Sirius XM Radio (Nasdaq: SIRI) continues to move in the right direction.

This morning's third-quarter report was solid. Adjusted revenue climbed 15% to $722.5 million, the result of a 7% increase in subscribers and the fact that the average account is paying more after a music royalty fee was implemented last summer.

Free cash flow more than doubled, and earnings of $0.01 a share were ahead of both the breakeven results it posted a year earlier -- after backing out debt-restructuring moves -- and the nil city that analysts had been expecting.

I had three questions earlier this week heading into this morning's report. Let's see how Sirius XM responded.

1. Where's Howard Stern?
"We hope that prior to the third-quarter earnings call, we'll be able to have an announcement as to what is going on with Howard," Chief Financial Officer David Frear told investors during the company's second-quarter call.


CEO Mel Karmazin announced that this morning's update is that there is no update.

"Discussions continue," he said -- and that's that.

This matter will obviously be settled before Sirius XM's next call. It has to be. Stern's five-year deal ends next month.

This isn't a matter of Sirius XM trying to build up drama. Frear wouldn't have told analysts that the company should have something to announce. One side or the other is driving a hard bargain, and the longer this plays out, the more likely it becomes that the two sides may agree on an extension of a year or two, instead of the longer kind of deal that would provide programming stability.

2. How is the model holding up?
Since we already knew that Sirius XM landed 334,727 net new subscribers, the model-based metrics that remained unanswered would be cleared up in the earnings release itself.

The responses are encouraging.

  • Are subscriber acquisition costs improving? Sirius XM is shelling out $59 for each gross addition, ahead of the $69 rate from a year earlier.
  • Is churn heading lower? At 1.9%, it was the same as the previous quarter but marginally improved from the 2% rate of a year ago. This roughly means that 1.9% of its subscribers are canceling in any given month.
  • Are programming costs in check? Definitely. Programming and content overhead actually fell by 5% to $88.9 million.
  • Is the average revenue per subscriber growing? This was a given, since the nearly-$2-per-month fee went into effect last August.
  • Is the average ad revenue per subscriber growing? Yes. Net advertising revenue climbed 29%, well ahead of the subscriber gains. I realize that this may be a sore subject, because premium radio isn't supposed to be about commercials and sponsorships, but it does show that the media giant's marketing team is doing a better job of reaching out to advertisers.

I should have also brought up conversion rates, the metric that details how many of the new car buyers are opting to pay for Sirius or XM once their free trials run out. The conversion rate is now up to 48.1%, ahead of the 46.2% from a year ago.

3. Will Sirius XM's report be good enough for Wall Street?
The stock had soared 55% since the eve of its previous earnings release, so I was skeptical about Sirius XM's ability to keep the party going.

It's not just my inner cynic whining. The stock has reversed positive or negative momentum in each of its three previous quarterly reports.







Day Change

Gain Between


Aug. 4 $1.01 $1.06 5% (18%)
May 4 $1.23 $1.18 (4%) 12%
Feb. 25 $1.10 $1.07 (3%) 80%
Nov. 5, 2009 $0.61 $0.64  --  --

My assessment was initially wrong. The stock opened higher and hit a fresh two-year high shortly after the open. However, the stock turned negative a handful of minutes into the trading day, despite the otherwise buoyant market.

Where do we go from here?
Now that Sirius XM is profitable, Liberty Capital's (Nasdaq: LCAPA) 40% preferred-share stake in the company is being factored into the fully diluted share count. In other words, there are 6.4 billion shares to contend with, and Sirius XM commands a market cap of $10 billion and an enterprise value of $13 billion.

Bears will argue that even Sirius XM's increased guidance points to a slow-growing, low-margin company with a lofty price tag. Now that the music royalty fee has been worked into the mix over the past year, revenue growth likely will decelerate from this past quarter's adjusted 15% clip. The company's guidance for the final quarter calls for net subscribers to grow slower than last year's fourth-quarter rate. This will be good news for Sirius XM's free cash flow and bottom line during the quarter itself -- a sixth consecutive profitable quarter should be a layup -- but it may raise growth concerns.

Bulls will argue that Sirius XM is just getting started. Even satellite subscription darling DirecTV (NYSE: DTV) grew its stateside television subscribers by only 3% over the past year. On the cable front, Cablevision (NYSE: CVC), Comcast (Nasdaq: CMCSA), and Time Warner Cable (NYSE: TWC) all recently posted sequential declines in video customers during the third quarter. Sirius XM may be growing slow, but it's a relative speedster.

Sirius XM has also overcome its demons. There are no liquidity concerns on the horizon. Revenue, earnings, and cash flow are improving. This is a legitimate media giant, even if it's not necessarily a cheap one.

The market-thumping results continue, with or without Stern's commitment.

What did you think about Sirius XM's report? Share your thoughts in the comments box below.