Sirius XM Shines a Little Brighter

In the past few weeks, Sirius XM, named after the night sky's brightest star, has regained a bit of lost luster.

After two years of struggling with a delayed merger, near bankruptcy, and the threat of delisting from the Nasdaq, Sirius XM (SIRI) may be turning a corner. On May 4 the satellite radio company reported first-quarter profits of $41.6 million, reversing a $52.7 million loss a year earlier.

Revenues rose 11 percent to $670.6 million, partly due to a music royalty charge added to many subscribers' bills. But the company also managed to sell more higher-priced and additional online subscriptions, and increase advertising revenues by 18 percent. "Sirius XM's future is bright," Chief Executive Officer Mel Karmazin told analysts during a conference call to report the results.

On Apr. 27, Sirius announced it had avoided delisting from the Nasdaq; its shares closed May 4 down 5¢ at 1.18, after reaching a 52-week high of 1.25 on May 3. Sirius' shares had hit a low of 7¢ last February, and Nasdaq had threatened the company with delisting. Sirius shares have nearly doubled in price since the beginning of the year.

On Apr. 28, Sirius announced it would pay back $114 million of debt on June 1, retiring it early as it replaces high-interest debt with lower-cost obligations. "The big cloud has now been lifted," says Martin Pyykkonen, an analyst with Janco Partners who upgraded Sirius XM shares to a buy rating on Apr. 13. "The company is coming out of a dark period."

Challenges Remain

Sirius XM, formed by the 2008 merger of Sirius Satellite Radio and XM Satellite Radio, still has a host of challenges. Some subscribers are defecting to cheaper Internet radio services. The company lost 305,547 subscribers in the first quarter who'd bought the service from retail stores, separately from their cars.

Shock jock Howard Stern's popular Sirius show is a big draw for the service, but his exclusive contract with Sirius expires at the end of 2010. Stern is operating without a new contract and it's unclear whether he'll stick with Sirius. Stern's agent, Don Buchwald, didn't respond to requests for comment.

Sirius is also battling the Federal Communications Commission, which wants to use airwaves adjacent to Sirius' for wireless broadband service, which Sirius has said could interfere with its broadcasts. "Sirius XM cannot rest on its laurels," says Susan Kevorkian, a program director at market researcher IDC. She suggests the company expand its menu of programs and concerts, and distribute its service on a wider range of devices, including tablet computers and set-top boxes.

Investors are starting to believe in Sirius' story again. The company averted bankruptcy last year after John Malone's Liberty Media loaned Sirius $530 million in exchange for preferred shares that can be converted into 40 percent of the company's common stock.

On Mar. 31, Liberty Media received government clearance to acquire more than half of Sirius XM's common shares at some point in the future. Liberty may buy common shares that would lift its stake to more than 50 percent in the coming months, according to a person familiar with the situation.

Healthier Operations

Sirius' operations are also healthier. The U.S. economic recovery has extended a rebound in subscribership that began last year when the government's cash-for-clunkers program spurred new car buying. In the first quarter, Sirius added a net 171,441 subscribers, coming close to reaching 19 million users, which it had before last year's plunge. In 2009, Sirius lost more than 231,000 subscribers amid plummeting sales of new cars that had satellite radios preinstalled.

Moody's on May 3 predicted U.S. car sales will rise to about 11 million vehicles this year, up from 9 million in 2009. Sales could top 17 million units in 2014.

Sirius expects to add more than 500,000 net subscribers this year, but could do even better, says Tuna Amobi, an analyst with research service Standard & Poor's (MHP) who has a hold rating on the stock. "Next quarter, they'll increase their guidance almost certainly," he says.

Sirius' star appears to be rising.

Before it's here, it's on the Bloomberg Terminal.