SIRIUS XM Posts Excellent Results - Analyst Blog

SIRIUS XM Radio Inc. (SIRI) posted highly encouraging financial results for the third quarter of 2010. These were the combined effects of double-digit growth in revenue, a record high net addition to its pay-radio services, and a meaningful improvement in average revenue per user (ARPU).

Quarterly net income was $67.6 million or an income of a penny per share compared to a net loss of $151.5 million or a loss of 4 cents per share in the prior-year quarter. Third quarter EPS of 1 cent was ahead of the Zacks Consensus Estimate of break-even.

Quarterly total revenue of $717.5 million was an improvement of 16% year over year and was also above the Zacks Consensus Estimate of $712 million. This was primarily due to increase in subscriber base, higher sale of "Best of" programming, and rate increases to the company's multi-subscription and Internet packages.

Quarterly total operating expenses were $574.5 million compared to $552.3 million in the year-ago quarter. Operating income in the third quarter was $143.1 million compared to an operating income of $66.4 million in the year-ago quarter. Quarterly adjusted EBITDA was a record high $169.7 million compared to $106.1 million in the prior-year quarter.

During the first nine months of 2010, SIRIUS XM generated $291.1 million of cash from operations compared to $253.1 million in the year-ago period. Free cash flow (cash flow from operations less capital expenditures) in the same period was $33.7 million compared to $35.8 million in the year-ago period.

At the end of the third quarter of 2010, SIRIUS XM had $316.3 million cash & cash equivalents and $2,668.6 million of outstanding debt compared to $383.5 million cash & cash equivalents and $2,813.6 million of outstanding debt at the end of fiscal 2009. At the end of the third quarter of 2010, debt-to-capitalization ratio was 0.91 compared to 0.97 at the end of fiscal 2009.

Segment-wise Results

Quarterly Subscriber revenue was $612.1 million, up 5.9% year over year. Advertising revenue was around $16 million, up 28.6% year over year. Equipment revenue was $17.8 million, up 69.6% year over year. Other revenue was $71.6 million, up 311% year over year.

Subscriber Statistics

During the third quarter of 2010, SIRIUS XM net added 334,727 subscribers which raised the company's total subscriber base to 19,862,175 at the end of September 30, 2010. Out of this, OEM subscriber was 12,630,463; Retail subscriber was 7,088,562; and Rental subscriber was 143,150. Payment category wise, Self-Pay subscriber was 16,335,819 and Paid Promotional subscriber was 3,526,356.

Important Operating Metrics

In the third quarter of 2010, ARPU was $11.81 compared to $10.09 in the year-ago quarter. Conversion rate of trial subscribers into self-pay subscribers was 48.1% compared to 46.2% in the year-ago quarter. Average self-pay monthly churn rate was 1.9% compared to 2% in the year-ago quarter. Subscriber acquisition cost was $59 compared to $69 in the prior-year quarter. Customer services & billing expenses per subscriber was $1.02 compared to $1.01 in the year-ago quarter.

Future Financial Outlook

Management is expecting that full year 2010 revenue of SIRIUS XM will exceed $2.8 billion. Free cash flow in 2010 will be more than $150 million. The company also projected that its year-end subscriber base will be approximately 20.1 million. Adjusted EBITDA for fiscal 2010 is likely to reach $600 million.

Recommendation

We maintain our long-term Neutral recommendation for SIRIUS XM. Currently it is a short-term Zacks #4 Rank (Sell) stock. We believe this is primarily on the grounds of the current valuation, which increased by more than 180% during the past one year.