3 Answers From Sirius XM

Well done, Sirius XM Radio (Nasdaq: SIRI  ) .

The satellite radio giant turned the corner -- in many different ways -- with this morning's third-quarter report. Since I lined up three questions for Sirius XM yesterday, it's only fair to come back with the mostly positive answers.

1. Where are the subs?
After back-to-back quarters of net subscriber defections to kick off the year, Sirius XM got back on track. It more than offset 1.5 million in cancellations with 1.6 million gross additions during the quarter. Sirius XM closed out the period with 18,515,730 subscribers, or 102,295 more than it had three months earlier.

Two months ago, I opened up the floor for predictions on the media company's account tally. I promised to crown a victor among the dozens of forecasts, and it certainly wasn't me.

I was expecting a net decline of 80,000 subs, well short of the 404,411 and 185,999 listeners Sirius XM lost during the first and second quarters, respectively. Despite the auto industry's "Cash for Clunkers" injection ramping up auto production lines, I figured that even more cancellations would pour in after recent rate hikes and the introduction of a new music royalty fee.

I was wrong, so who was right?

Satwaves.com's David "Newman" Phillips won the horseshoe match. His stab at 18,510,000 was off by a mere 5,730 listeners.

Phillips made his post earlier this week, so I should probably also hand out an honorary winner submitted closer to the time the article was actually published. Phillips nailed it -- no doubt about it -- but he also had the luxury of getting a clearer view of the economy in September and the robust carmaker revival that was hammered home with Ford's (NYSE: F  ) blowout performance.

The closest of the predictions around the time the article was originally written in September was dcsilver, off by less than 20,000 bopping heads with his 18,535,500 target.

The most impressive part of the metric is that self-pay subs grew both sequentially and year-over-year. Sirius XM may have had more overall subscribers a year ago, but there are slightly more today that are actually paying beyond the free trial. To this end, churn and conversion rates may have weakened over last year but they are clear improvements to where Sirius XM was earlier this year.

You sucker-punched me, Sirius XM, but I kinda like the taste of blood going down my throat. Nice shot!

2. How is the bottom line holding up?
My September stab was closer on the income statement.

"Rate hikes and cost savings should deliver better top- and bottom-line results than analysts expect," I wrote at the time. "Wall Street expects Sirius XM to post a loss of $0.02 a share on a 1% year-over-year decline in revenue. I believe that Sirius XM will manage to marginally grow revenue."

Pro forma revenue grew 3% to $629.6 million, as new fees and upgrades to "best of" and streaming packages helped boost the average revenue per user. There are slightly fewer subs, but they're paying a little more.

When you grease the income statement with a refreshing 19% slide in cash operating expenses, a decent top line is transformed into an inspiring bottom line. If it wasn't for charges related to Sirius XM restructuring its debt at lower interest rates -- a good thing, obviously -- the radio star would have actually posted breakeven results. It's on that basis that Sirius XM smoked the pros basking in their targeted deficits.

Free cash flow clocked in at a positive $26.7 million, and Sirius XM sees good things in 2010. It is forecasting adjusted operating profits to grow 20% next year, on top of the "over" $400 million it is still looking to generate in 2009.

Shares outstanding ballooned to 3.6 billion, and that is before accounting for Liberty Capital's (Nasdaq: LCAPA  ) 40% preferred share stake. This is going to be a factor as future profits get divided into a greater number of shares, but worrying about slicing up earnings is a good problem to have for a company that was on the brink of bankruptcy in February.

Sirius XM also expects to grow its subscriber count in 2010, and that's noteworthy. It abandoned providing subscriber guidance a year ago when its prospects soured. It's nice to see the swagger is back, Mel Karmazin.

3. How about them Apples?
Despite having a complete quarter on the market, Sirius XM was tightlipped about the actual performance of its official streaming app through Apple's (Nasdaq: AAPL  ) App Store for iPhone and iPod touch owners. Karmazin preferred to discuss the recent debut of its SkyDock that is being sold at Apple stores. It is one of the cheapest receivers to make, since it relies on an iPhone or iPod touch to serve as the car-tethered unit's display module. It's also available at Best Buy (NYSE: BBY  ) , Amazon.com (Nasdaq: AMZN  ) , and RadioShack (NYSE: RSH  ) -- essentially the places that matter.

Silence isn't necessarily a death sentence for the Apple app. Amazon hasn't provided hard metrics on its Kindle since its rollout two years ago, and no one doubts that the e-book reader is a winner. However, it's worth noting that Sirius XM's guidance for 2010 is based on 11.3 million cars being sold, along with Sirius XM's improving penetration as a factory-installed feature.

The SkyDock and the Sirius XM app are sexy, but this is still a company that is growing as auto buyers tire of terrestrial radio.

Keep on motoring, Karmazin.

What did you think of Sirius XM's report? Submit your thoughts in the comment box below.

Apple, Amazon.com, and Best Buy are Motley Fool Stock Advisor picks. Best Buy is a Motley Fool Inside Value selection. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 05, 2009, at 2:34 PM, jamf92 wrote:

    Well said. Now they need to break that $1 line sooner than later. So drink up the bubbly tonight SIRI but tomorrow is a new day and that $1 line in the sand is still lurking out there. But kudos have to be given where they are deserved and I was very happy to hear SIRI come back and slap the naysayers around a bit :)

  • Report this Comment On November 05, 2009, at 3:11 PM, dcsilver wrote:

    It's nice to see some recognition. Thanks for the look back Rick.... That being said, I was a little disappointed by the conference call. As I stated in my blog, which like Rick, tends to talk exclusively about Sirius, I was looking for more out of Sirius. See http://caps.fool.com/Blogs/ViewPost.aspx?bpid=287894&t=0....

