3 Questions for Sirius XM

We're now just two days away from Sirius XM Radio's (Nasdaq: SIRI  ) quarterly report.

We already know that the satellite radio giant had a monster quarter in terms of landing new listeners. Sirius XM revealed last month that it closed out 2011 with 21.9 million subscribers, tacking on roughly 540,000 net additions during the final three months of last year.

Shares of Sirius XM have responded, consistently closing above the $2 mark for a month.

We've been here before. Shares of Sirius XM poked their heads above $2 twice last year and stuck around for a few weeks before buckling under.

It should be different this time, though obviously Thursday morning's report will go a long way toward dictating whether that happens or not.

Analysts aren't holding out for much. They see revenue growing by a mere 6% to $785 million. They see profitability checking in at a modest $0.01 a share.

However, Sirius XM's reports are never just about the top- and bottom-line numbers. Let's go over three questions that Sirius XM's report will hopefully answer.

1. Are conversion rates improving?
One of the few trouble spots in Sirius XM's remarkable turnaround has been the recent decline in free trial conversions. Buyers of new and even most used cars are given a set amount of time to try Sirius or XM before having to pay up for the premium radio service.

Sirius XM's conversion rate was inching higher as we came out of the recession two years ago, but the tide turned during the 2010 holiday quarter. Conversion rates posted a year-over-year decline, and that troublesome trend has continued through 2011. Will Thursday deliver Sirius XM's fifth consecutive quarter of cascading conversion rates?

Sirius XM has largely deflected the conversion criticism, alluding to a product mix that's been unflattering to the metric. However, as Sirius XM matures -- and it's just a matter of folks with existing Sirius or XM receivers trading up to new cars -- conversion rates will have to improve.

Obviously, the inspirational news of the fourth-quarter net subscriber additions -- far more than the 328,789 net adds during the prior year's holiday quarter and the 257,028 accounts the year before that -- point to robust conversions. If not, we're probably looking at improving churn, which will help offset some of the sting if conversion rates are still shrinking. Either way, there's hope that this question will be answered somewhat favorably.

2. Will guidance for 2012 be revised?
Sirius XM initiated its outlook for 2012 back in September. CEO Mel Karmazin sees revenue climbing 10% to $3.3 billion, adjusted EBITDA improving by 20% to $680 million and free cash flow exploding 75% higher to $700 million.

The free cash flow and adjusted EBITDA guidance is encouraging. This is truly a scalable model where every incremental subscriber is more profitable than the one before. However, Sirius XM refused to put out a subscriber target, and the revenue target seems a little light given the 12% rate increase that kicked in last month.

Even if one rightfully argues that only a handful of subscribers are paying the new rate now, keep in mind that the fourth rate top-line analyst target implies a revenue run rate of $3.14 billion. If Sirius XM sticks to $3.3 billion, it's really more along the lines of a 5% increase from the January starting line when the higher monthly rate was introduced. Sirius XM's light revenue guidance implies that either few existing subscribers will be subjected to the new rates, or that subscriber growth will be weak in 2012.

Thursday's report can hopefully shatter that bearish thesis with revenue guidance revised higher to at least $3.4 billion or $3.5 billion. Initiating a subscriber addition target for 2012 would also be helpful.

There are reasons to be encouraged on that front. Auto sales -- Sirius XM's top source for new customers -- continue to improve.

Ford (NYSE: F  ) may have posted weaker than expected quarterly results two weeks ago, but the miss stemmed largely from an abysmal performance in Europe. Ford's North American business -- the only segment that matter for Sirius XM's reach -- was rock solid. Ford and General Motors (NYSE: GM  ) saw their stocks climb 4% and 8% respectively on Friday after better than expected employment news. More people going to work means more demand for cars -- and a golden opportunity for Sirius XM to pad its rolls.

3. Can Sirius XM make peace with Howard Stern?
Did you catch the Sirius XM Super Bowl commercial? Well, there wasn't one officially. The game -- broadcast on Comcast's (Nasdaq: CMCSA  ) (Nasdaq: CMCSK  ) NBC -- featured an ad starring Howard Stern for the upcoming season of America's Got Talent.

NBC tapped the free-talking radio legend to add a fresh dynamic to the primetime talent competition. Stern will continue to work through the final four years of his contract with Sirius XM despite the new television obligation. Ultimately this will be a major boost for Sirius XM as couch potatoes discover and rediscover the colorful icon that they can only hear on satellite radio.

This all comes at a time when Stern and Sirius XM are battling one another over unpaid bonus claims that Stern's camp believes the radio show host is due after the successful merger between Sirius and XM.

The battle isn't disruptive now, but Sirius XM is well served if it plays nice with Stern now before he adds "TV star" to his resume. A little color into that battle by the company come Thursday morning would be welcome.

Running of the bulls
I know which way I see these three questions being answered. I'm bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multi-bagger, a free report reveals all.