Don Knuth
February 18th, 2006, 10:30 AM
Static Hits XM, Sirius
WALL STREET IS SOURING ON satellite radio amid concerns about the cost of
acquiring new subscribers, high current losses and doubts about the ultimate
profitability of the business.
Shares of XM Satellite Radio and its rival, Sirius Satellite Radio, fell
last week, with XM dropping 3.89 to 21.67 and Sirius falling 0.46 to 5.28.
XM (ticker: XMSR) hit a 52-week low and now stands at just over half its
record of 40 in 2004. Sirius (SIRI) also fell to a 52-week low.
XM was hit Thursday after news that board member Pierce Roberts Jr. had
quit, warning in a letter that unless the company better controls costs,
there is "a significant chance of a crisis on the horizon."
Roberts' comments and heavy current losses are prompting Wall Street to
reassess its bullish view on the companies. In the fourth quarter, XM's cost
of acquiring subscribers rose as it confronted a marketing campaign by
Sirius keyed off Howard Stern's move to Sirius in early January.
Wall Street may be over-reacting, at least in its view of XM. Despite XM's
$268 million of red ink in the fourth quarter, it aims to produce positive
free cash flow from operations by the fourth quarter, and it could generate
ample cash flow in 2007. Last month, a Barron's cover story on the industry
argued that Sirius looked pricey and that XM was the better choice ("Don't
Bet on Howard," Jan. 23).
XM Chairman Gary Parsons addressed the Roberts letter on XM's earnings
conference call Thursday, arguing that a faster push to generate subscribers
is the best approach, even if it's costly, because of the high estimated
profitability of each new subscriber. Both Sirius and XM have decent balance
sheets. XM has about $700 million in cash and $1 billion in debt, while
Sirius has almost $900 million in cash and $1.1 billion in debt, giving them
some financial breathing room.
XM's advantages over Sirius include a higher subscriber base, a smaller
market value ($6.9 billion, vs. $8.7 billion), lower costs of acquiring
customers and a stronger stable of automotive partners. For these reasons,
XM could hear sweeter music from the Street within 12 months.
WALL STREET IS SOURING ON satellite radio amid concerns about the cost of
acquiring new subscribers, high current losses and doubts about the ultimate
profitability of the business.
Shares of XM Satellite Radio and its rival, Sirius Satellite Radio, fell
last week, with XM dropping 3.89 to 21.67 and Sirius falling 0.46 to 5.28.
XM (ticker: XMSR) hit a 52-week low and now stands at just over half its
record of 40 in 2004. Sirius (SIRI) also fell to a 52-week low.
XM was hit Thursday after news that board member Pierce Roberts Jr. had
quit, warning in a letter that unless the company better controls costs,
there is "a significant chance of a crisis on the horizon."
Roberts' comments and heavy current losses are prompting Wall Street to
reassess its bullish view on the companies. In the fourth quarter, XM's cost
of acquiring subscribers rose as it confronted a marketing campaign by
Sirius keyed off Howard Stern's move to Sirius in early January.
Wall Street may be over-reacting, at least in its view of XM. Despite XM's
$268 million of red ink in the fourth quarter, it aims to produce positive
free cash flow from operations by the fourth quarter, and it could generate
ample cash flow in 2007. Last month, a Barron's cover story on the industry
argued that Sirius looked pricey and that XM was the better choice ("Don't
Bet on Howard," Jan. 23).
XM Chairman Gary Parsons addressed the Roberts letter on XM's earnings
conference call Thursday, arguing that a faster push to generate subscribers
is the best approach, even if it's costly, because of the high estimated
profitability of each new subscriber. Both Sirius and XM have decent balance
sheets. XM has about $700 million in cash and $1 billion in debt, while
Sirius has almost $900 million in cash and $1.1 billion in debt, giving them
some financial breathing room.
XM's advantages over Sirius include a higher subscriber base, a smaller
market value ($6.9 billion, vs. $8.7 billion), lower costs of acquiring
customers and a stronger stable of automotive partners. For these reasons,
XM could hear sweeter music from the Street within 12 months.