Sirius Disappointment

The satellite radio operator increased its full-year revenue guidance a bit higher Monday, according to a Securities and Exchange Commission filing. Management now expects to book $230 million in revenue, up $5 million from its previous forecast. It also sees "strong" revenue growth in 2006 — whatever that means. And Sirius reiterated its expectations to achieve three million subscribers by the end of 2005 and generate positive free cash flow for 2007. The first quarter of positive free cash flow could be as early as the fourth quarter of 2006.

That all sounds good, albeit a bit vague, right? So why did the stock drift down nearly 5% on Monday, leaving it below $7?

Most of the "news" wasn't new at all. The free-cash-flow guidance pretty much jibes with what the company has been saying all along. Sure, an additional $5 million in revenue is always welcome. For young companies such as Sirius or XM Satellite Radio (XMSR) that are still heavily investing in their operations and bleeding red ink, every little bit helps. But the new $230 million revenue target still falls short of analysts' consensus expectations for $234.2 million, according to Reuters.

Mind you, investors in Sirius don't need much more than a reminder that Howard Stern is coming in January — or that, hey, this company is in the satellite radio business! — to start snapping up the stock.

But there was something about Sirius's subscriber commentary that gave reason for pause. Yes, management stuck by its previous expectation to hit the three-million mark by year's end. But as of Sept. 15, it was still a few subscribers shy of 2.08 million. That means that the company expects to attract more than 900,000 new customers in three and a half months.

At the end of June, Sirius had 1.81 million subscribers. So Sirius added only about 262,000 new subscribers in two-and-a-half months' time. Based on that pace, third-quarter subscriber additions could come in a bit light, says Chad Bartley, analyst at Pacific Crest Securities. Seeing as how Sirius still expects to hit its full-year subscriber target, the translation is that it will be a back-end loaded affair. (Bartley doesn't own shares of Sirius; Pacific Crest Securities doesn't have an investment-banking relationship with the company.)

Of course, everything is relative to Wall Street expectations, which at times have been wildly overoptimistic. Satellite radio operators tend to do their best business in the fourth quarter, when holiday gift-giving abounds. This year, Sirius is getting a little something extra in its stocking: Stern. His show is set to debut in January, and you'd be hard pressed to find someone who isn't expecting Sirius to get a, er, serious subscriber boost ahead of time.

But that's a fourth-quarter story. Meantime, the third quarter is looking a little weaker than people expected. The question is, why? Sirius could be seeing some pushback at the retail level from No. 1 competitor XM, says Bartley. XM has been heavily promoting its Delphi XM Roady 2 radio in recent months, offering it at the relatively low price of $49.99. He notes that recent market share tallies show XM widening its lead over Sirius.

Indeed, Legg Mason analyst Sean Butson trimmed his subscriber and revenue estimates for the full year following Sirius's comments. Still, he remains optimistic on the stock. "Sirius remains a play on Howard Stern, and we don't think light third-quarter additions affects that," Butson said in a note to clients Monday. "We continue to expect Howard [subscribers] to begin ramping up later this year ahead of this scheduled Jan. 1, 2006 launch." (Butson doesn't own shares of Sirius; Legg Mason doesn't have an investment-banking relationship with the company.) Like I said: Wall Street has been wildly optimistic on Sirius in the past. On Monday, Butson's not-so-stern words didn't resonate much.