10 Hidden Gems In SIRIUS XM's Annual Report (SIRI, DISH, T, S, RIMM)

SIRIUS XM Radio Inc. (NASDAQ: SIRI) filed its annual report this week for 2010.  While many investors know many of the larger outstanding issues, annual reports always contain factoids that most investors do not know about and that they rarely take the time to consider.  With so many holders and so many customers who love SIRIUS XM, we wanted to highlight ten of these issues which are not so well known.

Its Satellites… SIRIUS XM owns four orbiting satellites and one spare satellite for use in the SIRIUS system, with Space Systems/Loral constructing a sixth satellite for use in this system that is expected to launch in Q4-2011.  It owns five orbiting satellites for use in the XM system, but two satellites inside each system are expected to have and expected end of useful life in 2013.  The company maintains in-orbit insurance for the FM-5, XM-4 and XM-5 satellites that covers a total, constructive total or partial loss of the satellites that occurs during annual (or multi-year) in-orbit periods; but this insurance does not cover the full cost of constructing, launching and insuring new satellites and it will it protect SIRIUS from the adverse effect on business operations due to the loss of a satellite.  Three of the SIRIUS in-orbit satellites have experienced circuit failures on their solar arrays, but this did not interrupt operations.  Its XM-1 and XM-2 satellites have experienced progressive degradation problems common to early Boeing 702 class satellites and now serve as in-orbit spares.

International operations… SIRIUS Canada and XM Canada are each interests of the company and these have yet to merge after the two companies agreed to merge in November.  These still operate as separate entities.   In May 2010, the company’s letter of intent with ACIR DARS Mexico to pursue a license to offer satellite radio in Mexico was terminated.

Other services besides sat-radio…. Satellite TV on the DISH Network Corp. (NASDAQ: DISH) satellite television allows DISH satellite TV customers to have some services, but these are not counted in the company’s television service are not included in our subscriber count of 20,190,964 subscribers.  The company also offers between 20 and 25 music and comedy channels to mobile phone users through relationships with AT&T Inc. (NYSE: T), Alltel, Sprint Nextel Corporation (NYSE: S) and Research in Motion Ltd. (NASDAQ: RIMM), and subscribers to these services are not included in the subscriber count. The company offers Backseat TV as television content designed primarily for children in the backseat of vehicles and that is available as a factory-installed option in select Chrysler, Dodge and Jeep models, and at retail for aftermarket installation.

Prices… The combined SIRIUS-XM agreed not to raise the retail price for basic $12.95 per month subscription packages and not to cut the number of channels until July 28, 2011.  That means price hikes could be seen very soon, although it did recently cut its U.S. Music Royalty Fee from $1.98 a month on the base $12.95 package to $1.40 per month.

Competition… Automakers have deployed or plan to deploy integrated multimedia systems in dash boards like Ford’s SYNC, Toyota’s Entune, and BMW/Mini’s Connected, all of which can combine control of audio entertainment from a variety of sources, including AM/FM/HD radio broadcasts, satellite radio, Internet radio, and stored audio… Pandora recently filed to come public.  The fear was there that Howard Stern may defect before he resigned in December, yet a search of “Howard Stern” only picked up TWO references in the entire annual report.

FCC Licenses… Each FCC license was granted in 1997, but the FCC licenses for SIRIUS satellites expire in 2017 and the FCC licenses for XM satellites expire in 2013, 2014 and 2018. The company uses a net carrying value of its FCC licenses of $2.083 billion in revenues.

Real Share Count… The company’s market cap is now almost $7.1 billion based on about 3.93 billion shares outstanding.  The company actually has 9,000,000,000 shares authorized at December 31, 2010 and 3,933,195,112 of those are what makes up the free float.  Liberty Media Corporation holds preferred stock that is convertible into 2,586,976,000 shares of common stock and the company cannot issue equity or debt securities without the consent of Liberty Media.  On February 14, 2011, there were approximately 11,457 record holders of SIRIUS XM common stock.  That figure of course is much larger, but many brokerage clients are only counted once due to “Street Name” grouping. As of December 31, 2010, approximately 268,255,000 shares of common stock were available for future grants under the 2009 Long-Term Stock Incentive Plan.  Its four other plans do not have further awards coming but outstanding awards under the plans continue.

Accounting and Tax… SIRIUS XM has generated a federal net operating loss carryforward of approximately $8.1 billion through the year ended December 31, 2010.  , and we may generate net operating loss carryforwards in future years.  If an ownership change for purposes of Section 382 as a result of future transactions involving common stock, including purchases or sales of stock between 5% stockholders, its ability to use the NOL carryforwards and to recognize certain built-in losses would be subject to the limitations of Section 382.

Advertising… SIRIUS XM continues to have little to no advertising model on its subscriber services.  Of the $2.414 billion in subscriber revenues, only $64.517 million of the total revenues were advertising dollars.

Chances of a Liberty Buyout?… company noted, “The Series B Preferred Stock is convertible into 2,586,976,000 shares of common stock. Liberty Media has agreed not to acquire more than 49.9% of our outstanding common stock prior to March 2012, except that Liberty Media may acquire more than 49.9% of our outstanding common stock at any time after March 2011 pursuant to any cash tender offer for all of the outstanding shares of our common stock that are not beneficially owned by Liberty Media or its affiliates at a price per share greater than the closing price of the common stock on the trading day preceding the earlier of the public announcement or commencement of such tender offer. The Investment Agreement also provides for certain other standstill provisions during the three year period ending in March 2012.”

Be advised that none of these are scare tactics. They are just factoids that investors rarely go to the trouble to find out about.  As we always say, “Know what you are really investing in.”

JON C. OGG