LOSSES NARROW - A Turnaround Story For Satellite Radio

November 9, 2006

Losses Narrow is not a headline that has ever been enjoyed by Sirius and XM at the same time UNTIL NOW.

For those that have followed this sector for a long time, those words mean quite a bit. No one expected satellite radio to be instantaneously profitable. Heavy looses were expected in the beginning when the construction and launch of satellite constellations were the main topics of discussion.

Once launched, the process of garnering subscribers began. Content costs, distribution costs, and chipset design costs were all part of the mix. Again, no one was looking for profitability.

Confidence in the sector began to wane late last year, when the addition of more subscribers seemed to translate to bigger losses, and the competition between Sirius and XM was fierce. The prevailing question was “who in their right mind would pay for radio?”

One problem that Sirius and XM faced was exactly how to market all of the variety that is available, and how to get consumers to comprehend that they no longer had to settle for the content challenged radio that they were so familiar with. Early adopters of satellite radio became crusaders for the services, but still, losses seemed to grow with each passing quarter.

The first step in gaining credibility came with the deal between XM Satellite Radio and General Motors. While expensive, it gave the burgeoning sector something to hang it’s hat on. The exposure through the deal was not massive, but GM did install radios, and consumers did get exposure to the satellite radio concept.

Then Howard Stern changed everything. The polarizing yet widely accepted Stern gave credibility to the concept of paying for radio. People came on board to both services, and subscriber numbers went up dramatically. Now the concept of paying for satellite radio was not as foreign as it once was. However, the Stern deal was expensive, and Sirius and XM were still reporting wider losses. Both Sirius and XM had good long term guidance, but in a here and now society, it was something hard for investors to grasp…..UNTIL THIS WEEK.

This week, Sirius and XM still reported losses, but for the first time, the losses of BOTH companies narrowed. The street took notice. For those that follow these equities, the business plans suddenly look more attractive. Now the term Cash Flow Break Even comes into play. Although the guidance between the two companies differ somewhat, both Sirius and XM are on the cusp of reporting positive cash flow from operations in Q4 of 2006. In Sirius’ case, it is the classical definition of CFBE (includes Capital Expenditure spending). In XM’s case Capital Expenditures are excluded. However, that does not change the fact that CFBE is a near term event.

What does getting to CFBE mean? Well, traditionally, companies typically reach overall profitability with 18 months of reaching CFBE. If the company is growing fast, that 18 month estimation can be improved upon.

If that is not enough to get you thinking, consider this. With 12,000,000 subscribers, the satellite radio sector has only penetrated into about 4% of the 300,000,000 population in the United States. Is their room left to grow? Yes

Long term watchers of the sector have been waiting patiently for the days when “Losses Narrow” makes the headlines. Given the current business models, we can conceivably get to hear that for 4 to 6 consecutive quarters to come. A good trend has started in satellite radio, and if you are a believer in the concept, then you can simply imagine where satellite radio is heading.

11/09/2006 02:16:00 PM

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