A Nice Upward Day For XM
July 28, 2006
Back on July 11, SSG published an article titled "Good News XM Could Use
". In the piece, we outlined some potential items that we felt would be factors for XM Satellite Radio going forward. Now, on the heels of the XM conference call, we thought it would be good to review what we had stated and where we are today.
Items we outlined, and where we are today:
1. The announcement of 7,000,000 subscribers. This news should be about a week away for XM, and the earlier it is delivered the better. A subscriber addition rate of 6,000 NET subs per day would give us the 7,000,000 milestone on July 18, and would show a nice improvement on the 4,374 posted in the second quarter. An addition rate of 5,000 per day would still show a nice improvement and would bring the announcement on July 21st. The key here is showing an improvement.XM did announce 7,000,000 subscribers, but did not indicate when it happened. Given their guidance going forward, it is likely that it came a bit latter than we had hoped, but being able to announce it at the call was a big step. Kudos to XM
2. It would be very positive to see XM reiterate their subscriber guidance of 8,500,000 by year end sometime soon. Reiterating this, perhaps in conjunction with a 7,000,000 announcement might ease some concerns on the street.XM did not reiterate guidance, but instead took a tact that likely had an even more powerful impact. They lowered it to what many people feel is a VERY reachable goal, and then outlined that worst case scenerio. The effect here was likely much more profound then trying to reiterate the 8.5 million. There is likely not a person that follows this equity that can imagine a miss of 7.7 million. It also now gives XM the room to move upward at a later date.
3. The earnings report. Even though the subscriber number disappointed some, it can be offset by a more powerful metric in the financial status of the company. Good financial metrics will give people an understanding that the company is on a good financial path. Clear and concise discussion of the financial metrics will be seen as an overall positive and offer direction to investors.XM had a very good quarter financially, and this was not missed by the street. Their loss from operations improved dramatically over last year, and their statements relative to getting to Free cash Flow Positive were encouraging.
4. A statement that FCC issues are resolved, and that inventory levels will be sufficient to meet demand as well as guidance.While complete resolution with the FCC issue has not yet happened, XM did discuss the issue. This was very good. XM stated that it is now the testing procedure that is under review (something Sirius also spke to last week). The confirmation from both companies that the issue is actively being addressed is very powerful for the sector. Hopefully we can see a positive announcement involviong testing procedures in the next couple of weeks.
5. An announcement regarding the FTC issues, and where that stands. At this point the company has likely already responded to the FTC complaints and addressed them. News that the issues are resolved and impact was minimized would bolster the other positive news.This issue does not seem to be high on the radar screen anymore, and if the issue has been fully addressed, which we believe it has, then it is probably best to leave it off the radar screen.
6. Some news regarding the RIAA lawsuit. Perhaps even something as simple as where things stand would take some worry out of the equation. Are the parties negotiating, or is this headed to a courtroom. XM has done well to spell out their feelings, but it is still very unclear as to what a timetable is on the issue. Removal of question marks in the minds of investors would be positive.We were pleased to see XM discuss the issue at the call. Even though there is not much that can be said about the suit, the update reassures investors that the issue is being addressed and not ignored. XM has asked that the suit be dismissed.
7. XM has the Oprah Channel starting in September. Establish a date, and give people something to look forward to. Sirius and Howard Stern did very well by letting everyone know exactly when Howard was coming. XM should take a page from the Sirius playbook, and establish a date for Oprah and begin to market her and the debut.News relative to Oprah is beginning to flow. XM has done some on air previews, and they stated that Oprah will be a centerpiece of their marketing efforts. The only additional item we here at SSG would like to see is for Oprah to also give the show on XM a bit of a "push"We had also pointed out some longer term items that we felt XM should address. Again, they seemed to hit some of what we felt were key points:
1. An announcement relative to OEM partners. GM and Honda have given specific installation and penetration targets. XM should reiterate these. They should also add more specific details about Hyundai, Toyota and Nissan. Show the path that the OEM sector for XM is on.XM did cover this item pretty well. It appears that roll-outs of some programs may not be a quick or as robust as some were expecting, but at least an indication was made, and investors have a clearer picture on the short and long term installations.
2. Talk about the launch of XM 4. Explain the benefits it gives the XM constellation and discuss how it bolsters the service.Suprisingly this issue was not really covered. It would have been a good chance to speak about improving the service, etc. Perhaps we will see more flavor as the launch nears.
3. Talk about the financial metrics that have been achieved, and point out that goals are being set, are realistic, and there is a focus to achieving them. This will help bolster investor confidence. If XM still anticipates operational cash flow positive in the fourth quarter they should talk about it, and outline what it is that will get them there.XM did a great job with speaking about the financial metrics. Not much more needs to be said here.As the conference call approached, we here at SSG published and article about a potential buying opportunity in the equity. That artlle was titled "XM - Is there An opprtunity Going Into Earnings?" We outlined several key components that we thought could have an impact on the stock price. Those items were:
1. Explain management changes...what does this accomplish?
2. Discuss Q2 subscriber disappointment...what happened?
3. Update on FM modulator issues with FCC...what's the timing?
4. Update on RIAA, expected outcome
5. Marketing department shake up...discuss new direction5. Future guidance, subs, churn, costs, etc.
7. New hardware
8. Sales of wearable devices, how are they going?
9. Opie & Anthony, what's the business deal?
1o. Guidance for CFBE...is it still 2007?
XM Satellite Radio addressed almost all of these issues. It was great to see this happen, and the movement in stock price has been great. Investor confidence seems to be gaining. With Sirius reporting on August 1, 2006, the sector stands a good chance of seeing some nice up-lift.
Congratulations XMSR, and we look forward to the Sirius call.
7/28/2006 03:34:00 PM
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