Sirius XM Holdings Inc (SIRI)

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Sirius XM: An Earnings Surprise in the Making?

http://www.thestreet.com/story/10825691/1/sirius-xm-an-earnings-surprise-in-the-making.html?cm_ven=GOOGLEN


NEW YORK (TheStreet) -- When Sirius XM(SIRI) reports its second-quarter earnings results before the market open Wednesday, investors will be searching for some messages in the metrics -- including confirmation that the company's subscriber growth is improving month to month.
Analysts on average are forecasting break-even second-quarter earnings, compared with an adjusted loss of a penny a share.

Sirius XM has already announced net subscriber additions of 583,249 in the second quarter vs. net subscriber decline of 185,999 the same time last year; the estimate blew past analysts forecasts. The company also said that gross subscriber additions increased by 46% and deactivations decreased by 8% compared with the year-ago period.
Furthermore, self-pay churn improved to 1.8% for the second quarter from 2% in the year-ago period; and the conversation rate from a trial subscription included in the sale of a vehicle to a self-pay subscription improved in the second quarter of 2010 to 46.7%, up from 44.3%, which analysts called "dangerously low."
"Investors are somewhat tentative in terms of the overall story," S&P analyst Tuna Amobi said. "Cause it's a very low-priced stock. But if you go by the fundamentals improvement, it couldn't have been better." Amobi said the improving self-pay churn and climbing conversion rates bode well for the company in the back half of the year.
The overhang on Sirius stock from delisting threats is clearly behind investors for now.
Indeed, Sirius has painted a positive picture of the second quarter, but one of the key metrics that analysts are still anticipating is SAC, or subscriber acquisition costs. "How much SAC they incurred is one of the biggest factors that could affect profitability and free cash flow. SAC has been trending down for the company; it was at $64 in the fourth quarter of last year and $59 in the first quarter of this year.
"If SAC jumps, then that would take away from some of the improving trends... this year we think it could climb," Amobi said. Wunderlich Securities analyst Matthew Harrigan attributes such SAC effects to "auto inventory movements," in an investor note.

Another key area the analysts will be focusing on are how much of the pre-announced subscriber additions came from the retail channel vs. the auto channel. Furthermore, satellite CAPEX (capital expenditure) is expected to weight on free cash flow in 2010, with the XM-5 and Sirius 6 set to launch soon.
"Any time retail turns around ... should be a good sign. Retail has been a drag for the company," Amobi said.
During Sirius XM's second-quarter earnings call, analysts will also be looking for more color on Sirius XM's penetration of the used-car market; ARPU (average revenue per user), which has been helped by the pass through of music royalty fees; the impact of new products such as SkyDock on the retail channel; how well subscriber growth will be sustained; how well conversion rates will hold up and contract renewals with key personalities such as Howard Stern.
In the meantime, the biggest story will, of course, be next year. Barrington Research analyst James Goss said that as investors get further along in the year, increased subscriber counts will be a more important base for Sirius XM's business the following year than the current year -- "when the revenue benefits will exist for a full year and SAC will have already been incurred."
Looking into next year, Goss also noted that the Sirius XM merger will reach its three-year mark in mid-2011, allowing management an opportunity to take another look at its pricing plans.
Sirius XM has yet to post full-year positive net income, though the company posted its second-straight quarterly profit in the first quarter. For the first quarter, Sirius XM reported net income per share of 1 cent vs. a loss of 7 cents a share in the year-ago period, beating the break-even consensus estimate.
The company said it expects net subscriber additions for the full year to be about 750,000, and pro forma revenue to be about $2.75 billion vs. $2.79 billion projected by analysts.
Sirius XM stock has tumbled 2.4% to $1.02 in Tuesday early afternoon trading. Its shares have gained more than 70% year to date.