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Sirius XM to Report Q2 Results Wednesday: The Number That Matters

By: SeekingAlpha
Posted: 8/2/2010 7:09:00 AM
Referenced Stocks: ARPU;FCF;SAC;SIRI
Satellite Radio Playground submits:

by Dennis "Cos" Costa

On Wednesday, August 4th 2010 at 8:00 a.m. ET, Sirius XM Radio ( SIRI ) will be conducting a conference call to discuss the company's second quarter 2010 financial and operating results. Investors and analysts have been waiting for this call with much anticipation since the company preannounced on July 7th that they had added over 583K net subscribers in the second quarter. In the same press release, the company raised its guidance for full-year 2010 to more than 1.1M subscribers, while maintaining its guidance to achieve over $100M in free cash flow.

This news of such a large addition in subscribers was achieved with only modest, but stable, vehicle sales being reported in the same quarter. It also was announced after the company had already raised subscriber guidance on May 17th to over 750K, from 500K for the full year. It goes without saying that all eyes will be focused on how the company was able to achieve such dramatic numbers in a relatively flat vehicle sales environment. It will also be of interest to hear what impact these additional subscribers will have on important company metrics in both the short and longer term.

While these subscriber growth numbers appear positive, the company's stock price is hovering around $1.00 per share and it's a "banner" for investor confusion at this price. After almost a year of debate and concern over the company maintaining its listing on NASDAQ, having hundreds of pages written debating the pros and cons of a reverse split, surviving two of the company's automotive partners washing through bankruptcy, and Sirius XM regaining entry into the Russell indexes, the company's equity continues to frustrate investors. It turns out that all of these regulatory, indexing, and partner uncertainties, have had little to do with the equity price appreciation over the past months.

The company has been executing its business plan effectively, meeting and exceeding all of its operating and financial goals quarter-over-quarter, and year-over-year since the merger two years ago. In the first quarter of 2010, Sirius XM reported record pro forma income from operations of ~$158M, positive GAAP income of $41.6M, or $.01 cent per share. The company paid cash for bonuses to employees, representing a change from the past practice of using common shares as payment, which would have also resulted in dilution of the common shareholder. In the first quarter, Sirius XM made lump sum payments for operating expenses and programming, eliminating fees and high interest expense which would have reduced income in future quarters of 2010, into early 2011. They also accounted for increased capital expense, primarily due to an increase in satellite spending. Even with an anouncement of paying $114M in cash, as an early repayment of 10% PIK notes due in 2011, the company's equity still hasn't received any appreciation for the company's efforts.

While the above performance is certainly notable, the real performance, which many who have followed this company are waiting to see evidence of, is growth in cash. The company needs to become the cash-generating machine that was promised by CEO Mel Karmazin. With all of the company's accomplishments of the last eighteen months, the reported free cash flow in the first quarter of 2010 was a negative ($127M). While all of the explanations accounting for the use of cash above are understandable in rationalizing this number, it is not what will drive the company's equity to higher levels. As evidence of this sentiment by investors, on May 3rd, the day before the company's last conference call, the price of the stock was $1.23 per share. By the end of the week on May 7th, the stock was trading at $1.01 per share after reporting this negative free cash flow number.

Going into this call, many will tout the average revenue per share (( ARPU )), the subscriber acquisition costs (( SAC )), the churn rate, and the conversion rate for self-paying subscribers, and that great total net additional subscriber number, as the important key metrics to watch when they talk about Sirius XM's performance. While these numbers are important operating metrics, and interesting discussion on many forums, it will be the Free Cash Flow (( FCF )) that is the "Show Me" number for analysts and institutional investors when they make their decisions in the upcoming weeks and months. For investors, a suprise to the upside in positive free cash flow will be a welcome surprise.

Disclosure: Long SIRI

See also Valassis Communications, Inc. Q2 2010 Earnings Conference Call Transcript on