Sirius XM Steadily Overcoming Investor Doubts

NEW YORK ( TheStreet) -- Although shares of Sirius XM ( SIRI) have been on fire all year, up well over 30%, there are many who still question whether the company's business model is sustainable.

There's no other explanation for the fact that the company's short interest position, which is now up to 353 million shares, has steadily grown. This has occurred even as Sirius continues to post strong subscriber growth numbers.

Despite overcoming its near-death experience in 2008, the shorts have never believed in Sirius' survival. Essentially, there are 353 million shares that have been sold short, and these investors are betting on the company's demise -- hoping to make money should the stock fall. Admittedly, there was a point when I had my own doubts. I'm not going to pretend that I was always faithful.

Now, with Apple ( AAPL) and Google ( GOOG) entering the audio streaming fray, bears are lining up with shovels ready to dig Sirius' grave and hoping to make out like bandits. Sirius, however, has other ideas. Following a solid second-quarter performance that produced record results in virtually every metric, Sirius' management has every intention of proving these bears wrong.

The company reported profits of $125.5 million, or 2 cents per share on revenue of $940.1 million. While this may seem by some as a year-over-year decline in profits since Sirius earned $3.1 billion in last year's quarter, it's not exactly apples-to-apples. Last year's reversal of $3 billion of deferred income-tax valuation allowances was the main driver of that profit surge. Even with the 2 cents per share earned in this quarter, the company still met Street estimates.

Likewise, revenue of $940.1 million was good enough for a 12% year-over-year improvement, enough to beat the consensus estimate of $935 million. Elsewhere, the company announced a 15% increase in net subscriber additions, or about 716,000. This means Sirius ended the quarter with 25.1 million total subscribers, which is a 9% year-over-year increase.

I don't believe there is a company out there in the subscription-only entertainment industry that can match Sirius subscriber growth performance over the past couple of years. I won't disagree that Netflix ( NFLX) comes close. But here's the difference: As much as I've always liked Netflix's results, from a subscriber retention perspective it's been tough to gauge how Netflix has performed quarter to quarter and year over year.

While we do know that Netflix has been growing net subscribers at an impressive rate, we don't know how the company has performed in terms of cancellations or what the subscription industry calls "churn." For Sirius, though, over the past three year or so, churn has remained stable at 1.99% to 2%. This quarter, however, churn was down to 1.97%.

Although it looks like a small number, don't be quick to discount how important this slight improvement in churn really is. It can mean as much as one million additional subscribers during the full-year. It also means that Sirius is becoming more "sticky" with its users and subscribers are demonstrating incredible brand loyalty. anagement figured out ways to squeeze extra profits out of each subscriber it kept. ARPU, which stands for average revenue per user/subscriber, was up 23 cents sequentially to $12.28. Whether Sirius was going to sacrifice profits for revenue and subscriber growth was one of my chief concerns heading into this earnings report.

Sirius is known for aggressively reducing rates to maintain its subscriber count. Management figured out a way to meet conservative expense control with strategic growth initiatives such as the telematics platform, which I wrote about recently. It's still too early to proclaim telematics a bread-winner. But it's clearly not a money-loser.

In the meantime, I don't believe that there should be any further questions about Sirius' business model. The company continues to do the impossible -- grow despite stiff competition from Pandora ( P), Spotify and now Apple, which is planning to enter the automobile dashboard at the beginning to 2014. The bears, however, have proven to be incredibly patient. At some point one side will win. So far in 2013, the victor is clearly Sirius.

At the time of publication, the author held shares of Apple.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst ¿ bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

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