Wednesday, May 24, 2006

A Deeper Look at XM's Guidance

May 24, 2006

While the immediate aftermath of XM lowering subscriber guidance was felt deeply in the sector, there is a potential silver lining.

1. XM likely lowered guidance to a target that is easily obtainable, and likely to be exceeded. At the point they lowered guidance, the impact would be the same if the figure was 300,000 or the number they used at 500,000.

2. This lower guidance takes pressure off of XM to spend heavily to meet expectations. There will be no need to scramble to get subs at any cost simply to hit a lofty expectation. This will help XM as well as the sector as a whole. This will ensure that XM can spend their money more judiciously, and in turn Sirius can as well.

3. Although the year over year growth for Sirius has been very strong, the same indication can not be made for XM. This is because they are at differing points in their growth cycle. There will come a point when the year over year numbers will not be as impressive as in the past. This is not saying that satellite radio will not grow, it is mere acknowledging that impressive year over year numbers in terms of subscribers will at some point level off. It is at this point where impressive year over year financial metrics become the focal point. As a sector, or individually, it is important that impressive year over year financial metrics be delivered.

4. It was not really proper for XM to state that their subscriber growth issue is a sector wide problem. Sirius obviously took exception to XM's statement and rightfuly so. The immediate impact of the news took down both equities. Sirius recovered in after hours by releasing a statement reaffirming all of their guidance.

5. It is frustrating that only three weeks ago XM specifically maintained subscriber guidance at 9,000,000 by the end of the year. In our opinion it is very likely that XM had good indication at that point that they were not going to hit 9,000,000. Credibility is something that XM needs at this point, and this announcement takes away from that. One begins to wonder if the debt placement activity came into play with not announcing something a few weeks back. XM is now at attainable targets, but the credibility issue needs to be addressed.

While the immediate impact was not pretty, the "bar" is now set lower for XM, and it is likely lower by a safe margin. This may put some ease on the coffers of both XM and Sirius. In a duopoly that is competing for subscribers, the "other company" is usually forced to match that which their competitor is doing in terms of pricing. Sirius got a free pass from that with Stern, but that pass will not last forever, and at some point the pricing structure has to remain competitive.

As we stated in previous articles, this has the potential to be the issue that puts some separation between these two companies. With current prices where they are, you can be sure that investors are making every conceivable comparison between XM and Sirius prior to investing.

5/24/2006 09:45:00 PM

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