SIRIUS Focus Issues: Guidance or Refinancing? (SIRI)

Making calls on financial guidance and modeling for the future right now beyond a quarter is no longer an art which is easily mastered by many.  It is now guesswork or financial alchemy.  So how is that a speculative and consumer dependent company such as SIRIUS XM Radio (NASDAQ: SIRI) can issue a 5-year projection?  For better or worse, that is exactly what Mel Karmazin and friends did at SIRIUS XM this morning.

For starters, the company is in talks with several financial institutions over a financing to replace its 2.5% convertible noteswhich mature in 2009.  We previously noted that that was roughly $1.1 billion due in 2009, with $300 million due in February.  SIRIUS confirmed that thecurrent climate is hurting its operations, as if you wouldn’t have beenable to guess that.  The dramatic slowdown in autosales will hurt subscriber growth for thisyear and next.

SIRIUS now expects to end 2008 with 19.1 million subscribers andexpects to end 2009 with 20.6 million subscribers, yet it is stickingwith its prior revenue and adjusted EBITDA guidance for 2008 and 2009.We reviewed our prior notes and saw that the company had estimated 19.5 million subscribers for 2008-end and 21.5 million for2009-end.  Here are the new targets for the year ahead:

                             2009 2010  2011  2012  2013
(Subscribers in millions; dollar amounts in billions)                
Subscribers        20.6   22.1   24.0   26.2   28.4
Revenue              $2.7   $3.0   $3.4   $3.8   $4.1
Adj. EBITDA         $0.3   $0.6   $0.9   $1.3   $1.5
Free Cash Flow  $0.0   $0.4   $0.6   $1.0   $1.4

As far as revenue and other issues, Mel Karmazin had given priortargets of $2.4 billion in 2008 revenues and $2.7 billion in 2009.Here is a link to the full prior guidance.  Last month, we questioned how likely a refinancing would be for its debt maturity.  There has also been a new shareholder class action suit which is gaining traction.  That suit addresses speculation that Mel Karmazin may take the company private and we have noted how it may have to do a reverse split to keep its listing in 2009.

Mel Karmazin can easily change these numbers if economic weakness drags on and on for a long time rather than a garden variety recession.  But it is  baffling that SIRIUS would maintain this sort of growth projections when you consider the state of the economy, and the auto industry in particular.  These are words we fear he might have to eat, sooner rather than later.

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Jon C. Ogg
November 6, 2008