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Sirius XM Earnings: Trouble On the Airwaves [UPDATE]

Sirius XM (SIRI) has been struggling mightily for some time. Things have started looking better in some ways. The stock price is finally over $1 a share, which averts the potential delisting -- at least for now -- by Nasdaq. Today's earnings release is getting headlines about profits and subscriber growth. However, when you look more closely at the numbers themselves, as well as at some other things happening with the company, you have to wonder if this is hype and hope without enough happening.

First, the "profit" is actually "pro forma adjusted income from operations." Now look at their definition of pro forma:

The discussion of operating results below is based upon pro forma comparisons as if the merger between SIRIUS and XM occurred on January 1, 2007 and excludes the effects of stock-based compensation and purchase accounting adjustments associated with the merger between SIRIUS and XM.
I can understand wanting to look at things as though the two companies had occurred in the past, so you can get a clear perspective. But excluding the effects of stock-based compensation? Just how far off from the officially presented number would the result be? The company did swing into positive income from operations for 2009 of $463 million after a 2008 loss of $136 million. However, the year still saw a net loss of $441 million.

Pro forma subscriber revenue was up for the year by a little over 3 percent. Average revenue per user per month was up year-over-year, but customer churn went from 1.8 percent to 2.0 percent. Acquisition and customer service costs per user were down, as were overall operating expenses, so the company is gaining more control over costs.

And yet, increasing customers is vital to the company's success. Although Sirius saw a jump in net added customers in the fourth quarter 2009, compared to the same period in 2008, the year was gloomy. Net subscribers in 2009 were down over 231,000, versus growth in 2008 of roughly 1.66 million.

There is also disquieting news. On the less important side, Sirius has lost its contract with DirecTV, and so it no longer gets revenue from supplying music programming to the satellite television broadcaster. More seriously, there are the rumors that Howard Stern, a major draw for the broadcaster, might be on his way out. Sirius CEO Mel Karmazin avoided the question during the earnings call. That means no deal is set, and Stern has said that he's considering leaving Sirius to become a judge on American Idol -- with, presumably, a large chunk of change attached to the shift. Sirius is trying to remain upbeat, but I think its future is still rocky.

[UPDATE: As many of the comments show, there investors who get emotional over this company and who cannot abide any negative views. Although at BNET we're covering business, not investing, I thought that the following was important to consider. As Martin Peers at the Wall Street Journal argues, the Liberty stake in Sirius would add another 40 percent if converted to common stock, and accounting rules require that the company not count those potential shares if it is losing money for the year. If counted, that would push the enterprise value of he company to $9.2 billion, as the Journal's Eric Savitz explains. Divide by the company's projected EBITDA of $550 million and you've got a 16.7 multiple. But subscription-based revenue companies generally trade in the range of 4 to 8 times EBITDA. That suggests the stock really should have a market cap of $1.7 billion, or 25 cents a share. In other words, even at the $1.01 share price that Savitz used for the calculation, it's vastly over valued.

The preferred stock and the rule about not counting it when losing money also explains how the pro forma was done. You can see it as the preferred stock beneficial conversion feature of just over $186 million.

Also, it seems that Howard Sterns wasn't serious when he talked of going to American Idol. But he and his employer clearly don't have an ongoing deal worked out -- and given that the company had a net loss of subscribers in 2009 anyway, it's not as if he's attracting so many new subscribers that his staying mitigates the problem. If he did leave, there might be a chunk of subscribers that followed.]