    As the economy continues to swing wildly back and forth, I want to see Sirius take advantages of their monopoly and start branching out. Start talking about Sirius 2012. What the future holds, how different revenue streams are going to create value. I can’t believe my thoughts and expressions are more negative than Rick’s, this is a first for me.

  • Report this Comment On November 05, 2009, at 3:36 PM, GeorgioG wrote:

    Nov 15TH is the start of the masive ad campaign that will rebrand this company after a noisy 2008-2009. A lot of longs have been begging for this.

  • Report this Comment On November 05, 2009, at 3:39 PM, hotkarlito wrote:

    Still waiting for SIRIDoom and any other "shorters" to chime in with their negativity. Glad to see SIRI stuck it to all the naysayers. As soon as the economy turns around, people have more money to spend on things like satellite radio, and SIRI explores new market opportunities, this stock will be $1+ in no time.

  • Report this Comment On November 05, 2009, at 4:44 PM, wolfwuf wrote:

    hotkarlito...they (the shorter's) can't chime in they're too busy trying to catch up. I had expected a better run-up on the stock but then remembered for most of my very long time owning this stock it always went lower on good news....so maybe its not so bad.

    Got to watch the David Faber interview and he didn't squash Mel or the stock....that's a plus 'cause he's a tough one.

  • Report this Comment On November 05, 2009, at 4:54 PM, dstnewman wrote:

    Rick, thanks for the props. Great article. I think Sirius XM may start to get a little more respect that it deserves. Make sure your Foolish friends take note ;)

    David "Newman" Phillips

    http://www.satwaves.com

    Newman@satwaves.com

  • Report this Comment On November 05, 2009, at 4:55 PM, dstnewman wrote:

    Rick, thanks for the props. Great article. I think Sirius XM may start to get a little more respect that it deserves. Make sure your Foolish friends take note ;)

    David "Newman" Phillips

    http://www.satwaves.com

    Newman@satwaves.com

  • Report this Comment On November 05, 2009, at 4:57 PM, geoslv wrote:

    Chime chime ...

    Normally his would be the beginning of a runup. We've seen it before. It has to sink in that this is a manipulated stock.

    Millions of short stocks, maybe to keep it under a dollar to justify a split.

    But I don't predict anymore.

    I'm not a shorter.

  • Report this Comment On November 05, 2009, at 4:57 PM, dedmunds wrote:

    Well said hotkarlito...

    However it's just a matter of time and SIRIDick will be posting the NEGATIVITY COMMENTS!!

    GO SIRI !!!

  • Report this Comment On November 05, 2009, at 7:48 PM, JWILLI44 wrote:

    It was a tip that Mel K said the skydock was the cheapest radio to make. Now, with the Onyx only $79.99, the Stratus 6 at $69.99, The skydock can be sold for as low as $50.00 on Black Friday. If they can get these things to move, subscribers will flock especially with the new advertising campaign that is coming. I wonder, has there been any SIRIUS XM tv commercials since the merger. I dont believe so, besides a small plug during baseball games. This will be an exciting time for SIRIUS XM to reach new levels

  • Report this Comment On November 06, 2009, at 12:30 AM, BigVincent wrote:

    Siri Dumb received his last paycheck yesterday. No more bashing from a paid basher that can't bash reality down. LOL

  • Report this Comment On November 06, 2009, at 5:13 AM, wuff3t wrote:

    Amazing. A largely positive article about SIRI from Rick, no negative comments, and the people who normally complain about the negative comments are now complaining that there aren't any negative comments!?

  • Report this Comment On November 06, 2009, at 6:42 AM, SIRIDoom wrote:

    Steer clear of Sirius

    From heavy debt to an outdated business model, the company is still in serious trouble.

    When a loss of $11 million is applauded as a "great quarter," you know a company is in bad shape.

    Last Trade: 0.6350

    investors should steer clear of Sirius' stock as the company has a long way to go before it can post sustainable earnings.

    Sirius' stock has fallen nearly hand in hand with retained earnings over the past three years. The company is in the hole for more than $10 billion and living off debt. The stock drop -- 84% during the past three years -- is the direct result of past performance. While that trend may (or may not) be turning around, the ravages to the company's financial statements won't be undone quickly.

    Sirius took steps to hold its own financially by refinancing at lower interest rates and pushing its earliest refinancing need to 2011. But the debt load is overwhelming, and the threat of a massively dilutive Liberty Media equity conversion should make stock holders quake.

    REV-SPLIT 25 for 1 is the future of SIRI stock...

  • Report this Comment On November 06, 2009, at 11:32 AM, hotkarlito wrote:

    SiriMORON, given the company's history, that WAS a great 3Q for SIRI. For someone who supposedly knows "so much," your ANALysis implies nothing but shorting the stock. Most of the people on here are in the long, so back off.

  • Report this Comment On November 08, 2009, at 10:13 PM, DiscoFinance wrote:

    There is a movie/DVD about Sirius XM: "Stock Shock" explains how the whole naked short selling stock market manipulation thing works-and how the company nearly went bankrupt. Good flick. Amazon has it or stockshockmovie.com has a movie trailer.

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