Thursday, July 27, 2006

XM Sets The Stage For Upward Movement

July 27, 2006

Despite over 6 months of bad happenings for XM Satellite Radio, they had what can only be considered a good call today.

Yes, some of the numbers were not impressive, but the direction of the company is what really made the day.

XM spoke to many of the issues that have been ailing the company of late, and did what is likely the best thing that could have been done. They set goals and guidance that are obtainable, and in doing so illustrated that the upward process is a "one step at a time" activity.

XM laid out a worst case scenario, and indicated that even if that scenario were to happen that Free Cash Flow would still be around the quarter. Initial reaction to the lowered subscriber guidance was not good. The stock traded down sharply in pre-market, and continued in the red until management spoke.

Gone were excuses and dodging, and in was some straight forward talk about where XM was headed. This is exactly what the street was looking for.

The lowered guidance effectively changed the expectations of the street and the company. Last year at this time XM raised subscriber guidance by 500,000 subscribers. This was the beginning of the troubles for XM. They had raised the bar to high. This year we see the exact opposite.

On the heels of what can only be categorized as a steady flow of bad news, XM took a new tact. They built the bad news into the expectations, and laid out a baseline rather than shooting for the stars. It is almost as if the outlined a fresh start, and the street responded nicely.

Until the past year, XM had a relative easy street in the sector. They were observed as the leader, and things were going so well it seemed impossible that bad times would come. Some bad decisions were made, and efforts to rectify the situation often fell short as well. Today XM took the first steps in moving in the right direction.

Now, this new XM is something that we have not really seen as yet. They will need to show that the steps they are implementing are indeed moving the company in the right direction. We here at SSG believe that the lowered subscriber guidance now has a built-in piece of good news. XM and Sirius are currently working with the FCC to establish the testing procedures and guidelines for the FM modulators. Should the new procedures be approved in the coming couple of weeks, and should XM resume production, they could conceivably be in a position to upgrade their 7.7 million low end to something in the neighborhood of 8 million. They would then be in a great position to review things again in the Q3 call.

XM also did a good job of tempering the OEM expectations for this year. For whatever reason, expectations were for big ramp-ups from Hyundai and Toyota. Hyundai has started their program, as XM indicated previously they would. Toyota is not expected to begin until next year. The same is the case for Nissan. The missing component here is what installation rates Toyota would have. Given the guidance, it would appear that factory installs will not yet be wide spread. In our opinion XM should take additional steps to clarify the install rates of some of the manufacturers. XM seems to have shifted their focus from Toyota to Nissan in their call. Perhaps some additional information will be available at a future investor conference.

Today seemed to offer a new and fresh start for the most part. Demonstration of meeting goals is the next step. Another aspect that the street noticed was that the loss from operations was down substantially. This was welcomed news. The loss from operations was about 48 million this year vs. About 88 million last year. A dramatic improvement that bodes well going forward.

Not all obstacles have been cleared, but the course is now set and known by the street. This is what is what investors were looking for.

7/27/2006 09:01:00 PM

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