3 Things to Watch When Sirius XM Reports

Everything seems to be holding up well as we head into Sirius XM Radio's (NAS: SIRI) third-quarter call next week.

Standard & Poor's raised the satellite radio company's credit rating -- from BB- to BB -- yesterday, offering up a stable outlook for a company that gets stronger financially with every passing quarter.

Sirius XM's stock has also not rallied heading up to Tuesday morning's call. Shares have actually fallen by 15% since its second-quarter report. That's a good thing. It's not as if expectations are heightened through inflated appreciation, something that has stung the stock in the past.

In short, the climate is ripe for a healthy move higher if Sirius XM has even a modestly bullish report to offer next week.

Let's take a look at a few of the things worth watching.

1. The bottom line is the bottom line
Sirius XM hasn't been a top-line growth story for some time. Revenue grew a mere 6% in its previous quarter, and that's just what analysts are targeting this time around.

It's the nature of the beast. Sirius XM has more than 21 million subscribers, and most of them come in the form of drivers of cars with pre-installed Sirius or XM receivers. There are a lot of older cars on the road that don't have access to satellite radio and newer cars with dormant receivers, but the addressable market has never been as large as bulls would like to believe. Infrequent drivers or those who actually prefer local content as they drive around may never come around to premium radio.

It won't always be this way.

There may finally be some streaming opportunities at compelling price points. There are still a few marquee terrestrial radio celebrities that would be magnetic draws to satellite radio. However, for now the real growth will be on the bottom line as Sirius XM continues to cash in on its scalable model to deliver faster earnings and free cash flow growth than its top line is mustering.

2. Make sure the upcoming price hike doesn't turn Sirius XM into the next Netflix
Any company entertaining a price increase -- as Sirius XM will come January -- can't ignore Netflix's (NAS: NFLX) summertime gaffe. Even though just half of Netflix's subscribers were subjected to the pricing increase -- and only a subset of those users were on the single DVD unlimited plan that was hit with the highest 60% increase -- the public interpreted the move as insensitive. Netflix did a poor job of communicating that it was the ticket to acquire even more streaming content from skittish studios that were tired of seeing their digital vaults practically given away by Netflix.

Sirius XM's basic monthly rates will climb just 12% to $14.49 in a little more than two months. It's the media giant's first base increase in years, though Sirius XM has tacked on music royalty fees and boosted secondary rates since the merger between Sirius and XM was completed three years ago.

The only reason why this may cause some resentment is because the rate hike isn't technically warranted. Sirius XM is posting record profitability. Programming and content costs have actually fallen 7% through the first half of this year, and the decrease is even larger on a per-subscriber basis. Will listeners question why they have to pay more for something that is costing Sirius XM less to deliver?

This is also a sensitive time. Conversion rates -- the percentage of new car drivers continuing to pay for satellite radio after their free trials run out -- have actually fallen through the first six months of the year. Higher rates in an iffy economy may ding conversion rates and bump up churn.

Sirius XM has been discussing a 2012 rate increase for several quarters, but now that it formalized the extent of the hike last month this will be the first conference call where the company can address any initial feedback or resistance that it may be receiving.

3. There has to be more color to the 2012 guidance initiated last month
Despite the 12% pricing increase, Sirius XM is only projecting revenue to climb by 10% next year. If we go with the annual run rate implied by the $784.2 million in revenue that analysts are targeting for this year's fourth quarter -- to gauge Sirius XM's guidance on a more accurate starting line relative to the January price hike -- we're really only seeing a mere 5% top-line increase.

Save for a few instances in 2008, Sirius XM's guidance has been historically conservative. This should be the case here, unless either less than half of its subscribers will be hit with the price increase or subscriber growth will be stagnant.

We live in competitive times on the dashboard. General Motors (NYS: GM) became the latest automaker -- following in the tread marks of Toyota (NYS: TM) and Ford (NYS: F) -- to offer seamless access to Pandora (NYS: P) and other free streaming sites through their car entertainment systems in select new models. A little more clarity on last month's guidance -- or ideally some upward adjustments -- would go a long way to easing concerns about challenging subscriber growth next year.

It's your turn, Mel Karmazin.

If you want to see how Sirius XM stands up to the stream teams addSirius XM Radioto My Watchlist.

At the time thisarticle was published The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Netflix, General Motors, and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributorRick Munarrizcalls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix and Ford. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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