Will Sirius Post Some Serious First-Quarter Results Today?

Money Morning
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When Sirius XM Radio Inc. (NASDAQ:SIRI) reports its first-quarter results early today (Thursday) investors will be looking for two things: An operational sense of direction from the newly merged satellite radio player, and any insight on the opportunities that might emanate from Liberty Media Holding Corp.’s (NASDAQ:LINTA) recently taking a 40% stake in Sirius.

Investors who wish to evaluate the quarterly report should focus on there things:

  • Whatever the company is willing to provide in terms of subscriber numbers or subscription trends.
  • Cost-cutting or cost-management initiatives and results.
  • And adjusted earnings (earnings before income taxes, depreciation, and amortization, also known as EBITDA).

Let’s take a look at each of the three.

Sirius Subscribers: Sirius subscriber numbers will be a good indication as to where the company is heading.  In November, Chief Executive Officer Mel Karmazin said he expected subscribership to increase to 28.4 million by 2013. Sirius has 19 million subscribers at the end of last year and expects to close 2009 with 20.6 million, Karmazin said at the time.

Subscribership is based on two key factors: U.S. auto sales, and the state of the consumer-driven U.S. economy.

Auto sales are on a steady decline with Chrysler LLC in bankruptcy and General Motors Corp. (NYSE:GM) potentially facing a similar fate.  Fewer car sales means fewer subscribers joining the Sirius service, since the auto sector is a big source of new business for the satellite radio provider. Ford and GM both experienced 32% sales declines.

“Satellite radio’s growth has grown increasingly dependent on OEM automotive distribution,” said Stanford Group analyst Frederick Moran.  “Automotive sales have fallen to the lowest levels in decades.”

The U.S. recession won’t help, either. Satellite radio is considered more of a luxury than a necessity.  Last quarter, Sirius saw its gross additions slip 7% despite the holiday season.  All signs point to margins getting squeezed. But the question then becomes, how much before this number sends investors for the exits?

One potential way to combat this is via innovation. For instance, Sirius has promised to launch the new Sirius iPhone application in the new several weeks, according to The Wall Street Journal.

The new application will allow customers to stream satellite radio over their Apple Inc. (NASDAQ:AAPL) iPhones. And that means that Sirius XM seems to be admitting that its satellite-delivery system – once viewed as cutting edge – now has major competition far beyond what the founders of the satellite radio service ever thought possible. According to The Journal, Sirius must prove it can emerge as a leader in a technological marketplace where cars now have iPod jacks and phones can go online, allowing people to stream free music stations.

Cutting Costs: Subscriber acquisition costs (SAC) will be another key focal point of the report.  These are the costs involved in acquiring subscribers.  This includes – but is not limited to – marketing and subsidies.

Investors will want to see a good number here.  Considering the harsh economic conditions, investors will feel more confident if Sirius shows an adjustment in spending during a time when money is not pouring in.

In 2008, Sirius was able to cut spending by 12%, a clear indicator that management has a good sense of the bottom line.

EBITDA: Earnings before income taxes, depreciation and amortization (EBITDA) will be the main focal point of today’s report.  Analysts expect Sirius XM to post a first quarter loss of 2 cents a share, on revenue of $647.4 million.

In the first quarter last year – reported well before Sirius merged with XM – the company reported a loss of 7 cents a share.  In the fourth quarter, Sirius showed EBITDA strength when it reported $31.8 million in adjusted income, which was significantly better than the year prior when it reported a loss of $224.1 million. In its first-quarter report, the company could report a bigger number.

“There is a greater emphasis on the importance of adjusted earnings before income, taxes, depreciation and amortization” said Karmazkin, the CEO of Sirius XM.  “It is in 2009 when we will have over $300 million of EBITDA.”

An EBITDA report of $300 million would be a tremendous improvement, given that the company reported a loss of $565.5 million for 2007 and $136.3 million last year.

Other Factors to Consider

Sirius XM investors have other factors to consider when evaluating the company’s long-term outlook. The merger took much longer than expected,  causing major problems financially.  Shareholders faced a total wipeout when the stock fell to a nickel a share.

In February, Liberty Media came along and bailed out the company with a $530 million loan.  This gave Liberty’s John Malone and his company a 40% stake in the satellite radio provider.  The stock popped on this news.  The company’s shares also took off when Standard & Poor’s Inc. boosted the company’s junk-territory rating from “CCC” to “CCC+” and raised the issue-level rating by one level.  S&P kept the company’s senior unsecured notes at a rating of “CCC-.”  Showing some signs of life, Sirius XM’s stock traded as high as 60 cents a share, and closed yesterday (Wednesday) at 52.5 cents.

Liberty Media seems to have a bigger plan for satellite media.  On Monday, Liberty Entertainment (NASDAQ:LMDIA), a branch of Liberty Media, joined forces with The DirectTV Group Inc. (NASDAQ:DTV).  It is clear that Liberty has a bigger plan for satellite service.

“There are a lot of interesting things that might transpire between Sirius XM Radio Inc. and DirectTV,” Liberty Media Chief Executive Officer Greg Maffei told CNBC in a Monday interview. Liberty Media executives are tossing around the ideas of a program partnership, bundling programming and merging the Sirius and DirectTV’s marketing teams.

Sirius is also hoping that the proposed iPhone application brings on new subscribers by offering wireless telephone services.

Sirius will have to deal with contracts in 2009.  Not only will it have to negotiate a new contract with Karmazin, it must also consider which of its personalities it wants to keep. A major renegotiation will be between the company and so-called “shock jock” Howard Stern, whose five-year, $500 million deal draws to a close.

“I’m not concerned,” Stern said. “I think satellite radio is great and will be a successful business and it will survive.  As long as someone is paying our salary, we’re here and I believe we’ll get paid and that satellite radio will be here.”

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