(SIRI) SIRIUS XM Upgraded to Outperform

We upgrade our recommendation on SIRIUS XM Radio Inc. (SIRI)  to Outperform based-on its record-high net subscribers’ addition in the second quarter of 2012.This improved performance was mainly due to strong management execution on the back of rising auto sales. We expect the company to improve in several other operational metrics, including adjusted EBITDA, free cash flow, and further penetration in the U.S. auto sector, in the second quarter.

Despite price rise of its services, SIRIUS XM has generated record-breaking net subscribers’ growth in the last two successive quarters. Solid conversion rate and effective marketing strategy helped the company to achieve this milestone. Meanwhile, the company is currently fighting a hostile takeover bid from Liberty Media Corp. (LMCA), its most powerful creditor.

Recently, management declared that SIRIUS XM added 622,042 net subscribers in the just concluded second quarter of 2012. Quarterly net subscribers’ addition is an improvement of 37.6% year over year. In the company’s history The second-quarter 2012 was the best one with respect to net subscriber addition. This astonishing net subscriber addition helps SIRIUS XM to end the previous quarter with a record high total subscriber base of more than 22.9 million.

Management projected a rosy picture for the rest of 2012. SIRIUS XM is now expecting to add 1.6 million net subscribers in 2012 compared with its previous estimation of 1.5 million net subscribers. This is the second time that the company raised its net subscriber addition for fiscal 2012. Similarly, the revenue guidance for fiscal 2012 has been raised to $3.4 billion from its earlier guidance of $3.3 billion. However, annual free cash flow and adjusted EBITDA guidance remain same at $700 million and $875 million, respectively.

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