http://articles.moneycentral.msn.com...ngAProfit.aspx Sirius trouble turning a profit Despite some encouraging signs, Sirius Satellite Radio still continues to excel at two things: adding new subscribers and losing money. By Robert Walberg Sirius Satellite Radio (SIRI, news, msgs) continues to excel at two things: adding new subscribers and losing money. Management also played its usual games with the earnings announcement Tuesday, burying the lack of profits six paragraphs into the press release. Before telling us that the company actually lost more in the most-recent quarter ($237.8 million) than it did a year ago ($177.6 million), management showered investors with encouraging developments: Revenue surged 187% to $150.1 million. Addition of 600,460 net subscribers, a jump of 64% from last year. A 57% share for the second quarter, with a 61% share in June. Third-straight quarter leading industry in net subscriber additions. Subscriber acquisition costs fell 18% to $131 from $160. Upped revenue and subscriber guidance for full-year 2006. If you stopped reading the press release there, as management probably hoped, it’s easy to understand why you might get excited about investing in Sirius’ stock. The company’s marketing efforts, radio personalities, and strong relationships within the automobile industry have given it a leg up on its larger rival XM Satellite Radio Holdings (XMSR, news, msgs) when it comes to adding subscribers. Adding new relationships with KIA and Mitsubishi, as well as taking over the broadcasting rights to NASCAR from its rival in 2007, should keep the momentum going. Trend in Sirius' favor Sirius now expects to end the year with about 6.3 million subscribers, up from its previous estimate of 6.2 million. That will still leave it a couple million behind XM, but the trend over the last year is working in Sirius’ favor. In a couple of years, Sirius may actually achieve its goal of becoming number one. Unfortunately, the price of that goal is so high that the company continues to bleed red. For those of us who persisted to the meat of the earnings report, we learned that the company’s net loss grew by 34%, despite posting more revenue and subscribers than expected. The company also tried to diffuse the growth in expenses by not listing the percentage change, as if we were too stupid or too lazy to do the math. Whereas management was more than happy to point out the 64% jump in subscribers and the 187% rise in sales, it didn’t want you to see that sales and marketing expenses jumped 65%, or that satellite and transmission expenses rose 164%. More alarming, programming and content expenses surged 235%. Overpaying for personalities and content actually does have an impact on the bottom line, even if you try to bury it in your report. Not a viable business Until management figures out a way to get subscribers without having to pay exorbitant sums to people like Howard Stern or to organizations like the NFL, Sirius will continue to deliver mixed results at earnings time. You simply can’t have average monthly subscriber revenues coming in at about the same figure as subscriber acquisition costs and still have a profitable, viable long-term business. On the plus side, subscriber costs are coming down and average revenue per user is rising. Management needs to focus on widening the spread considerably if it hopes to meet its stated long-term goals of $3 billion in revenue and $1 billion in free cash flow by 2010. It needs to end the costly programming/personalities race with XM. Otherwise, there’s no way the company will hit its cash flow targets. Shares see sharp drop Just look at the company’s guidance for fiscal 2006, in which it now expects to be cash flow negative to the tune of $500 million, worse than an earlier projection of $480 million. Promising to be cash flow positive is one thing, delivering the goods is quite another. Since I wrote my first report on Sirius in which I questioned management’s integrity, the sustainability of the company’s business model and the insane valuation of the stock, Sirius shares have declined sharply -- from just north of $7 per share to under $4. The stock has bounced back a bit in recent weeks, and at today’s price is reasonably valued considering its long-term promise and extremely devoted fan/investor base. Speculators might want to nibble in hopes of a renewed rally ahead of the NASCAR buzz, but until the company gains control of expenses and until the average subscription costs falls below $100, most investors should continue to take a pass. At 18x trailing sales the stock is still richly valued, and with over $1 billion in debt the balance sheet is still too leveraged.