SIRI Steadily Moving Toward Stability

Satellite radio service provider SIRIUS XM Radio Inc. (SIRI), which was facing bankruptcy only a year ago, is now steadily moving toward stability. Recently, the company announced that it expects to generate a record high subscriber growth in 2010. SIRIUS XM now expects to add 1.3 million net subscribers in 2010, much higher than its previous estimate of 1.1 million. Total subscriber base may reach up to 20.1 million at the end of 2010. Notably, this is the fourth time that management has raised its subscriber guidance for 2010.

SIRIUS XM’s business depends to a large extent on automakers. The sale and lease of vehicles equipped with satellite radios is the most important source of revenues for both the XM and SIRIUS satellite radio services. Improving U.S. economic conditions have resulted in the recovery of auto sector sales, together with a stabilizing outlook for consumer spending levels, prompting management to present a promising picture.

Last quarter, SIRIUS XM reported signficiant improvements on several operating metrics. Average revenue per user (ARPU) was $11.81 compared with $10.66 in the year-ago quarter. Conversion rate was 46.7 % compared with 44.3% in the year-ago quarter. Average self-pay monthly churn rate was 1.8% compared with 2% in the year-ago quarter. Subscriber acquisition cost was $59 compared with $57 in the prior-year quarter. Customer services & billing expenses per subscriber came at $1.01 compared with $1.05 in the year-ago quarter.

As a result of these improvements, SIRIUS XM also raised its revenue estimate for fiscal 2010 to $2.8 billion from its previous expectation of $2.7 billion. Free cash flow in 2010 will be around $150 million. Adjusted EBITDA, for fiscal 2010, is likely to reach $575 million.

Based on those metrics, Standard & Poor’s (S&P) recently announced that it had put its ratings on SIRIUS XM on Credit Watch for a possible upgrade. S&P currently has a “B” Corporate Credit rating for SIRIUS XM. If S&P actually raises the company’s rating, we believe it will be a major boost for SIRIUS XM in order to refinance it’s approximately $3 billion of outstanding debt with low interest rate.

We maintain our long-term Neutral recommendation for SIRIUS XM. Currently, it is a short-term Zacks #3 Rank (Hold) stock.

SIRIUS XM RADIO (SIRI): Free Stock Analysis Report

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