Sirius XM Preview: Recovery Intact

Sirius XM should continue to show signs of improvement in its first-quarter results, analysts say.
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) --

Sirius XM

(SIRI) - Get Report

appears to be a drastically different company when compared to where it was a year ago, a sentiment that will likely be echoed after the satellite provider posts first-quarter results Tuesday.

Last year,

Sirius XM

posted a first-quarter loss following a sharp drop in net subscribers. The release came several weeks after

Liberty Media

saved the company with a

$530 million capital infusion

. On the day of the earnings release, Sirius XM's stock fell to 43 cents.

Fast-forward to now: Sirius XM hit a new 52-week high of $1.25 Monday ahead of Tuesday's report. Fears of a



have vanished, and investors already have a pretty good idea of how the company's first-quarter report will shape up.

In an earnings pre-release last month,

Sirius XM

said it added 171,441 net subscribers in the first quarter of 2010, compared to a year-ago net subscriber decline of 404,422. Churn, which measures how well Sirius XM is retaining customers, fell to 2% from 2.2% in the same quarter of 2009.

Perhaps the most crucial improvement for Sirius XM has been in the conversion rate metric, which measures how many free-trial subscribers convert to paying customers. For a company that has pinned its success to auto in-dash installations, the conversion rate has become its primary measure of success. The rate rose to 45.2% in the first quarter of 2010 from 44.6% a year ago.

"In our opinion, one of the more important trends is the increasing conversion rate," Barrington Research analysts James Goss and John Hain wrote in an earnings preview Monday. "We feel the improving conversion rate is demonstrative of consumers' continued demand for the company's programming and services."

What isn't known is how Sirius XM performed on the top and bottom lines. One year ago, Sirius XM said the first-quarter net loss attributable to shareholders was $236.6 million, or 7 cents a share, and revenue totaled $586.99 million.

Those numbers have already improved for Sirius XM. In the fourth quarter of 2009, Sirius XM said it had revenue of $676.17 million and net income of $14.16 million, or breakeven on a per-share basis.

No analyst covering Sirius XM is expecting a profit in the first quarter on a per-share basis, but that's mostly due to the large number of shares outstanding. Sirius XM currently has 3.88 billion shares outstanding, or more than 6 billion on a fully-diluted basis to account for Liberty Media's preferred share stake.

"If you take a small net income figure and you divide it a few billion times, it'll round to break even," Barrington's Hain said in a phone interview Monday.

Barrington is forecasting net income of about $15.2 million, Hain said, while revenue should increase to $682.2 million. That's above the Thomson Reuters consensus of analysts of $671.3 million and Sirius XM's fourth-quarter revenue total of $676.2 million.

Wunderlich Securities analyst Matthew Harrigan is forecasting revenue of $672.9 million, also above the Wall Street average. He also expects Sirius XM to break even for the quarter, acknowledging that the company's large base of retail shareholders would prefer to see something on the bottom line.

"Optically, it's always nice to make money," Harrigan added. "But given the very large number of shares, that's just the way the math works."

However, a bigger focus for analysts will be U.S. vehicle sales, a timely concern as automakers will offer April sales figures Monday. analysts predicted that April's Seasonally Adjusted Annualized Rate (SAAR) would fall to 11.2 million from 11.8 in March.

Now that auto sales are the primary driver for new subscriber growth, Barrington Research's analysts say they have maintained a watchful eye on consumer activity in that sector. Wunderlich's Harrigan shares a similar long-term focus.

"What matters is the sustainable run rate as opposed to how it bobs around on a monthly basis," Harrigan said. "Sirius is clearly viable. The only issue is how much the equity is worth. The long run issue will be the run rate of U.S. auto sales, which should logically be higher than where it is now if the economy recovers."

Aside from the conversion rate, Sirius XM hasn't offered other key metrics to measure its performance with automobile installations, such as the average revenue per subscriber (ARPU) and the costs of acquiring each subscriber (SAC).

Wunderlich's Harrigan said he expects ARPU to increase to $11.06, up from $10.43 in the year-ago quarter and $10.92 in the fourth quarter.

SAC should climb to $64.36 from $64 in the sequential quarter and $61 from the year-ago quarter, Harrigan said, which comes mostly due to the increased number of U.S. auto sales.

Investors will also be watching to see how well Sirius XM has been managing its cash flow. In the first quarter of 2009, Sirius XM had negative free cash flow of $3.6 million. In the fourth quarter, though, free cash flow turned positive at $150 million.

In the guidance that Sirius XM provided in February, the company expects free cash flow to remain positive in 2010 and revenue of over $2.7 billion this year. To account for the improvements, Sirius XM Mel Karmazin trumpeted positive signs in ARPU, SAC, subscriber numbers and free cash flow.

"These gains position us to deliver on our 2010 guidance," Karmazin said in the earnings release.

Tomorrow, Karmazin and Sirius XM will take its first step toward achieving that goal.

-- Written by Robert Holmes in Boston


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