Sirius-XM: A Long, Challenging Road Ahead

Subscribers are up, but the recently merged satellite radio provider lost nearly $5 billion last quarter and still faces a host of questions

By Olga Kharif

Sirius XM CEO Mel Karmazin Karen Bleier/AFP/Getty Images

Mel Karmazin sounds an upbeat tone for a chief executive whose company, Sirius XM (SIRI), just announced an almost $5 billion loss.

During a Nov. 10 conference call discussing third-quarter results, Karmazin called the company's performance "impressive," considering the macroeconomic environment. Indeed, the troubled satellite radio provider showed some encouraging signs. The company ended the quarter with 18.92 million subscribers, up 17% from a year earlier. Sales also rose for the product of the July merger of XM Satellite Radio and Sirius Satellite Radio. Had the company been combined for the three months that ended in September, its revenue would have risen 16% to $613 million.

Karmazin also waxed optimistic about the company's ability to refinance some $210 million in debt due in February and other liabilities that add up to about $1 billion for the whole year. "The tone of the conference call seemed to provide some needed, if inconclusive, reassurance on the near-term debt refinancing," says Tuna Amobi, an analyst at Standard & Poor's.

Right Now, Any Growth Is Good

For some companies, growth of any kind is commendable when the economy is slumping into recession and customers are curtailing spending on everything but the essentials. "We are growing significantly, and companies larger than us and smaller than us are not," Karmazin said. The company ended the quarter with $359.6 million in cash, down from $438.8 million last December. Sirius XM shares rose 3.9% to 27¢ the day the earnings were announced.

Growth aside, some of the company's biggest challenges haven't subsided. Sirius suffered a third-quarter loss of more than $4.88 billion, reflecting the declining value of its merged assets. And investors are still awaiting details on debt refinancing (BusinessWeek, 10/22/08) from a company that's expressed confidence on the matter for months.

And results through September don't reflect more recent economic malaise, including further evidence of the collapse of the U.S. auto industry, a big source of sales of Sirius radio service. Shares of General Motors (GM) sank to a 62-year low Nov. 10 (BusinessWeek.com, 11/10/08) on concern over the automaker's prospects.

A Discretionary Expense

While Karmazin said the company's higher-end packages are selling well, subscribers may yet tighten their belts and cut back on satellite radio. "They are a very, very discretionary expense," says Larry Rosin, co-founder of consulting firm Edison Media Research about Sirius XM. "Families are cutting their expenses. It seems doubtless they'll lose some people that way." On Nov. 6, Sirius pared its subscriber numbers for 2009 to 20.6 million, from 21.5 million users it expected in September. "I wouldn't be surprised if they revised that guidance again," Amobi says.

The company's projections for earnings before certain expenses including taxes are holding steady vs. prior guidance. While many analysts still expect Sirius XM to lose money next year, the company is guiding for cash-flow break even.

To meet targets, the company is slashing costs—in part by eliminating 22% of its workforce. More drastic measures may be called for, Amobi says. "They are probably going to go deeper."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.