Optimistic Broadcast From XM Satellite Radio

Despite the somewhat upbeat call, more guidance on subscriber growth would be nice.
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Investors breathed a sigh of relief Monday when

XM Satellite Radio

(XMSR)

posted earnings results that were essentially in line with guidance, demonstrating that things hadn't gotten worse.

The company reported a loss of 32 cents a share vs. the expected 46-cent loss. Revenue came in at $240 million, which also was slightly better than expectations. However, I believe most people were relieved to hear that management still believes the company will be cash-flow positive this quarter and that it did not lower the low end of its subscriber-count guidance.

Also, a fairly big positive was the decline in subscriber-acquisition costs to $60. I don't know anybody who expected this number to decrease like that. Average revenue per user came in at $11.36 for the quarter, which also was better than expected.

The company forecast 2006 revenue to be about $810 million to $815 million. Also, the company now expects to end the year with 7.7 million to 7.9 million subscribers. The prior range was 7.7 million to 8.2 million, but few felt the company could hit the high end of that range. The company ended the quarter with 7.2 million subscribers.

Q&A Highlights

Here's a quick rundown of notable mentions during the company's conference call:

  • More than 5.5 million automobiles with factory-installed XM are on the road.
  • There was no comment on merger speculation.
  • Family plans have increased to 21% of the overall subscriber base.

Portables (Eno and Helix) should see a slight increase in unit sales during the fourth quarter, but overall sales remain fairly flat. The company is having conversations with MP3 makers, and we could see new deals in which XM Satellite Radio is put on other people's MP3 players. Management would like to work with

Apple

(AAPL) - Get Report

, but it doesn't sound like that is very close to happening.

XM Satellite Radio is going to try to move away from discounting hardware to discounting the service more. So, for example, as a subscriber, you might get a discounted rate for three to six months if you sign up for two years. The goal is to lock people in over longer contracts so they become loyal customers. Satisfaction rates remain very high.

Overall, it was a decent quarter relative to the downward revised expectations. Despite this somewhat optimistic call, I'm still a little concerned.

It seems like the fourth quarter is providing some comfort on the retail side, and a new customer (

Toyota

(TM) - Get Report

) is helping on the OEM side. I'll need to see continued strength on the OEM side before I can really embrace this stock.

Again, it was a fine report, so I don't want to dampen the mood completely, but management hasn't exactly been the best when it comes to guiding subscriber growth. I'd wait until next quarter's report to hear more about full-year guidance before taking a full position in the name.

At time of publication, Thomas had no positions in any of the stocks mentioned in this column, although positions may change at any time without notice.

Ben Thomas, CFA, is the portfolio manager for a technology-oriented midcap hedge fund. Prior to this, he was a portfolio manager and senior equity analyst for Invesco, where he was responsible for managing the Midcap Growth portfolio as well as the firm's technology research efforts. Before that, Thomas worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a degree in finance and earned his MBA from Indiana University. He serves on the board of directors for the CFA Society of Louisville and is a member of the CFA Institute.