Lean, Mean XM

A new bid to cut costs wins Wall Street kudos.
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Now that Sirius (SIRI) - Get Report is winning the growth game, XM (XMSR) makes lowered costs a priority.

Investors expect another subscriber-target update from Sirius when the New York satellite radio shop reports third-quarter earnings Wednesday morning. With rival XM trimming its goal Monday to less than 8 million users by year end, Sirius seems to have taken control of the race to gain market share.

But despite the surging success of its smaller competitor, XM stuck with its long-term goal of hitting about 20 million subscribers by 2010. Executives on an earnings conference call said they were confident that its subscriber rolls will grow as more people buy XM equipped cars from auto partners like

Toyota

(TM) - Get Report

and

Honda

(HMC) - Get Report

.

But growth is taking a back seat at XM as the company strives to hit its positive cash flow target this quarter. To that end, XM executives said the company would change its sales approach by cutting discounts and trying to attract more long-term customers.

Some of the changes include a six-month trial period with a two or three-year subscription. Recent pitches offer three-month free periods with one or two-year contracts. The company also says it will reduce the amount it pays to subsidize the customers' upfront radio costs.

These changes are intended to help XM lower its costs per gross add, or CPGA, spending.

Asked what the higher priority was between growth and efficiency, an XM executive said, "That's a tough question -- obviously we are focused on both." But he added that if forced to pick one answer, "CPGA is more important. We want to reach positive cash flow from operations in the fourth quarter."

XM, which had a CPGA of $93 in the third quarter, expects to take on higher costs in the fourth-quarter's holiday buying season. But despite the seasonal jump, the company expects full-year CPGA of under $110. That number compares with CPGA of $109 last year and $100 in 2004.

The company expects to turn the tide of red ink in the current quarter, at least on a selective basis. XM predicts it will have positive cash flow from operations in the fourth quarter. That would mean the beginning of the end, presumably, of runaway costs and the perpetual need for more financing.

Sirius has also promised to breakeven as early as the fourth quarter and be cash flow positive in 2007.

Analysts expect Sirius to post a third-quarter adjusted net loss of 14 cents a share on sales of $167 million, Wednesday before the market opens.

XM shares jumped 15% to $13.16, while Sirius rose 6% to $4 in midday trading Monday.