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Accounting Analysis (8)
⚫Assume that instead of using its current
accounting practices for subscriber revenue, Sirius
instead recognized subscriber revenue upon the
receipt of subscriber payments. Estimate the Loss
from operations that Sirius would have reported for
the year ended December 31, 2005 :
Accounting Analysis (9)
⚫Briefly describe how Sirius accounts for its FCC
license. Do you think that Sirius’ current application of
this accounting method is appropriate? Explain your
Ratio Analysis (10)
⚫Property & Equipment turnover ratios for
Sirius and Citadel for fiscal year 2005.
Ratio Analysis (11)
⚫Major reason(s) for the difference
between turnover ratios.
–Sirius has made a considerable investment
in its satellite system to support its satellite-
based radio network. Citadel is a traditional
broadcast radio station, requiring less
capital investment to support this
transmission method.
Ratio Analysis (12)
⚫Operating margin ratios for Sirius and
Citadel for fiscal year 2005
Ratio Analysis (13)
⚫Major reason(s) for the difference between the margins
that you computed above.
–Two basic reasons. First, Sirius’ business model needs
much greater scale economies to operate profitably in
order to cover the fixed costs of the satellite system and
Ratio Analysis (14)
⚫Major reason(s) why ‘Net loss’ has been more
negative than free cash flow during these
years.
–From the statement of cash flows, we see that there are four major
reasons:
–Large non-cash depreciation expense related to depreciation of
satellite system (cash for purchase of satellite system was paid out
⚫The sell-side analyst model provided with this case
presents a ‘Base Case’ model in which Sirius’ total
subscribers are forecast to grow to 17.3 million by the
end of 2010. Briefly evaluate the plausibility of this
forecasting assumption.
–Assuming similar growth in XM, these assumptions imply that
about 15%of US population will individually sign up for
Satellite radio by 2010
Forecasting Analysis (15)
⚫The sell-side analyst model provides a ‘Revised
Model’ in which Sirius’ depreciation and amortization
expense is forecast to grow at a much lower rate than
its total revenues through 2010. Do you think that
this lower growth rate for depreciation and
amortization expense is justified? Explain your
Forecasting Analysis (16)
Forecasting Analysis (17)
⚫Load Sirius into eVal and provide a set of forecasting
assumptions that yield similar sales growth and EPS
assumptions to those in the ‘Revised Model’ (see Exhibit 2 of the
model). (note that Sirius data can be loaded from the eVal ‘Data
Center’ sheet by typing SIRI in the white box at the top of this
sheet and clicking the adjacent ‘Go’ button)
–Set sales growth and gross margin assumptions to match analyst
–Trend non-operating income to zero
–Trend cash to 10%
