Monday, November 06, 2006
XM Call
November 6, 2006
In response to a few e-mails I thought it best to answer in this forum rather than individually.
In my Q3 pre confernce call there were several items that I covered regarding XM. For many items I was within a reasonable range with estimates. For a few metrics I was off.
Specifically, the CPGA, SAC (a part of CPGA and EPS.
I had felt that Nate Davis would cut costs at XM Satellite Radio. He has a reputation for keeping a close eye on the budgets, and I expected no different now that he is President of XM. What I did not expect was such a dramtic showing in that department.
I had anticipated a CPGA (Cost Per Gross Addition) of $108 and a SAC (Subscriber Aquisition Cost) of $65. this category of costs encompases marketing expenses, subsidies, etc. This is the area of the financial statement that saw BIG cuts from XM Satellite Radio. XM reported a CPGA of $93 and a SAC of $60. There is no real basis by which an estimate for this category can be derived other than historical data and trends. Many expected XM to cut costs in this area, but no one, including myself, expected the drop in spending to be so dramatic. It was good to see trhat XM did a far better job matching marketing spending to the pace at which they added subscribers. It is always tough coming up with an estimate in this category because so much is unknown to those that develop estimates. I assigned what I felt were reasonable cuts in spending in this area given the competitive nature of the business. many analysts actually carried estimates slightly higher than my own. A few carried more agressive assumptions. My estimates were a tad lower in both categories than street consensus.
Now to EPS (Earnings Per Share). My initial model had XM posting a loss of 45 cents, slightly below the street average of 46 cents. I went slightly lower because I believed that nate Davis would have some effect in cost cutting measures in Q3. In review of XM's filings, there was activity regarding delevereging. This move by XM is a prudent one. The initial announcements of delevereging were in Q3. At the tail end of the quarter, XM announced an extension of the offer into Q4. I mistakenly felt that most of this delevereging activity was attributable to Q3, and that a small portion would spill over into Q4. In considering this activity, I added 6 to 7 cents to my 45 cent loss estimate to account for the costs associated with the activity. As it turns out, the entire delevereging load is a Q4 event. XM covered this in their call. This does not mean that these costs disappear. They are simply going to be accounted for in Q4. Setting aside the delevereging, I was still off by a wide margin, and that is once again attributable to a deeper cut in marketing and subsidy spending than I anticipated.
That being said, I am extremely happy to see XM satellite Radio beat the expectations of everyone. The egg on my face I wear with a smile because the satellite radio sector received some real validation today, and the fiscal responsibilty shown by XM Satellite Radio is a true ray of light in what has otherwise been a difficult year.
Wednesday morning Sirius Satellite Radio will be holding their call. Even with the knowledge of the XM call, I am sticking to the estimates I made for Sirius this past Friday.
11/06/2006 11:45:00 PM
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