Sirius XM Reports Q3: Content Questions Remain

 |  Includes: LMCA, SIRI
by: Dennis Costa

On Thursday, November 4th 2010, Sirius XM Radio (NASDAQ: SIRI) reported the company’s third quarter operating and financial results in a press release and conference call. The company reported profit of $67.6M attributable to common shareholders, on revenue that came in over $722M, representing a 15% year over year increase. The company posted a profit of .02 cents per share based on common shares outstanding, and a penny per share fully diluted, compared to a year ago loss of (.04) cents per share. Adjusted EBITDA was up 60% to $170M compared to the same period in 2009 of $106M. The company reported Free Cash Flow of $62M, up 132% from last years $26.7M.

On October 13th, the company pre-announced net subscriber additions for the quarter of 334K, compared to 102K for the third quarter of 2009. The company ended the third quarter with 19,862,175 subscribers, and guided to end the year with approximately 20.1M subscribers. Most analysts expected a solid financial report based on strong subscriber growth numbers and effective churn management of 1.9%. They were also looking for some guidance for 2011, and for the status of some of the company’s premium contract negotiations. Instead, the company revised their end of the year guidance for 2010, increasing EBITDA to just over $600M from $575M, increasing total revenue from over $2.7M to exceed over $2.8 billion, and reiterating free cash flow to exceed $150M for the full year.

The company did not give any guidance for 2011 beyond the information presented at Liberty Media’s (LCAPA) investor conference on October 1st, 2010.

“We continued our positive momentum in the third quarter, improved our churn and conversion rates, and attained a record high subscriber count. We delivered record adjusted revenue and adjusted EBITDA, increased our free cash flow, and we are now raising our financial guidance for the full year.”

Mel Karmazin, CEO of Sirius XM

With this third quarter report, the company has shown growth in all metrics important to building shareholder value for five consecutive quarters. They continue to show evidence of customer satisfaction with its product content offerings, and price-point model for subscriptions, as evidenced by effective churn management. The company has enhanced customer retention by providing new content offerings that include –acclaimed Director and Writer Kevin Smith, celebrating Hispanic Heritage Month with focused progamming, adding Pearl Jam Radio, Neil Diamond Radio, and the latest addition SPICE Radio. All of these added content offerings are designed to keep the programming as unique and diverse as the near 20M subscribers the satellite radio provider now serves.

When asked about the status of the NFL contract, which CEO Mel Karmazin had reported “near completion and in the hands of the lawyers” during a recent conference, Mr. Karmazin did not add any additional information. He stated that there were a couple of points that needed to be worked out before a final agreement could be reached. Questions regarding whether the potential for an NFL work-stoppage (strike) were included in the talks, were met with an acknowledgment that the issue was being included in the negotiations, but could not be discussed because talks were on-going.

When asked about the much anticipated and closely watched Howard Stern contract negotiations, Mr. Karmazin again had little to offer on the status of the talks, except in saying that the talks were on-going. A question was raised regarding management’s assessment of whether subscriber additions could still be attributed to having Howard Stern as part of their programming line-up. It was suggested that his contribution relating to additional subscribers might be the result of a die-hard following of subscribers, brought on earlier in his original contract signing, as opposed to new subscribers being signed today. Mr. Karmazin simply dismissed the inquiry, saying only that Howard Stern continues to contribute to the success of the company in adding subscribers.

All in all this was a very good conference call that provided investors with confidence that the company is doing what it has said it would. It has continued to add shareholder value with efficient expense management, while providing diverse and unique programming content, improving penetration and convesion rates in its primary markets, and restructuring its balance sheet by taking advantage of its improved credit ratings. The company did leave investors and analysts with more unknowns about two of its premium content contracts –Howard Stern and the NFL.

This conference call did little to reassure the company’s investors, of the content providers’ continued inclusion in the programming line-up. Management also did little to provide forward estimates for growth beyond 2010. This usually results in more conservative estimates from analysts when constructing their models for future valuation. Given the 60% rise in the stock’s price over the last two months, some valuation models may be revised in the upcoming weaks to reflect this lack of forward upward guidance. The company’s equity traded down 10 cents at the close the day of the conference call.

Disclosure: Long SIRI, no position LCAPA