Sirius Satellite Radio (NASDAQ:SIRI) released its quarterly earnings report (or maybe I should say "results report") today with revenues and subscriber numbers well below what the most optimistic company watchers had hoped for, coming in at 351,000, or a 35% quarter-over-quarter rise. Management maintained predictions that the company would have in excess of 1 million subscribers by year-end.
That's the stuff this company's stock is built on -- nothing silly like current results, which is why 35% gains (usually cause for delirious parties at almost every other company in the world) are a disappointment at Sirius.
Sirius is a "story stock," and it's got a great deal going for its story. Its cost to provide service to an incremental customer, after all, is zero after each new customer has been acquired. But in order to get there, both Sirius and its larger brethren, XM Satellite Radio (NASDAQ:XMSR), are consuming cash by the barrel. I know, Sirius trumpeted its "strongest in the industry" cash position and balance sheet. That's sort of like being the best bluegrass band in all of Belgium. While it put its $700 million in cash in bold, it did not give its 119% increase in long-term debt the same emphasis.
The company noted that its churn percentage has barely hit 2%, a pretty respectable rate. It will be much more interesting to see what the level of customer slippage XM and Sirius experience once their services are more seasoned and populated with mainstream users rather than early adopters, but I suspect that the rates will remain somewhat low, especially as their revenues from vehicle-installed service increases.
As of March 31, this still accounts for 20% of Sirius' customers, Sirius-compatible stereos (and one-year subscriptions) will be standard equipment in several DaimlerChrysler (NYSE:DCX) models and soon-to-be Ford (NYSE:F) vehicles. The company also announced (access courtesy of CCBN StreetEvents) that its plug-and-play stereo units will soon be available at Wal-Mart (NYSE:WMT).
In the meantime, Sirius investors have to watch the massive amount of cash burn with some concern. Essentially, they're rooting for the J Curve to bail them out. Undoubtedly, the company is still at the point of heavy investment on small current return. Also, the economic model exists for Sirius to be enormously profitable. Will the company reach it? As I've said on numerous occasions, its shareholders are taking a massive chance, especially as its enterprise value has surged beyond $4 billion. That's right, a $4 billion market cap, on $9.2 million of current quarter sales and $146 million in losses.
There are a few other things to note. First, the company broke out an "adjusted loss from operations" sheet on its press release to show that on a cash-from-operations basis, it merely lost $78 million. But I note three things. First, this number ignores interest expense, which is a very real $23 million, even if that interest is deferred under the terms of the notes. Second, the company paid in stock more than $8 million in stock options to employees, and paid $9.2 million in equity to third parties for marketing. That's right: Sirius paid as much to third parties in marketing as it generated revenues in the quarter.
This breakout comes close to approximating Sirius' cash performance for the quarter, but it doesn't make a very good representation of the company's economic losses.
As an investor, what concerns me most is the increase in debt and working capital as well as the continued cash burn from operations, which exceeded $74 million in the last three months. Sirius generated net proceeds of $293 million from issuance of convertible debt (convertible into more stock, of course) during the period, but how many additional quarters can a money-losing company do that? Not many, and not without some spectacular, economically meaningful growth.
That's the question upon which an investment in Sirius rests. The cash on hand gives the company some operating room, but at some point, Sirius will have to pull the plane out of its dive. That's an awfully big risk for $4 billion in investment capital. If expectations weren't so high, this might be compelling.
Bill Mann owns none of the companies mentioned in this article. Take a free trial to Mathew Emmert's Income Investor for companies that offer risk/reward profiles that are more his speed.
