15,173,070 shares of its common stock valued at $40.9 million upon. Management recognized expense associated with these shares of $3.5 million and $1.9 million during the nine months ended September 30, 2005 and 2004, respectively.

  • In June 2004, Sirius issued DaimlerChrysler AG warrants to purchase up to 21,500,000 shares of common stock at an exercise price of $1.04 per share. These warrants vest based on the achievement of various performance milestones, including the volume thresholds contained in an agreement with DaimlerChrysler.

  • In February 2004, Sirius announced an agreement with RadioShack Corporation to distribute, market and sell SIRIUS radios. In connection with this agreement, management issued RadioShack warrants to purchase up to 10 million shares of common stock. These warrants have an exercise price of $5.00 per share and vest and become exercisable if RadioShack achieves activation targets during the five-year term of the agreement.

  • In January 2004, Sirius signed an agreement with Penske Automotive Group, Inc., United Auto Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation (collectively, the “Penske companies”). In connection with this agreement, we agreed to issue the Penske companies warrants to purchase up to 38 million shares of common stock at an exercise price of $2.392 per share. Two million of these warrants vested upon issuance. The balance of these warrants vest over time and upon achievement of certain milestones by the Penske companies.

  • In January 2004, Sirius issued the NFL warrants to purchase 50 million shares of common stock at an exercise price of $2.50 per share. Of these warrants, 16.7 million vest upon the delivery to the Company of media assets by the NFL and its member clubs, and 33.3 million of these warrants will be earned by the NFL or its member clubs as Sirius acquires subscribers which are directly trackable through their efforts.

In Greek mythology, there are varied stories about the hunter, Orion, who believed himself to be the best, and once boasted that he was able to kill anything the earth produced. It was then that Gaia (Earth), angered at this boast, sent a scorpion that killed him. Mourned by Artemis (Goddess of hunters), he was made immortal by being placed among the stars in the sky. It was then told that to prevent him being alone in the sky, the dog (Canis Major) was later added to the stars to keep Orion company in his hunting.

In astronomy, Sirius is the brightest star in the nighttime sky, and is situated in the constellation Canis Major. Its name comes from the Greek (seirios, "glowing"). Since it sits in eye of the greater dog Canis Major, it is known as the 'Dog Star.'

These Greek mythology and astronomy classes were presented to readers so that you can be forewarned: As Sirius Satellite's star starts to fade, remember that caution: Beware of DOG!


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