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Why the CFO Thinks You Should Invest in Sirius XM Radio


Sirius XM CFO David Frear outlines the reasons at this year's UBS Global Media and Communications Conference.

"So as you begin to see the installation leveling out, you also see what amounts to a peak in subscriber acquisition costs. Putting a radio in a car is just another consumer electronics (CE) implementation. We all know that CE tends to get more efficient cost-wise per unit over time, and we expect that to happen in our business," elaborated Frear. "We should be successful in bringing down the cost of installation over the course of the next several years. That provides for opportunities for scaling of margins."

Sirius expects adjusted EBITDA margins to continue to improve from 27% currently to 40% at maturity.

Frear said that Sirius' borrowing costs have also gone down significantly as the company has delevered significantly in the past few years. A February 2009 15% note, June 2009 11.25% note, and August 2009 9.75% note have all been repaid, leaving a March 2010 8.75% note the one with the highest interest rate yet to be repaid. The Federal Reserve's low-interest rates policy has also benefited Sirius, added Frear.

Sirius also does not expect to be paying taxes for the next several years because "the upside of having invested $12-13 billion in getting the company launched over the years is that we have over $7 billion now of NOLs [net operating losses] that will shelter us from taxes," noted Frear.

Finally, the company will also see a big drop in capital spending in the form of satellite spending once Sirius 6, its next and last replacement satellite in the current replacement cycle, goes up in May 2013. The company will then not have to spend on satellites again until late 2016, "giving us more opportunities to build more cash flow."

Strong subscriber growth, revenue growth, lower interest expense, lower capital expenditure and cash savings from the use of NOLs equates strong growth of FCF, surmised Frear.

For 2012, FCF is expected to increase to $700 million from $416 million in 2011 and $210 million in 2010.

"What will we do with all that money? We could acquire things [though] we haven't seen anything yet that makes sense for the company to buy," said Frear. "To the extent that we don't have anything to buy, then I think the best thing we can do is provide capital back to shareholders; that can be done in form of either dividends or stock buybacks. We'll certainly be having those discussions with our board and we'll get back to you soon."

Twitter: @sterlingwong
No positions in stocks mentioned.
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