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Welcome home, bulls.
If you think this column is going to be an open lovefest over Sirius XM Radio (Nasdaq: SIRI ) , you're absolutely right. The caveat is that I'm also writing today about the five reasons for investors to worry about the satellite-radio giant.
Let's get into the reasons to don the party hats.
1. Fatter billfolds
Sirius XM may be watching over fewer subscribers than it did at the beginning of the year, but most of the remaining listeners are paying more. Sirius XM began charging for online streaming in March. It also bumped the monthly rate for secondary receivers within the same family account by 29%. Over the summer, Sirius XM instituted a music royalty fee that added nearly $2 to the monthly tab. That's some pretty impressive pricing flexibility for a company whose individual parts merged under the condition that it leaves its base rates alone until 2011.
The end result is that analysts see revenue growing by 9% next year, even if subscriber tallies flatten out or continue to inch lower.
The vetting process also has its benefits, as advertisers are likely to pay more for a loyal audience that didn't flinch at the effective rate increases.
2. Just go with the cash flow
Sirius XM disavowed most of its revenue and subscriber-growth projections last year, but it's been sticking to its cash-flow guidance. In fact, most of the Sirius XM updates since then have been to actually raise its target.
Sirius XM now expects to generate adjusted operating income of $400 million this year, up from the $350 million it was targeting a quarter earlier.
Operating profits don't mean a whole lot if debt obligations are percolating, but there is good news on that front, too.
3. No more panhandling
Sirius XM was desperate earlier this year. It was swapping debt for equity at pocket-change prices. JPMorgan Chase (NYSE: JPM ) and UBS AG (NYSE: UBS ) were creditors with loans to Sirius XM coming due in a few months. After proclaiming that filing for bankruptcy wasn't an option, Sirius XM relented.
With a debt-repayment hurdle looming, a grim press release warned that "it may be forced to file for bankruptcy protection as early as February 17, 2009."
The terms were harsh -- with Liberty amassing a preferred-share stake equaling 40% of the company on top of a costly loan -- but beggars can't be choosers.
Sirius XM isn't begging anymore. It had no problem offering $257 million in notes last month at attractive rates, and without diluting the share count. Sirius XM's near-term survivability is no longer questioned, especially by the company itself.
4. The synergies are real
The combination of two industry titans typically results in material cost-cutting initiatives. This is becoming apparent with every operating profit upgrade out of the Sirius XM camp. Everything from station consolidation to combining operations translates into some serious nibbling at the overhead.
The synergies are even more pronounced when the end result is essentially a monopoly (fooled ya, FCC suckers). Since Sirius XM is simply competing against itself, subscriber acquisition costs continue to get cheaper. It no longer has to differentiate -- or denigrate -- its satellite-radio rival to get its marketing message across. It doesn't have to compete for automaker attention. Just watch Sirius XM's negotiating prowess as its star contracts come up for renewal or as terrestrial celebrities explore the migratory process.
5. Turning to the Web
Another satellite was placed into Sirius XM service this week. The satellite was launched in June and has completed all post-launch testing.
As you can imagine, these puppies aren't cheap. Satellite coverage gives Sirius XM a huge coast-to-coast advantage, but it's also something that may become less necessary as online connectivity becomes more pervasive.
The trend opens Sirius XM up to Web radio competition from the likes of Pandora, CBS's (NYSE: CBS ) Last.fm, and Yahoo!'s (Nasdaq: YHOO ) Y! Music, but none of those companies has the premium infrastructure in place with 18.4 million paying subscribers. It's the one with the branded content and the radio celebrity contracts.
In short, it's in the driver's seat when it comes to Internet radio. Sirius XM may not be able to get away with charging as much as it does now for the service in the future, but the global opportunity and the lighter lifting -- free of satellites, signal repeaters, and perhaps even proprietary receivers -- will result in a higher-margin giant than the market sees today.
Connectivity also affords Sirius XM some legitimate opportunities in e-commerce and social networking, areas where it's just starting to scratch the surface.
Do you still think Sirius XM is doomed? Before you answer, check out the five reasons to worry about Sirius XM.