Sirius XM: The Good and Bad Earnings News

Good news at Sirius XM (SIRI) was tempered by a hard dose of reality on Nov. 5. Sure, the top satellite-radio provider added subscribers, increased revenue, and narrowed losses in the third quarter. At the same time, Sirius is girding for slower growth than in the past, and analysts remain concerned about the company's ability to control costs. Investors were on the lookout for any signs of rebound after two quarters of recession-fueled subscriber losses and a cash crunch in the early part of the year sent Sirius stock into a tailspin. Even after the third-quarter customer gain the subscriber base is at 18.5 million, down from 19 million at the end of 2008. Sirius CEO Mel Karmazin struck an upbeat tone as he presented financial results. "Our subscriber base is large, loyal, and satisfied, and is expanding again," he said. Sirius added 102,295 users; many analysts expected more defections after Sirius lost 590,421 users in the first half. Investor Expectations LowerSales went in the right direction too, increasing 3%, to a record $629.6 million, helping to narrow losses to $181.9 million from $217 million a year earlier. Sirius is benefiting from a rebound in sales of new cars, many of them with satellite-radio service preinstalled. Car sales may rise to 11.4 million units next year, from 10.3 million this year, say analysts at Standard & Poor's, which like BusinessWeek is owned by The McGraw-Hill Companies (MHP). "I am extremely happy with the state of our business today and what's ahead for us," Karmazin said during the earnings call. Sirius stock rose almost 5%, to 64¢ after the earnings were released. Good feelings aside, investors may need to settle for a far slower pace of growth than the company has had previously. "Expectations have come down," says Standard & Poor's analyst Tuna Amobi. "This company is not going back to these levels of double-digit growth." Amobi expects Sirius to add 200,000 net subscribers in the fourth quarter, and 300,000 users in all of 2010. In 2008, Sirius added 1.65 million users and its total customer base increased 10%. Sirius expects revenue to increase in the mid-to-high single digits this year. In 2008, sales climbed 18.4%. Big Automaker Concessions UnlikelyAs growth slows, it will be harder for Sirius to generate substantial free cash flow, which analysts define as the cash raised from subscriptions minus the costs of providing the service. "The company needs to continue to add subscribers and boost revenue per (subscriber) in order to generate significant amounts of free cash flow going forward," says Lev Polinsky, an analyst at JPMorgan Chase (JPM), which has provided banking services to Sirius. At the same time, the company will need to keep a lid on expenses. In the coming months, Sirius hopes to renegotiate the deals that put its radio service in cars. While Sirius doesn't disclose terms, the arrangements usually involve up-front expenses for Sirius. Analysts say carmakers may be unwilling to make many concessions. "The auto companies are hurting also," Amobi says. "I am not counting on any major upside on these contracts." After it refinanced a chunk of debt earlier this year, Sirius' third-quarter interest expense was $78.5 million, a 60% increase from a year earlier. The service provider also expects to spend $170 million this year, $220 million in 2010, and another $125 million in 2011 to launch new satellites to improve and continue its service coverage. Other expenses may follow. On Nov. 15, Sirius plans to launch a big branding campaign, its first major advertising push since it combined with rival XM in 2008. Howard Stern's Departure Could HurtSirius released an application that puts its service on Apple iPhones. But the app doesn't include key content, such as shows from the popular Howard Stern. As a result, instead of recruiting new users, it's been mainly a retention tool, says Susan Kevorkian, a program director at consultant IDC. Stern's contract expires at the end of 2010, and if he leaves, that could lead to an outflow of subscribers. Kevorkian says Sirius needs to offer a wider array of services on mobile phones and online to battle entertainment rivals like the iPod and Web radio services including Pandora. "Fundamentally, Sirius XM is a content provider and aggregator," she says. "What's required here is an overall identity shift. We don't think they are managing their growth strategy as effectively as they could."

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