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XM adds listeners, but Feds tune in, too
Two new federal probes likely mean the XM Satellite Radio's stock is in for a rough patch. For now, at least, I'm selling.
By Robert Walberg
Some good news from XM Satellite Radio: The company picked up more than half a million subscribers in the first quarter.
Unfortunately for shareholders, the company also picked up a couple of regulatory headaches. XM (XMSR, news, msgs), along with reporting its quarterly earnings, said Thursday that it had received two letters from federal regulators investigating the company. Ouch.
Management said it received a letter from the Federal Trade Commission on April 25, stating that the FTC is conducting an inquiry to determine whether a variety of marketing activities were in compliance with, among other regulations, the Truth-in-Lending Act and the Telemarketing Sales Rule.
The company also received a letter from the Federal Communication Commission indicating that FCC had tested the Delphi XM SKYFi42 radio and determined that the transmitter was not in compliance with applicable emission limits. XM said it is conducting internal reviews into both matters and will cooperate fully with authorities. The company said it doesn't know if there will be any impact on operations.
Spending for subscribers
While neither issue seems overly serious, the news cast a pall over the earnings report, which contained a disappointment or two of its own. Most concerning was the fact that XM reported a wider-than-expected first-quarter loss of $149.2 million, or 60 cents a share. The Street was looking for losses of only 55 cents a share.
Investors also were troubled by the fact that subscriber acquisition costs jumped from $52 in the year-ago period to $62. Clearly, the battle for subscribers with Sirius Satellite Radio (SIRI, news, msgs) remains a costly one. Note, though, that the cost of adding subscribers in the first quarter fell considerably from the $89 recorded in quarter four, when XM launched a major marketing blitz to counter the arrival of Howard Stern on Sirius. Nevertheless, management needs to improve on this metric further if it wants to achieve profitability soon.
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Where XM enjoyed success during the quarter was in adding subscribers, bolstering revenues and improving its long-term financial structure. With the addition of nearly 569,000 new subscribers, the company reported better-than-expected revenues of $208 million. The company finished the period with a total of 6.5 million subscribers, an 72% increase from year-ago levels.
Management noted that XM remains on pace to end the year with over 9 million subscribers. Assuming XM reaches that goal, the company also expects to be cash-flow positive by year's end. Note that when Amazon.com (AMZN, news, msgs) finally turned cash-flow positive years ago, the stock jumped.
Exit XM
XM restructured its debt over the past few weeks in order to reduce interest-rate payments, lower the cost of capital and increase the companys financial leverage.
With the expected launch of several new players, its World Cup broadcast, the arrival of Oprah and Friends and second season of Major League Baseball, XM is well positioned to continue adding subscribers and growing its ad base. The eventual loss of NASCAR to Sirius will hurt, but not enough to keep the company from hitting its subscriber targets or from remaining No. 1 in the satellite market.
While the short-term picture will be clouded by the federal investigations, management at XM continues to position the company for long-term success. Now might not be the best time to buy the stock, but the growing acceptance of satellite radio suggests that the second half of 2006, into early 2007, will be a much brighter period for the company and the stock.
Until I get a better handle on how the FTC inquiry will shake out, prudence suggests removing the stock from my Street Patrol portfolio though I expect to buy again at a later date.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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