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Sirius XM: More Cash, Fewer Customers

Keeping customers happy has always been Job One for Sirius XM CEO Mel Karmazin. But for the moment, an equally paramount priority for the ailing satellite radio provider is generating the cash needed to keep the business running. "We are a cash-flow growth story," Karmazin told analysts and investors when he delivered Sirius XM's (SIRI) first-quarter financial results May 7.

The tradeoff was made plain in the first quarter as Sirius improved its cash generation while at the same time suffering a larger-than-expected customer loss. The number of subscribers plummeted by more than 400,000, leaving the total at 18.6 million. In part, the loss reflected a decline in sales of autos that come preloaded with Sirius XM radio receivers. The number of customers who have Sirius XM installed in cars fell by 37,604. "It's a pretty clear dotted line between trouble in the auto industry and satellite radio," says Murray Arenson, an analyst at Janco Partners.

Satellite radio units in new cars has been a major driver of new subscriptions. In fact, Karmazin said the company is basing its financial projections on the estimate that Detroit will sell only 9 million cars this year. In previous years, satellite radio companies based financial models on car sales of nearly 16 million. On a net basis for the quarter, Sirius XM posted a loss of $236 million.

Higher Subscriber Fees

Sirius also suffered a loss in the number of subscribers who sign up for the service on their own. The tally of retail customers dropped by 368,031. In midday trading, Sirius XM stock tumbled 8.6¢, or 16.4%, to 44¢.

In trying to shore up its cash position, Karmazin said the company was forced to make some decisions that might not be favorable to subscribers, such as raising the price of its family plan package to $8.99 a month from $6.99 and implementing a monthly $2.99 fee to get stations streamed over the Internet. That service was previously free to subscribers.

The emphasis on financials paid off. For the second straight quarter, Sirius XM reported positive adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA. This yardstick is particularly important for cash-strapped companies such as Sirius XM because it also indicates ability to repay debt.

Back-to-back positive EBITDA quarters signal a turning point for Sirius, Karmazin said. Indeed, it was only a few months ago that a debt-laden Sirius appeared likely to seek Chapter 11 bankruptcy protection. But a $530 million investment in February from John Malone's Liberty Media (LINTB) resolved those issues for now, and Karmazin raised his forecast for adjusted EBITDA for 2009 to $350 million from $300 million. He also said the company would have enough cash on hand to meet its debt covenants through the end of 2010.

Sirius XM has been particularly vigilant about reducing its programming costs. Every content deal that has come up for renewal in the past two quarters has been renegotiated at a lower price, executives say. They declined to identify which deals specifically were renegotiated, but programming costs in the first quarter were reduced by 10%, or $11 million, from the year-earlier period.

With Olga Kharif in Portland, Ore.

Lowry is a senior writer for BusinessWeek in New York.

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