Sirius XM Radio First Quarter Earnings Preview

By Relmor Demitrius -

Sirius XM Radio (NASDAQ:SIRI) will announce their first quarter conference call results on Tuesday, May 4th.  Sirius XM usually reports on a Thursday and most recently the same day that Liberty Media (NASDAQ:LINTA) reports.  Liberty Media holds 40% of Sirius XM Radio in its tracking stock, Liberty Capital (NASDAQ:LCAPA).  Liberty Media is reporting on Thursday, May 6th.  It was assumed by many investors that Sirius XM would report on that day as well.  When the company announced last week that they were moving their expected date up two days, speculation sparked to assume a good quarter is forthcoming.  Let us look at the numbers and see if there is any reality to this hope.

Before we begin breaking down specific metrics, let us lay down some ground work for some assumptions, expectations, and logical reasoning on certain calculations.  Usually the best way to approach a company’s prospects for a given quarter is to look closely at their year to year results and ask yourself what’s changed since then.  So what’s changed from Q1 of 2009?  Alot.

In Q1 of 2009 there were absolutely no royalty charges affecting revenue.  There also weren’t any premium internet charge associated with the service.  Over the course of the past year, Sirius XM Radio added more features and increased revenue streams from existing subscribers.  These include things such as “Best Of” packages and higher fees for multiple accounts or radios.  There will be more costs associated with subscriber acquisition than in 2009, as they announced already that they are adding 170,000 net subscriber additions in Q1.  As Sirius XM must pay forward to acquire these subscribers, this line item may be up a bit from 2009.  Offsetting some or all of this will be lower costs to acquire them.  The number of net additions this time is greater, but the cost per subscriber will be less.  This figure could actually be substantially less, as SAC (cost to acquire) has been consistently dropping quarter to quarter.  We also know that retail subscriber losses will be less this quarter year to year.  This means more activation fees and these net additions are more cost effective to the bottom line.  So far it looks like there are a lot of positives in the numbers.

Since Sirius XM Radio already announced they had approximately 170,000 net additions in subscribers in Q1, let’s first go over the subscriber metrics.

Sirius XM will only lose 4,000 subscribers due to retail losses in Q1 of 2010 according to my calculations.  They will add around 175,000 net additions from the OEM market.  This should give us about 15,750,000 self pay subscribers, the heart and soul of their customer pool.  This is the solid base of subscribers that sees little movement.  Considering the loss of over 368,000 retail subscribers in Q1 of 2009, this is a huge recovery.  Since these additions are cost effective, requiring no promotion fees or royalty payments to carmakers, this is a nice boost to their bottom line.  Looking now for Q2 to complete the reversal of this market, helped largely by a ramp up in used car programs and a brand new radio line-up from the company in 2009.

Revenue.

We have their guidance already being confirmed on high single digit revenue growth, and 20% growth in EBITDA for the entire year of 2010.  Let’s see what this might look like in Q1 and see if they low balled these figures or were being generous.

Total revenue will come in around 704 million dollars.  I expect a full quarter and full penetration now of the royalty rate (of those that will ever have to pay it) to really aid revenue here.  I also see a nice increase in activation fees from the reversal in the retail market.  It is also possible for Sirius XM to even make money on the sale of the radio itself.

Some of this information we were provided with when Sirius XM issued a press release in April giving some flavor to their subscriber numbers.  ARPU should remain flat and possibly see a seasonal pullback a bit from Q4 numbers.  Subscriber costs to acquire should continue to be low and even see a bit of improvement from Q4 even.  SAC was $61 in Q1 of 2009, and ARPU was $10.43.  The rising trend on ARPU is not as much seasonally based now, as it is just a reality of their improving business model. Estimate of Total Revenue : 704 Million

Operating Costs.

Sirius XM Radio CEO Mel Karmazin has been working diligently to cut costs across the board.  Some of the synergies of the Sirius/XM merger are already in play as shown by the improvements in operating costs this past year; administrative, advertising, and research and development to name just a few.  I see some continued improvement in some areas, while reality will set in regarding others.  Improvements from merger synergies will slow down in several aspects of the company’s business.  The true synergies of the merger lay within spectrum consolidation, monopoly of the technology, and contract renegotiations (which have a good deal of potential to save the company millions).  Until then Mr. Karmazin has done a nice job for now of giving value to the merger.

Also affecting earnings will be 15 million in charges related to the lent shares from the 2008 550 million dollar merger bonds, that convert at 1.87 a share.  This was necessary according to a ruling Sirius XM Radio received this year on how they were allowed to handle the lent shares on their books.  They will need 15 million a quarter deducted from fully adjusted earnings only, obviously no cash would be lost.

There is 65 million in interest payments that need to be made as well.  There are sure to be share related charges or investment losses/gains that might affect the numbers to the downside.  I am going to estimate another 10 million in charges to cover such unknowns.

It appears Sirius XM just might have a very strong quarter after all.

Fully adjusted earnings per share, with all charges, will come in around 55 million.  That should be good enough for Sirius XM’s first real profitable quarter in their history.  This quarter should finally prove the common shares actually have true value, not just positive operating income.  At this time in the company’s history, Sirius XM has both.

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Disclosure: Long SIRI