Earnings Preview: Sirius XM Q1

| About: Sirius XM (SIRI)

By Brandon Matthews

Sirius XM Radio (NASDAQ:SIRI) will report its first quarter results tomorrow, and Satwaves will again provide the very best live blogging coverage of the earnings call, with special guest Rick Aristotle Munarriz of The Motley Fool. The Sirius XM story will once again prove to be a revenue growth story that is unmatched by any other media company. Year over year comparisons are going to be exceptional.

It was just one year ago that Sirius XM nearly collapsed, which resulted in a net loss of nearly half a million subscribers in the first quarter of 2009. As a result, revenues across the board took a substantial hit and first quarter revenue came in at just over $586 million. Last quarter, Sirius XM reported $682 million in revenue, and a review of analyst expectations demonstrates that earnings are expected to come in at or near this level, which provides Sirius XM with an opportunity for an upside surprise.

We already know that Sirius XM added over 171,000 new subscribers during the first three months of the year, and that some analysts had predicted significant subscriber losses. Based on my estimates, Sirius XM’s top line number should come in above the $700 million mark for the first time in the company’s history. This is based on increased subscriber revenue, increased ad revenue, additional incremental revenue and lower churn.

I’m looking for operating income to exceed $100 million, compared to a loss of $50 million one year ago. Other analyst expectations suggest $90 to 95 million in net operating income. As a result, EBITDA should come in at just under $165 million, compared to analyst targets of roughly $156 million.

Although I do expect that the company will report a .01 (.007) earnings per share profit, there will be some accounting charges that offset those results. Specifically, there remains some confusion over recent GAAP accounting changes that went into effect on January 1 of this year that deal with share lending agreements. These rule changes, as I understand them, will cause Sirius XM to take a retroactive charge of $15 million per quarter for each prior quarter since the share lending agreements were entered into. The recent refinancing should add an extra half penny, bringing total charges to .04 per share. Still, any charges relating to accounting rule changes tend to be shrugged off by investors and the focus should remain on the posted profit.

I expect ARPU to be up slightly to $10.85 on the heels of the BlackBerry (RIMM) and Apple (NASDAQ:AAPL) iPhone/iPod apps that were released recently. Many iPods and iPhones were received as gifts in late Q4. The free trials of those initial apps would not have expired until January, and I expect that the resulting incremental revenues were extraordinary given the fast turnaround time in which Sirius XM brought the Blackberry app and now the Android (NASDAQ:GOOG) app to market. I believe the success of the Apple app is directly responsible for Sirius XM’s quick release of its subsequent apps, and the numbers will support this.

The company has already indicated that it sees churn declining, so I won’t second guess its opinion. These smartphone apps will likely also help in retaining subscribers due to the added value they create for Satellite Radio subscribers. Retail radios that were received as gifts in December and activated in January should give a boost to retail subscriber numbers, and I foresee a slight unexpected retail increase rather than a loss that can be further attributed to a stabilized economy and new product offerings.

Subscriber Acquisition Costs, on the other hand, could go either way. Most anticipate an increase in SAC due to increased automotive production rates, yet the one unknown in the SAC equation is how many subs were attributable to the used car market. Subscribers from this market have far lower acquisition costs associated with them, and the pre-released subscriber numbers seem to indicate that a large number of new subs could have been generated from this market. For that reason, I’ll remain conservative and look for SAC to remain stable at $63.

In summary, the year over year numbers are going to be exceptional. The year over year swing in subscribers alone is over 600,000 net. If in fact revenue comes in above $700 million for the quarter all analyst expectations will have been exceeded and upgrades should be anticipated. Revenue below $682 million, would be viewed as negative. I’ll let the accountants sort out the rest.

Disclosure: Long SIRI

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