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Tuning In on Sirius

Growth is nice, but investors want to see less spending on each new user.


(SIRI) - Get Free Report

hit the gas on retail sales last month. But come Tuesday, investors will be checking the fuel tank.

The New York satellite radio shop is expected to deliver a third-quarter financial report before the market opens, and all eyes will be on the price of user gains.

A big subscriber growth number used to be the only pill Wall Street needed to quell its anxiety over mounting losses at Sirius and rival

XM Satellite Radio


. But as XM's report last week of

surging costs showed, investors are now counting on seeing a little less red ink. XM shares have fallen 20% this month on fears of widening losses.

Early reports suggest that Sirius is getting a leg up on XM after a summer of lagging behind in retail radio sales. For September, Sirius accounted for 56% of total store sales for satellite radios. And with Howard Stern joining in January, Sirius is expected to improve its subscriber sales.

"We continue to believe Howard Stern's migration to Sirius will be an important catalyst for the stock during the second half of 2005 and early 2006," writes Merrill Lynch analyst Laraine Mancini, who has a buy rating on the stock. Merrill does banking on Sirius.

The worry is that slashing prices and boosting promotions to goose sales may take a hefty toll on expenses. But at least these are actual customers signing on for service. Another growing concern is that Sirius has been

padding its subscriber numbers by counting new cars as they are delivered to dealers, rather than counting individual users.

In an effort to start the week on a good foot, Sirius said Monday that it had extended its exclusive radio supply deal with



until 2012. Sirius says it will add 750,000 new subscribers in the 2006 car model year that started last quarter.

But new cars, while great for giving Sirius confidence in its forecasts, don't always turn into paying customers.

"If you count them when they are sitting in the lots, it's not going to matter how much the little old lady driving the Chrysler hates Howard," says one former Sirius investor who now holds XM.

Sirius reports a suspiciously low monthly defection rate of about 1.5%, but that number is likely to climb as the company eventually cleans the nonpaying and postpromotional users from its ranks.

Even optimists are bracing for some bad news on that front. Merrill's Mancini expects churn rose to 2% in the third quarter.

Analyst expect Sirius to post a net loss of 16 cents a share on $64.8 million in sales for the quarter ended Sept. 30. A year ago, the company lost 14 cents a share.

Sirius shares rose 9 cents to $6.11 in midday trading Monday.